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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
MARCH 11, 1997
Date of Report
(Date of earliest event reported)
CITADEL COMPUTER SYSTEMS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 0-08718 75-2242792
(State or other jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
3811 TURTLE CREEK BOULEVARD, SUITE 330, DALLAS, TEXAS 75219
(Address of Principal Executive Office)
(214) 520-9292
(Registrant's telephone number, including area code)
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(C) EXHIBITS.
The following exhibits are furnished in accordance with Item 601 of
Regulation S-B.
99.1 Form of Offshore Securities Subscription Agreement
99.2 Form of 5% Redeemable Convertible Note
99.3 Form of Warrant to Purchase Shares of Common Stock of
Citadel Computer Systems Incorporated
99.4 Form of Registration Rights Agreement
ITEM 9. SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S
On March 11, 1997, the Company had an initial closing with respect to
$1,000,000 as part of a private placement of up to $1,500,000 of 5%
redeemable convertible notes due February 2000 (before fees and expenses).
The notes were sold to certain offshore accredited investors pursuant to
Section 4(2) of the Securities Act of 1933, as amended, and Regulation S.
First Bermuda Securities Limited ("First Bermuda") acted as placement agent.
The Company used the proceeds to retire certain outstanding indebtedness and
for working capital.
The principal amounts of the notes may be converted, at the option of
the holders, as follows: (a) 30% at a conversion price per share equal to the
lesser of $1.50 per share or 80% of the then average closing bid price of the
Company's common stock commencing 41 days after March 11, 1997; (b) 40% at a
conversion price per share equal to the lesser of $1.50 per share or 77-1/2%
of the average closing bid price of the Company's common stock commencing 71
days after March 11, 1997; and (c) the remaining 30% at a conversion price
per share equal to the lesser of $1.50 per share or 75% of the average
closing bid price of the Company's common stock commencing 101 days after
March 11, 1997. Each conversion is calculated from the average closing bid
price of the Company's stock the five trading days prior to and including the
conversion date. The Company has the option to redeem the notes for cash in
the event the conversion price with respect to notes submitted for conversion
would be less than $1.50 per share. The redemption price for notes to be
redeemed will be the principal amount and all accrued interest multiplied by
the reciprocal of the conversion discount as then in effect.
For each $25,000 of notes purchased, each investor received warrants to
purchase 5,000 shares of the common stock of the Company at $2.00 per share.
The warrants have a two year term and will vest as follows: (a) 33-1/3% vest
in respect of that portion of the note still held by the holder after the
expiration of 90 days following the closing date; (b) 33-1/3% vest in respect
of that portion of the note still held by the holder after the expiration of
135 days following the closing date; and
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(c) 33-1/3% vest in respect of that portion of the note still held by the
holder after the expiration of 180 days following the closing date.
The Company also granted the investors certain registration rights
covering the shares of common stock issuable upon conversion of the notes
pursuant to a registration rights agreement.
First Bermuda, as placement agent, is entitled to receive a commission
of eight percent (8%) of the proceeds, payable in shares of the Company's
stock, and a warrant to purchase approximately 120,000 shares of Company
common stock at an exercise price of $2.00 per share. Copies of the form of
note, subscription agreement, warrants and registration rights agreement are
filed as exhibits hereto and incorporated herein.
The Company had previously announced its intention to raise
approximately $3 million from a private placement during the fourth quarter
of fiscal 1997. To date, an aggregate of $1,000,000 of the notes as
disclosed in this report were sold in the placement. The Company determined
to postpone the sale of the remaining amounts but may consider other
financing alternatives in the future.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITADEL COMPUTER SYSTEMS INCORPORATED
(Registrant)
DATE: March 26, 1997 By: /s/ Steven B. Solomon
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Steven B. Solomon, Chief Operating Officer
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EXHIBIT 99.1
FORM OF OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
THE SECURITIES SUBSCRIBED FOR HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR
SOLD IN THE UNITED STATES (AS DEFINED IN REGULATION S UNDER THE ACT) OR TO OR
FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS (AS DEFINED IN REGULATION S) EXCEPT
PURSUANT TO REGISTRATION UNDER OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT.
OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
This Offshore Securities Subscription Agreement (the "Agreement"), dated
________ __, 1997, is entered into by and between Citadel Computer Systems,
Inc., a company incorporated in the state of Delaware (the "Company"), and
OFFSHORE NOMINEES LIMITED (the "Buyer").
The Company has offered for sale outside the United States (as that term is
defined in Regulation S ("Regulation S") under the Act up to 60 Units each Unit
consisting of a 5% Convertible Note due ___________, 2000 (the "Securities") of
original principal amount of $25,000, convertible into common stock of the
Company, together with warrants to purchase up to 5,000 shares of the Company's
common stock as set forth in the Warrant Agreement dated as of the date hereof
(together with the Securities (the "Units"). Buyer has been offered $1,500,000
in principal amount of the Securities. Interest on the Securities will be
payable as provided in the form of Convertible Note attached hereto as Annex A.
The terms on which the Securities may be converted into shares of the Company's
common stock (such shares underlying the Securities being referred to herein as
"Shares") and the other terms of the Securities are set forth in the Form of
Convertible Note attached as Annex A. Capitalized terms used herein and not
defined herein shall have the meanings given to them in Regulation S as the same
may be amended from time to time.
The parties hereto agree as follows:
1. Purchase and Sale of Securities. Upon the basis of the representations and
--------------------------------
warranties, and subject to the terms and conditions, set forth in this
Agreement, the Company covenants and agrees to sell to the Buyer on the Closing
Date (as hereinafter defined) $1,500,000 of the Securities at a price of 100% of
the original principal amount, and upon the basis of the representations and
warranties, and subject to the terms and conditions, set forth in this
Agreement, the Buyer covenants and agrees to purchase from the Company, on the
Closing Date $1,500,000 of the Securities of the Company at 100% of the original
principal amount.
2. Closing Instructions to Escrow Agent. (a) The closing of the purchase and
-------------------------------------
sale of the Securities pursuant to Section 1 hereof shall take place on or
before ________ __, 1997 (the "Closing Date") after the Company has delivered to
the offices of First Bermuda Securities Limited (the "Escrow Agent") located at
Jardine House, 3rd Floor, 33/35 Reid Street, Hamilton, HM 12 Bermuda,
Convertible Notes (each a "Convertible Note") representing the Securities in
denominations of not less than $25,000, registered in the name of the Buyer
(representing the maximum amount of Securities to be purchased by the Buyer
hereunder) and Warrants (as defined below) registered in the name of the Buyer.
(b) The Company and the Buyer agree that they shall instruct the Escrow
Agent as provided in Annex B and as follows:
(i) On the Closing Date, for each Convertible Note subscribed for and
delivered to the Escrow Agent pursuant to paragraph 2(a) above, the Escrow Agent
shall, upon confirmation in the form of a federal funds wire number that First
Bermuda Securities Limited has wired payment of the aggregate purchase price for
the Securities (less any fees the Company has authorized Escrow Agent to deduct)
in immediately available funds to the Company's account as provided in the
escrow instructions attached as Annex B, release the Securities described in
paragraph 2(a) above. The Escrow Agent shall return to the Company any
Convertible Notes and Warrants that the Buyer does not purchase on the Closing
Date. If the closing shall not have taken place by ________ __, 1997, this
Agreement shall terminate.
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(ii) The Escrow Agent will make delivery of the number of Convertible
Notes set forth in clause (2a) above in accordance with the instructions of the
Buyer subject to customary settlement procedures upon confirmation of the wiring
of funds to the Company as described in clause 2(b)(i) above, except that all
such Convertible Notes and the Warrants shall be delivered to a location outside
the United States and none of the Convertible Notes or Warrants shall be
delivered to a U.S. Person (as defined in Regulation S).
3. Representations and Warranties of the Buyer: The Buyer understands and
--------------------------------------------
represents and warrants to, and agrees with the Company that:
(a) The Buyer understands that no federal or state agency has passed on, or
made any recommendation or endorsement of the Securities.
(b) The Buyer acknowledges that, in making the decision to purchase the
Securities, it has relied solely upon independent investigations made by it and
not upon any representations made by the Company with respect to the Company or
the Securities, except for the representations and warranties in this Agreement,
the Convertible Note, the Warrant, the Registration Rights Agreement and the
Officer Certificate (as defined below), except that the Buyer has received,
reviewed and relied upon the Opinion of Counsel (as defined below) and copies of
the report on Form 10-QSB for the quarter ended November 30, 1996, the report
Form 10-KSB for the year ended February 29, 1996, filed by the Company pursuant
to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and all
other filings, including filings on Form 8-K, under the Exchange Act since
February 28, 1996, which, together with any filings by Company after the date
hereof and prior the Closing, are defined as "Exchange Act Reports".
(c) The Buyer understands that the Securities are being offered and sold to
it in reliance on specific exemptions from or non-application of the
registration requirements of federal and state securities laws and that the
Company is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set
forth herein in order to determine the applicability of such exemptions and the
suitability of the Buyer to acquire the Securities.
(d) The Buyer is not a U.S. Person (as defined in Regulation S) and is not
and will not be an affiliate (as defined in the Exchange Act) of the Company.
To enable the Company to avoid withholding interest paid, the Buyer certifies
under penalty of perjury that it is neither a citizen nor a resident of the
United States and that its address set forth in the Escrow Agreement is correct.
(e) No public offer or solicitation of the Securities or the Shares
issuable on conversion of the Securities was made to the Buyer and no offer of
the Securities or the Shares issuable on conversion of the Securities was made
to the Buyer while the Buyer was present in the United States.
(f) At the time the buy order for the Securities was originated the Buyer
was located outside the United States and is outside the United States on the
date of the execution and delivery of this agreement and will be outside the
United States on the Closing Date.
(g) The Buyer is aware that the Securities and the Shares issuable upon
exercise of conversion rights have not been and will not be registered under the
Act (except as may be required under the Registration Rights Agreement) and may
only be offered or sold pursuant to registration under the Act or an available
exemption therefrom and Buyer has not, and will not, engage in any public
offering or distribution of the Securities or the Shares.
(h) The Buyer (i) will not, during the period commencing on the Closing
Date and ending 40 days after the Closing Date (the "Restricted Period"), offer
or sell or agree to sell the Securities in the United States, to a U.S. Person
or for the account or benefit of a U.S. Person or other than in accordance with
Rule 903 or 904, as applicable, of Regulation S, and (ii) will, after the
expiration of the Restricted Period, offer, sell, pledge or otherwise transfer
the Securities or the common stock issuable upon the exercise of conversion
rights only pursuant to registration under the Act or an available exemption
therefrom and, in any case, in accordance with applicable federal and state
securities laws.
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(i) The Buyer and its affiliates have been advised of and are familiar
with, have complied, and will comply, with the offering restrictions, and any
other requirements, of Regulation S.
(j) The transactions contemplated by this Agreement (i) have not been pre-
arranged by the Buyer with a purchaser located in the United States which is a
U.S. Person, and (ii) are not part of a plan or scheme by the Buyer to evade the
registration provisions of the Act.
(k) The Buyer is an "accredited investor" as defined in the Act and will be
purchasing the Securities for its account for the purpose of investment and not
(i) with a view to, or for sale in connection with, any distribution thereof or
(ii) for the account or on behalf of any U.S. Person.
(l) Neither the Buyer nor any of its affiliates has entered, has the
intention of entering, or will during the Restricted Period enter into, with any
U.S. Person, any put option, short position or other similar instrument or
position with respect to the Securities or securities into which the Securities
are convertible or participate in any other attempt designed to lower the
trading prices of the Company's common stock.
(m) The Buyer shall indemnify the Company against any loss, cost or damages
(including reasonable attorney's fees and expenses) incurred as a result of the
Buyer's breach of any representation, warranty, covenant or agreement in this
Agreement.
4. Registration Rights; Warrants. On or prior to the Closing Date, the
-----------------------------
Company and Buyer agree to execute a Registration Rights Agreement (the
"Registration Rights Agreement") and a Warrant (the "Warrant") in the forms
substantially set out in Annex C and Annex D attached hereto, respectively.
5. Conversion of Securities. The Securities may be converted into the Shares,
-------------------------
as herein defined, at the option of the holder thereof under the terms set forth
in the Form of Convertible Note, attached hereto as Annex A.
6. Representations and Warranties of the Company. The Company represents and
---------------------------------------------
warrants to, and agrees with, the Buyer that:
(a) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of Delaware.
(b) This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity; and the Company
has full corporate power and authority necessary to enter into this Agreement
and to perform its obligations thereunder.
(c) No consent, approval, authorization or order of any court, governmental
agency or body or arbitrator having jurisdiction over the Company or any of its
affiliates is required for execution of this Agreement, including, without
limitation, the issuance and sale of the Securities, or the performance of its
obligations hereunder.
(d) Neither the sale of Securities pursuant to, nor the performance of its
obligations under this Agreement by the Company will (i) violate, conflict with,
result in a breach of, or constitute a default (or an event which with the
giving of notice or the lapse of time or both would be reasonably likely to
constitute a default) under (A) the certificate of incorporation, charter or by-
laws of the Company or any of its affiliates, (B) any decree, judgment, order,
law, treaty, rule, regulation or determination applicable to the Company or any
of its affiliates of any court, governmental agency or body, or arbitrator
having jurisdiction over the Company or any of its affiliates or over the
properties or assets of the Company or any of its affiliates, (C) the terms of
any bond, debenture, note or any other evidence of indebtedness, or any material
agreement, stock option or other similar plan, indenture, lease, mortgage, deed
of trust or other material instrument to which the Company or any of its
affiliates is a party, by which the Company or any of its affiliates is bound,
or to which any of the properties of the Company or any of its affiliates is
subject, or (D) the terms of any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company or any of its
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affiliates is a party to; or (ii) result in the creation or imposition of any
lien, charge or encumbrance upon the Securities or any of the assets of the
Company or any of its affiliates.
(e) The Company has an authorized capitalization consisting of 30,000,000
shares of common stock, par value $.01 per share (the "Common Stock"), and
1,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred
Stock"). The Company has issued and outstanding __________________ shares of
Common Stock and 570 shares of Preferred Stock as of ________ __, 1997. All of
the issued shares of capital stock of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable; prior to the Closing
Date, the authorized capitalization shall include the Shares to be issued upon
conversion of the Securities. The shares of Common Stock issuable upon
conversion of the Securities, when issued and delivered in accordance with the
terms of the Securities, will be duly and validly issued, fully paid and non-
assessable. The issuance of the Shares will not be in violation of any
preemptive or similar rights of the holders of any securities of the Company.
The Securities (i) are free and clear of any security interests, liens, claims
or other encumbrances, (ii) have been duly and validly authorized and on the
Closing Date will be duly and validly issued, fully paid and non assessable,
(iii) will not have been, individually and collectively, issued or sold in
violation of any preemptive or other similar rights of the holders of any
securities of the Company and (iv) will not subject the holders thereof to
personal liability by reason of being such holders. The Common Stock underlying
the Securities is quoted on, and will be, following the completion of the
Restricted Period (if sold in accordance with the provisions of this Agreement,
applicable securities law and Regulation S as then in effect), eligible for
trading on, The National Association of Securities Dealers Inc. Electronic
Bulletin Board ("NASDAQ").
(f) The Company is a Reporting Issuer (as defined in Regulation S) because
it has a class of securities registered pursuant to Section 12(g) of the
Exchange Act and has filed all the material required to be filed pursuant to
Section 13(a) of the Exchange Act for a period of at least twelve (12) months
preceding the date of this Agreement. The Common Stock is listed on NASDAQ and
the Company has received no notice, oral or written, with respect to its
continued eligibility for such listing. The Company hereby agrees, promptly
following the Closing of the transactions contemplated by this Agreement, to
take such action as is necessary to cause the Shares issued upon exercise of
conversion rights under the Convertible Notes to be listed on NASDAQ upon such
conversion following expiration of the Restricted Period (subject, if required,
to notice to NASDAQ of the actual number of shares issued). The Company further
agrees, if the Company applies to have the Common Stock traded on any other
principal stock exchange or market, it will include in such application the
Shares and will take such other action as is necessary or desirable to cause the
Shares to be listed on such other exchange or market upon expiration of the
Restricted Period.
(g) The Exchange Act Reports are the only filings made by the Company since
February 29, 1996 pursuant to Sections 13(a), 13(c), 14 and 15(d) of the
Exchange Act, and the Company will cause its Common Stock to continue to be
registered under Section 12(g) or 12(b) of the Securities Exchange Act of 1934,
will comply in all respects with its reporting and filing obligations under said
Act, and will not take any action or file any document (whether or not permitted
by said Act or the rules thereunder) to terminate or suspend such registration
or to terminate or suspend its reporting and filing obligations under said Act.
The Company will take all action necessary to continue the listing and trading
of its Common Stock on NASDAQ and will comply in all respects with the Company's
reporting, filing and other obligations under the by-laws or rules of the NASD
and NASDAQ.
(h) The Company has the requisite corporate power to own its properties and
to carry on its business as now being conducted. The Company is duly qualified
as a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary other than those in which the failure so
to qualify would not have a Material Adverse Effect. "Material Adverse Effect"
means any adverse effect on the business, operations, properties, prospects, or
financial condition of the entity with respect to which such term is used and
which is material to such entity.
(i) The Company has furnished or made available to the Buyer true and
correct copies of the Company's Certificate of Incorporation as in effect on the
date hereof (the "Certificate of Incorporation"), and the Company's By-Laws, as
in effect on the date hereof (the "By-Laws").
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(j) The Company has delivered or made available to the Buyer true and
complete copies of the Exchange Act Reports (including, without limitation,
proxy information and solicitation materials excluding any preliminary proxy not
distributed). The Company has not provided to the Buyer any information which,
according to applicable law, rule or regulation, should have been disclosed
publicly by the Company but which has not been so disclosed. As of their
respective dates, the Exchange Act Reports complied in all material respects
with the requirements of the Exchange Act and the rules and regulations of the
SEC promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such Exchange Act Reports, and none of the Exchange
Act Reports contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
Exchange Act Reports comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(k) Except as set forth in the financial statements and other documents
filed by the Company under the Exchange Act, the Company has no liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to November 30, 1996, and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in such
financial statements, which individually or in the aggregate, are not material
to the financial condition or operating results of the Company. The Company has
not provided to the Buyer any information which, according to applicable law,
rule or regulation, should have been disclosed publicly by the Company but which
has not been so disclosed.
(l) Since November 30, 1996 there has been no material adverse change and
no material adverse development in the business, properties, operations,
financial condition, results of operations or prospects of the Company, except
as disclosed in accordance with the Exchange Act Reports.
(m) There is no material action, suit, proceeding, inquiry or to the
knowledge of the Company or any of its subsidiaries, investigation before or by
any court, public board, government agency, self-regulatory organization or body
pending, or to the knowledge of the Company or any of its subsidiaries,
threatened against or affecting the Company or any of its subsidiaries other
than as set forth in the Exchange Act Reports.
(n) Neither the Company, nor any or its affiliates, nor any person acting
on its or their behalf has, directly or indirectly, made any offers or sales of
any security or solicited any offers to buy any security, under circumstances
that would require registration of the Securities under the Act.
(o) The Company has taken no action which would give rise to any claim by
any person for brokerage commissions, finder's fees or similar payments by the
Buyer relating to this Agreement or the transactions contemplated hereby, except
for dealings with First Bermuda Securities Limited, whose commissions and fees
will be paid for by the Company.
(p) As of the date hereof, the Company has reserved and the Company shall
continue to reserve and keep available at all times, free of preemptive rights,
shares of Common Stock for the purpose of enabling the Company to satisfy any
obligation to issue shares of its Common Stock upon conversion of the
Securities; provided, however, that the number of shares so reserved shall at
all times be at least 1,800,000 in aggregate for purposes of conversion of the
Securities and exercise of the Warrants. The number of shares so reserved may
be reduced by the number of shares actually delivered pursuant to the conversion
of the Securities and exercise of the Warrants (provided that in no event shall
the number of shares so reserved be less than the number required to satisfy the
remaining conversion rights on the unconverted Securities or exercise rights on
the exercised Warrants) and the number of shares so reserved
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shall be increased to reflect stock splits and stock dividends and
distributions.
(q) No legend has been or shall be placed on the Securities or share
certificates representing the Securities or Shares and no note or stock transfer
instructions have been or shall be given to the Company's transfer agent with
respect thereto other than as set forth in Section 10.
(r) Based upon the truth and accuracy of the representations and warranties
made by the Buyer, the sale of the Securities pursuant to this Agreement will be
made in accordance with the provisions and requirements of Regulation S and
applicable state law.
(s) No offer to sell the Securities was made by the Company to any person
in the United States.
(t) None of the Company, any affiliate of the Company, or any person acting
on behalf of the Company or any such affiliate has engaged, or will engage, in
any Directed Selling Efforts as that term is defined in Regulation S with
respect to the Securities nor any general solicitation of the Securities.
(u) The transactions contemplated by this Agreement (i) have not been pre-
arranged with a purchaser who is in the United States or is a U.S. Person, and
(ii) are not part of a plan or scheme to evade the registration provisions of
the Act.
(v) The Company undertakes and agrees to make all necessary filings in
connection with this offering as required by the laws and regulations of all
appropriate jurisdictions and securities exchanges in the United States of
America.
(w) The Company shall indemnify the Holder against any loss, cost or
damages (including reasonable attorney's fees and expenses) incurred as a result
of the Company's breach of any representation, warranty, covenant or agreement
in this Agreement.
7. Offering Materials. All offering materials and documents used in
-------------------
connection with the offers and sales of the Securities prior to the expiration
of the Restricted Period include statements to the effect that the Securities
and the Shares issuable upon the exercise of conversion rights have not been
registered under the Act and that the Buyer, may not directly or indirectly
offer or sell the Securities or such shares in the United States or to a U.S.
Persons (other than distributors) unless the Securities or shares are registered
under the Act, or an exemption from the registration requirements of the Act is
available. Such statements shall appear (1) on the cover of any prospectus or
offering circular used in connection with the offer or sale of the Securities
and (2) in the placement section of any prospectus or offering circular used in
connection with the offer or sale of the Securities. Buyer represents that all
offering materials and documents received by it in connection with the offers
and sales of the Securities prior to the Closing of the transactions
contemplated herein have complied with the foregoing. Nothing contained in this
Section 7 shall negate or detract from any of the representations, warranties
and agreements of Buyer contained in Section 3 above.
8. Covenants of the Company. (a) The Company covenants and agrees that
------------------------
during the period beginning on the date hereof and ending 90 days following the
Closing Date, the Company will not, without the prior written consent of a
"Majority-in-interest" of the Buyers, negotiate or contract with any party to
obtain additional equity financing (including debt financing with an equity
component) pursuant to the exemption from the registration requirements of
Regulation S (the "Future Offerings"). In addition, the Company will not
conduct any Future Offerings during the period beginning on the 90/th/ day
following the date hereof and ending 180 days following the Closing Date unless
it shall have first delivered to the Buyer at least ten (10) business days prior
to the closing of such Future Offering, written notice describing the proposed
Future Offering, including the terms and conditions thereof, and providing the
Buyer an option during such ten (10) day period to purchase all or any portion
of its "pro-rata" share of the securities being offered in the Future Offerings
on the same terms as contemplated by such Future Offering (the limitations
referred to in this and the immediately preceding sentence are collectively
referred to as the "Capital Raising Limitation"). The Capital Raising
Limitation shall not apply to any transaction involving the Company's commercial
banking arrangements or issuances of securities in connection with a merger,
consolidation or sale of assets, or in connection with any strategic partnership
or joint venture (the primary
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purpose of which is not to raise equity capital), or in connection with the
disposition or acquisition of a business, product or license by the Company (so
long as the securities so issued are "restricted securities" within the meaning
of Rule 144 under the 1933 Act and do not carry registration or piggy back
rights for at least 360 days from the date of this Agreement), the issuance of
securities to settle securities litigation, or exercise of options by or the
grant of performance shares to employees, consultants or directors. The terms
(i) "majority-in-interest" means Holders of 5% Convertible Notes holding more
than 50% of the Common Stock underlying the Securities (treating the Securities
on an as converted basis) and (ii) "pro-rata share" means the principal amount
of the Securities initially purchased divided by the aggregate principal amount
of all Securities sold hereunder.
(b) The parties shall use their best efforts timely to satisfy each of the
conditions described in Section 9 of this Agreement.
(c) So long as the Buyer beneficially owns any of the Securities, the
Company shall timely file all reports required to be filed with the SEC pursuant
to the Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would permit such termination, except in the
event of a merger, consolidation or sale of all or substantially all of the
Company's assets, as long as the surviving or successor entity in such
transaction (i) assumes the Company's obligations hereunder and under the
agreements and instruments entered into in connection herewith and (ii) is a
publicly traded corporation whose Common Stock is listed for trading on the
AMEX, the NYSE or the NASDAQ.
(d) At Buyer's request, the Company agrees to send the following reports to
Buyer until Buyer transfers, assigns, or sells all of the Securities: (i) within
ten (10) days after the filing with the SEC, a copy of its Annual Report on Form
10-KSB, its Quarterly Reports on Form 10-QSB and any Current Reports on Form 8-
K; and (ii) within two (2) business days after release, copies of all press
releases issued by the Company or any of its subsidiaries.
(e) The Company shall at all times have authorized, and reserved for the
purpose of issuance, a sufficient number of shares of Common Stock to provide
for the full conversion of the outstanding Securities and issuance of the Shares
in connection therewith (based on the conversion price of the Securities in
effect from time to time). In that regard, on the Closing Date, the Company
shall have at least 1,800,000 shares reserved for issuance upon conversion of
the Securities and the exercise of the Warrants (subject to adjustment in order
to comply with the immediately preceding sentence); provided that the Company
shall not reduce the number of shares of Common Stock reserved for issuance upon
conversion of the Securities and the exercise of the Warrants without the
consent of a majority-in-interest of the buyers of the Securities, which consent
will not be unreasonably withheld.
(f) So long as the Buyer beneficially owns any Securities, the Company
shall maintain its corporate existence, except in the event of a merger,
consolidation or sale of all or substantially all of the Company's assets, as
long as the surviving or successor entity in such transaction (i) assumes the
Company's obligations hereunder and under the agreements and instruments entered
into in connection herewith and (ii) is a publicly traded corporation whose
Common Stock is listed for trading on the AMEX, the NYSE or the NASDAQ.
(g) The Company and the Buyer agree that the Closing Date, when certified
by Escrow Agent as the Closing shall be deemed to be a conclusion of the
offering of the Securities contemplated hereby. The Company acknowledges and
agrees that, for purposes of clarifying and specifying the applicable Restricted
Period under Regulation S, the Buyer intends to observe as the Restricted Period
(as defined in Regulation S) for the Securities, the period of 40 days
commencing on the Closing Date and ending 40 days thereafter.
(h) The Shares issued upon conversion of the Securities and the
certificates evidencing the same shall at all times be free of legends (except
as provided in Section 10 below), "stock transfer restrictions," or other
restrictions, except as expressly set forth in this Agreement and the
Convertible Note.
9. Conditions Precedent to the Buyer's Obligation. The obligations of the
-----------------------------------------------
Buyer hereunder are subject
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to the performance by the Company of the following additional conditions
precedent:
(a) The Buyer shall receive, on the Closing Date, an opinion of counsel to
the Company, dated the Closing Date, as to the representations made by the
Company in Sections 6(a) through and including 6(f) and in Sections 6(m) and
6(n) hereof, and such other matters as Buyer reasonably requests (collectively,
the "Opinion of Counsel"). The form of the Opinion of Counsel shall be as set
forth in Exhibit 1 hereof.
(b) Delivery of the notes representing the Securities with restrictive
legends to the Escrow Agent as set forth herein.
(c) The Company shall have delivered to the Buyer a certificate (the
"Officer Certificate") in form and substance reasonably satisfactory to the
Buyer, executed by an executive officer of the Company, to the effect that all
the conditions to the Closing shall have been satisfied and the representations
and warranties of the Company herein are true and correct as of the date when
made and as of the Closing Date, and certifying as to the Company's Certificate
of Incorporation, By-Laws, resolutions authorizing transaction, and incumbency
of Company officers.
(d) The Company and the Buyer shall have entered into the Registration
Rights Agreement and the Warrant as contemplated by Section 4.
10. Legends. (a) The certificates representing the Securities, and the Shares
--------
issued during the Restricted Period, shall bear the following legend (the
"Legend"):
"The securities represented hereby have been issued pursuant to Regulation
S promulgated under the Securities Act of 1933, as amended (the "1933
Act"), and have not been registered under the 1933 Act. Such securities
may not be transferred, offered or sold prior to the end of the forty (40)
day period (the "Restricted Period") commencing on ________ __, 1997 unless
such transfer, offer or sale is made in an "offshore transaction" and not
to or for the account of or benefit of a "U.S. Person" (as such terms are
defined in Regulation S) and is otherwise in accordance with the
requirements of Regulation S. Following the expiration of the Restricted
Period, the securities represented hereby may not be offered, sold or
otherwise transferred in the United States or to a U.S. Person unless the
securities are registered under the 1933 Act and applicable state
securities laws, or such offers, sales and transfers are made pursuant to
an available exemption from the registration requirements of those laws."
(b) Following the expiration of the Restricted Period, and subject to
Section 10(d) below, the Company will remove or will promptly instruct its
transfer agent to remove the Legend from the Shares issued during the Restricted
Period (and will instruct its transfer agent to issue without the Legend, the
Shares issuable upon any conversion or exercise occurring after the Restricted
Period), if the Buyer holding such Securities or any other person in whose name
the certificates have been or are to be validly and legally issued shall have
delivered a certificate (a "Removal Certificate") to the Company to the
following effect:
"The undersigned acknowledges that the securities to which this certificate
relates have not been registered under Securities Act of 1933, as amended
(the "1933 Act") and that offers, sales or other transfer of such
securities must be made in compliance with Regulation S promulgated under
the 1933 Act, pursuant to an effective registration statement under the
1933 Act or pursuant to an available exemption from registration, and the
undersigned certifies that the undersigned has not made, nor will the
undersigned make or cause to be made, any offer, sale or other transfer of
such securities, in violation of the 1933 Act, other applicable securities
laws or the rules and regulations of the Securities and Exchange
Commission."
(c) Upon the submission, at any time after the expiration of the Restricted
Period, by Buyer of a written request for legend removal for the purpose of a
bona fide pledge or deposit of the Shares with a margin account, together with
the certificates for which the legend removal is being requested and a Removal
Certificate signed by both the Buyer and the pledgee or other holder of the
Shares, the Company will reissue or will promptly instruct its transfer agent to
reissue the certificates representing the Shares to be so pledged or deposited
without the Legend.
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(d) Notwithstanding the provisions of this Section 10, if with respect to
the Company's receipt of a Removal Certificate from any person, prior to any
removal of the Legend, there shall have been after the date hereof any amendment
to the Act or Regulation S or any no action letter, interpretative release or
other advice from the Securities and Exchange Commission after the date hereof
which disallows the removal of the Legend under the circumstances in which the
request that it be removed is being made, then the Company shall have no
obligation to remove or to instruct its transfer agent to remove the Legend,
unless the Company shall have received from the person requesting such removal a
written letter of counsel to such person reasonably acceptable to the Company
and its counsel confirming that the Legend may be so removed or share
certificates may be so issued without the Legend without violation of the Act.
If the person requesting a removal of the Legend is unable to supply the legal
opinion referred to above then the Company shall, upon demand of such person, be
obligated to register the Common Stock for resale pursuant to the terms of the
Registration Rights Agreement.
11. Transfer Agent Instructions. The Company's transfer agent will be
----------------------------
instructed to reserve for issuance such number of shares of the Company's Common
Stock as would be issuable if the Convertible Notes were converted on the
Closing Date and such additional number of shares as, from time to time, shall
be necessary to provide for the issuance of Shares upon the conversion of the
Convertible Notes. Additionally, the Company shall deliver to its transfer
agent promptly after closing irrevocable instructions substantially in the form
set forth in Annex E attached hereto, pursuant to which the transfer agent shall
be instructed to issue upon conversion the number of shares provided for in the
Convertible Note being converted on the terms provided for therein without
restrictive legend, registered in the names provided by the Holders, subject to
the terms and conditions in this Agreement and in the Convertible Note. The
Company warrants and covenants that no instructions restricting the
transferability of the Shares other than the instructions in the immediately
preceding sentence and instructions for a "stop transfer" instruction until the
end of the Restricted Period have been given, or shall be given, to the transfer
agent, and that the Shares shall otherwise be freely transferable on the books
and records of the Company, subject to the restrictions in this Agreement and in
the Convertible Note. Nothing in this section, however, shall affect in any way
the obligations and agreement of the Buyer to comply with all applicable
federal, state and foreign securities laws upon resale of the Securities.
12. Miscellaneous. (a) This Agreement may be executed in one or more
--------------
counterparts and it is not necessary that signatures of all parties appear on
the same counterpart, but such counterparts together shall constitute but one
and the same agreement.
(b) This Agreement shall be governed by and constructed in accordance with
the laws of the State of Delaware.
(c) This agreement shall inure to the benefit of and be binding upon the
parties hereto, their respective successors, and no other person shall have any
right or obligation hereunder. This Agreement shall not be assignable by either
party without the prior written consent of the other, and any assignment in
violation hereof shall be void. Notwithstanding the foregoing, the Buyer may
assign its rights in this Agreement subject to the terms and conditions of this
Agreement and the Convertible Note, and the provisions of this Agreement shall
then inure to the benefit of, and be enforceable by, any transferee of any of
the Securities or Shares.
(d) This Agreement together with the Convertible Note, the Registration
Rights Agreement and the Warrant constitutes the entire agreement of the parties
with respect to the subject matter hereof and supersedes all prior oral or
written proposals or agreements related thereto. This Agreement may not be
amended or any provision hereof waived, in whole or in part, except by a written
amendment signed by both of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement, all as of the day and year above written.
CITADEL COMPUTER SYSTEMS INCORPORATED
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By:
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Steven B. Solomon, Chief Operating Officer & Secretary
BUYER: OFFSHORE NOMINEES LIMITED
By:
------------------------------------------------------
10
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EXHIBIT 99.2
FORM OF CONVERTIBLE NOTE
NOTE NO. ___
THE SECURITIES REPRESENTED HEREBY AND ANY SHARES (AS DEFINED BELOW) ISSUED UPON
THE EXERCISE OF CONVERSION RIGHTS HEREUNDER HAVE BEEN AND WILL BE ISSUED
PURSUANT TO REGULATION S PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "1933 ACT"), AND HAVE NOT BEEN REGISTERED UNDER THE 1933 ACT. SUCH
SECURITIES MAY NOT BE TRANSFERRED, OFFERED OR SOLD PRIOR TO THE END OF THE FORTY
(40) DAY PERIOD (THE "RESTRICTED PERIOD") COMMENCING ON ________ ___, 1997
UNLESS SUCH TRANSFER, OFFER OR SALE IS MADE IN AN "OFFSHORE TRANSACTION" AND NOT
TO OR FOR THE ACCOUNT OF OR BENEFIT OF A "U.S. PERSON" (AS SUCH TERMS ARE
DEFINED IN REGULATION S) AND IS OTHERWISE IN ACCORDANCE WITH THE REQUIREMENTS OF
REGULATION S. THIS NOTE MAY NOT BE CONVERTED INTO SHARES BY OR ON BEHALF OF ANY
U.S. PERSON. FOLLOWING THE EXPIRATION OF THE RESTRICTED PERIOD, THE SECURITIES
REPRESENTED HEREBY AND ANY SHARES ISSUED UPON THE EXERCISE OF CONVERSION RIGHTS
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A
U.S. PERSON UNLESS THE SECURITIES ARE REGISTERED UNDER THE 1933 ACT AND
APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE
LAWS.
CITADEL COMPUTER SYSTEMS INCORPORATED
5% REDEEMABLE CONVERTIBLE NOTE DUE ________ ___, 2000
THIS NOTE is one of a duly authorized issue of Convertible Notes of CITADEL
COMPUTER SYSTEMS INCORPORATED, a Corporation duly organized and existing under
the laws of the state of Delaware (the "Company") designated as its 5%
Redeemable Convertible Notes Due ________ ___, 2000, in an aggregate principal
amount of up to $1,500,000 (the "Notes").
FOR VALUE RECEIVED, the Company promises to pay to Offshore Nominees or the
permitted registered holder hereof (the "Holder"), the principal sum of
$________ (United States Dollars) (the "Initial Principal Amount") or such
lesser principal amount as is indicated on the table (the "Table") below
following the conversion or conversions of this Note in accordance with
Paragraph 4 (the "Outstanding Principal Amount") on ________ ___, 2000 (the
"Maturity Date"), and to pay interest on the Outstanding Principal Amount from
time to time, annually in arrears on the first day of ________ (the "Interest
Payment Date"), at the rate of 5% per annum accruing from the date of issuance.
Accrual of interest shall commence on the first business day to occur after the
date hereof until repayment in full of the principal sum has been made or duly
provided for. Accrued and unpaid interest shall bear interest at the same rate
from the due date of the interest payment, until paid. The interest so payable
will be paid in shares of the Company's common stock (the "Common Stock") at the
then applicable conversion price (computed as described in Paragraph 4 below) on
________ ___ to the person in whose name this Note (or one or more predecessor
Notes) is registered on the records of the Company regarding registration and
transfers of the Notes (the "Note Register") on the tenth day prior to the
Interest Payment Date. The principal of, and interest on, this Note are payable
in such coin or currency of the United States of America as at the time of
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payment is legal tender for payment of public and private debts, at the address
last appearing on the Note Register of the Company as designated in writing by
the Holder from time to time. The Company will pay the principal of and
interest upon this Note on the due date, free of any withholding or deduction of
any kind (subject to the provisions of Paragraph 2 below), to the registered
Holder of this Note as of the due date and addressed to such Holder at the last
address appearing on the Note Register. The forwarding of such check or
shares shall constitute a payment of principal and interest hereunder and shall
satisfy and discharge the liability for principal and interest on this Note to
the extent of the sum represented by such check plus any amounts so deducted.
TABLE
OUTSTANDING
CONVERSION CONVERSION PRINCIPAL AUTHORIZED
DATE AMOUNT AMOUNT SIGNATURE
This Note is subject to the following additional provisions:
1. The Notes are originally issuable in amounts of not less than $25,000 and
integral multiples thereof.
2. All payments on account of the principal of and interest on this Note and
all other amounts payable under this Note (whether made by the Company or
any other person) to or for the account of the Holder hereunder shall be
made free and clear of and without reduction by reason of any present and
future income, stamp, registration and other taxes, levies, duties, costs
and charges whatsoever imposed, assessed, levied or collected by the United
States or any political subdivision or taxing authority thereof or therein,
together with interest thereon and penalties with respect thereto, if any,
on or in respect of this Note (all such taxes, levies, duties, costs and
charges being herein collectively called "United States Taxes"). Should
any such payment be subject to any United States Tax and the provisions of
the preceding sentence of this Paragraph 2 either cannot be effected or do
not result in the Holder actually receiving free and clear of all United
States Taxes an amount equal to the full amount provided under this Note,
the Company shall pay to the Holder such
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<PAGE>
additional amounts as may be necessary to ensure that the Holder receives a
net amount equal to the full amount that it would have received had such
payment not been made subject to United States Taxes unless withholding
arises because holder has failed to furnish the data described below in
this Paragraph 2. In addition to the United States Taxes paid by the
Company or additional amounts paid to the Holder, in each case pursuant to
the preceding provisions of this Paragraph 2 ("Additional Payments"), the
Company shall also pay to the Holder upon demand such additional amounts as
may be necessary to compensate the Holder, on an after-tax basis, for any
tax or levy imposed or assessed by any jurisdiction on or with respect to
any such Additional Payments (including any income taxes payable by the
Holder with respect to Additional Payments pursuant to the income tax laws
of the jurisdiction of its principal office or lending office or any
political subdivision or taxing authority thereof). Holder agrees to
provide Company a Form W-8, a certification under penalty of perjury, or a
certificate from a financial institution described in Section 871(h)(4)(B)
of the Internal Revenue Code of 1986 demonstrating that the Holder is not a
United States person.
3. If at any time there occurs a transaction in which in excess of 50% of the
Company's voting power is transferred (excluding any public or private
offering of Company equity securities), including any consolidation or
merger of the Company with or into any other corporation or other entity
or person (whether or not the Company is the surviving corporation), or
any other corporate reorganization or transaction or series of related
transactions, the Holder of this Note then outstanding may participate in
any such transaction as a class with common stockholders on the same basis
as if this Note had been converted one day prior to the effective date of
such transaction; provided, however, that at the option of the Holder of
this Note, such Holder may treat the effective date of any transaction
that occurs prior to ________ ___, 2000 as a redemption date and shall be
entitled to have the Company redeem this Note at a price equal to 125% of
the Outstanding Principal Amount of this Note, plus accrued but unpaid
interest. Such holder shall be entitled to make such election at any time
up to ten (10) days prior to the effective date of the transaction. The
Company shall not effect any stock split, subdivision or combination with
an effective date within three (3) trading days preceding the effective
date of a merger or consolidation. The Company shall not make, or fix a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of
Common Stock, with an effective date within three (3) trading days prior
to the effective date of a merger or consolidation.
4. The Holder of this Note is entitled, at its option, at any time commencing
(a) forty-one (41) days after the Closing Date as defined in the
Subscription Agreement (as defined below) until maturity hereof to convert
thirty percent (30%) or any lesser portion of the Initial Principal Amount
which is at least $25,000 into shares of Common Stock ("Shares") at a
conversion price for each Share equal to the lesser of $1.50 per share or
eighty percent (80%) of the average closing bid price of the Common Stock
for the five (5) previous trading days including the Conversion Date (b)
seventy-one (71) days after the Closing Date, an additional forty percent
(40%) of the Initial Principal Amount may be converted at a conversion
price for each Share equal to the lesser of $1.50 per share or seventy-
seven and one half percent (77 1/2 %) of the average closing bid price of
the Common Stock for the five (5) previous trading days including the
Conversion Date, and (c) one hundred and one (101) days after the
Closing Date the remaining thirty percent (30%) of the Initial Principal
Amount may be converted at a conversion price for each Share equal to the
lesser of $1.50 per share or seventy-five percent (75 %) of the average
closing bid price of the Common Stock for the five (5) previous trading
days including the Conversion Date , provided, however, that in no event
shall the Holder be entitled to convert any portion of this Note in excess
of that portion of this Note upon conversion of which the sum of (1) the
number of shares of Common Stock beneficially owned by the Holder and its
affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of this
Note and the
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<PAGE>
unexercised portion of the Warrant, as defined in the Subscription
Agreement) and (2) the number of Shares issuable upon the conversion of
the portion of this Note with respect to which the determination of this
proviso is being made, would result in beneficial ownership by the Holder
and its affiliates of more than 4.9% of the outstanding Shares. For
purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulations 13 D-G
thereunder, except as otherwise provided in clause (1) of such proviso. In
the event of any stock split, dividend, combination or similar event
occurring after the Conversion Date and prior to the issuance of the
respective stock certificates, the conversion price will be subject to
appropriate adjustment. For purposes of this section, the closing bid
price of the Common Stock shall be the closing bid price as reported by
The Nasdaq Stock Market, or the closing bid price in the over-the-counter
market or, if the Common Stock is listed on a stock exchange, the closing
bid price on such exchange as reported in The Wall Street Journal. Such
conversion shall be effectuated by surrendering the Notes to be converted
to the Company, with the form of conversion notice attached to the Note as
Exhibit A, executed by the Holder of the Note evidencing such Holder's
intention to convert this Note, and accompanied, if required by the
Company, by proper assignment hereof in blank. Interest accrued or
accruing from the date of issuance to the date of conversion on the amount
so converted shall be paid in shares of common stock of the Company,
calculated at the same conversion price (as determined above), as would
apply on the conversion date of the principal amount being converted but
using the discount percentage applicable as of such date and shall
constitute payment in full of any such interest on the same terms as would
otherwise apply to the conversion of the principal amount hereof. No
fractional Shares or scrip representing fractions of Shares will be issued
on conversion, but the number of Shares issuable shall be rounded to the
nearest whole Share. The date on which notice of conversion is given (the
"Conversion Date") shall be deemed to be the date on which the Holder
notifies the Company of its intention to convert by delivery, by facsimile
transmission or otherwise, of a copy of the Conversion Notice (as defined
below). Notice may be given by facsimile to the Company at (214) 520-9293.
This Note, together with the original executed copy of the Notice of
Conversion, shall be delivered to the Company as soon as practicable
following the date on which notice of conversion is given as described
above. Any unconverted principal amount and accrued interest thereon shall
at the maturity date be paid, at the option of the Company, in either (a)
cash or (b) Shares valued at a price equal to the average closing bid
price of the Common Stock for the five (5) trading days immediately
preceding the maturity date.
Upon the surrender of this Note, accompanied by a Notice of Conversion of
Convertible Note in the form attached hereto as Exhibit A, properly
completed and duly executed by the Holder (a "Conversion Notice"), the
Company shall issue and, within five (5) business days (the "Deadline")
after actual delivery of this Note with the Conversion Notice, deliver to
or upon the order of the Holder (1) that number of Shares for the portion
of the Note converted as shall be determined in accordance herewith and
(2) this Note with the appropriate notation to the Table by an authorized
officer of the Company to account for the remaining balance of the
principal amount hereof following conversion, if any. Without in any way
limiting the Holder's right to pursue other remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of the
Shares issuable upon conversion of this Note is more than one (1) business
day after the Deadline the Company shall pay to the Holder $250 per each
$25,000 principal amount Note per day in cash, for the first day beyond
the Deadline and $500 per each $25,000 principal amount Note per day for
each day thereafter that the Company fails to deliver the Shares. Such
cash amount shall be paid to Holder by the fifth day of the month
following the month in which it has accrued or, at the option of the
Holder (by written notice to the Company by the first day of the month
following the month in which it has accrued), shall be added to the
principal amount of this Note, in which event interest shall accrue
thereon in accordance with the terms of this Note and such additional
principal amount shall be convertible into Shares in accordance with the
terms of this Note.
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The number of shares of Common Stock to be issued upon each conversion of
this Note shall be determined by dividing (i) the sum of (A) that portion
of the principal amount of the Note to be converted plus (B) the
"Conversion Date Interest" (as defined below), by (ii) the conversion
price in effect on the date the Conversion Notice is delivered to the
Company by the Holder. Conversion Date Interest means the product of (i)
the principal amount of the Note to be converted, multiplied by (ii) a
fraction (A) the numerator of which is the number of days elapsed since
the date of issuance of this Note and (B) the denominator of which is 365,
multiplied by (iii) .05.
5. Not used.
6. If the Company receives a Conversion Notice with respect to any Note for
which the conversion price would be less than $1.50 per share, at the
election of the Company, each such Note may be redeemed by the Company
rather than converted. The redemption price (the "Redemption Price") for
each Note to be redeemed shall be the principal amount and all accrued
interest multiplied by the reciprocal of the conversion discount as then
in effect. The Redemption Price shall be paid to the Holder of the
redeemed Note within five (5) business days of the Conversion Date.
7. No provision of this Note shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Note at the time, place, and rate, and in the coin or
currency or Shares, herein prescribed. This Note and all other Notes now
or hereafter issued on similar terms are direct obligations of the
Company. This Note ranks equally with all other Notes now or hereafter
issued under the terms set forth herein. In the event of any liquidation,
reorganization, winding up or dissolution repayment of this Note shall be
subordinate in all respects to any other indebtedness for borrowed money
of the Company, whether outstanding as of the date of this Note or
hereafter incurred. Such subordination shall extend without limiting the
generality of the foregoing, to all indebtedness of the Company to banks,
financial institutions, other secured lenders, equipment lessors and
equipment finance companies, but shall exclude trade debts; and any
warrants, options or other securities convertible into stock of the
Company shall rank pari passu with the Notes in all respects.
8. The Company hereby expressly waives demand and presentment for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor,
notice of acceleration or intent to accelerate, bringing of suit and
diligence in taking any action to collect amounts called for hereunder and
shall be directly and primarily liable for the payment of all sums owing
and to be owing hereon, regardless of and without any notice, diligence,
act or omission as or with respect to the collection of any amount called
for hereunder.
9. If the Company at any time or from time to time after the Closing Date
makes, a dividend or other distribution to holders of Common Stock payable
in securities of the Company other than Shares, then and in each such
event provision shall be made so that the Holder shall receive upon
conversion of this Note pursuant to Paragraph 4 hereof, in addition to the
number of Shares receivable thereupon, the amount of such other securities
of the Company to which the Holder on the relevant record or payment date,
as applicable, of the number of Shares so receivable upon conversion would
have been entitled, plus any dividends or other distributions which would
have been received with respect to such securities had the Holder
thereafter, during the period from the date of such event to and including
the Conversion Date retained such securities, subject to all other
adjustments called for during such period under this Note with respect to
the rights of the Holder.
10. If at any time or from time to time after the Closing Date, the Common
Stock issuable upon the conversion of the Note is changed into the same or
different number of shares of any class or classes of stock, whether by
re-capitalization, reclassification or otherwise (other than a subdivision
or combination of shares or stock dividend or reorganization
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provided for elsewhere in this Note or a merger or consolidation, provided
for in Paragraph 3), then and in each such event the Holder shall have the
right thereafter to convert the Note into the kind of stock receivable
upon such re-capitalization, reclassification or other change by holders
of shares of Common Stock, all subject to further adjustment as provided
herein. In such event, the formulae set forth herein for conversion and
redemption shall be equitably adjusted to reflect such change in number of
shares or, if shares of a new class of stock are issued, to reflect the
market price of the class or classes of stock issued in connection with
the above described transaction.
11. If at any time or from time to time after the Closing Date there is a
capital reorganization of the Common Stock (other than a re-
capitalization, subdivision, combination, reclassification exchange of
shares provided for elsewhere in this Note) then, as a part of such
reorganization, provision shall be made so that the Holder shall
thereafter be entitled to receive upon conversion of this Note the number
of shares of stock or other securities or property to which a holder of
the number of Shares deliverable upon conversion would have been entitled
on such capital reorganization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Note with
respect to the rights of the Holder after the reorganization to the end
that the provisions of this Note shall be applicable after that event and
be as nearly equivalent as may be practicable, including, by way of
illustration and not limitation, by equitably adjusting the formulae set
forth herein for conversion and redemption to reflect the market price of
the securities or property issued in connection with the above described
transaction.
12. If one or more of the "Events of Default" as described in Paragraph 13
shall occur, the Company agrees to pay all costs and expenses, including
reasonable attorneys' fees, which may be incurred by the Holder in
collecting any amount due under this Note.
13. If one or more of the following described "Events of Default" shall occur:
(a) The Company shall default in the payment of principal or interest on
this Note; or
(b) Any of the representations or warranties made by the Company herein,
in the Offshore Securities Subscription Agreement dated as of
__________ ___, 1997 between the Company and the Holder (the
"Subscription Agreement"), or in any certificate or financial or
other statements heretofore or hereafter furnished by or on behalf of
the Company in connection with the execution and delivery of this
Note or the Subscription Agreement shall be false or misleading in
any material respect at the time made; or
(c) The Company shall fail to perform or observe any other covenant,
term, provision, condition, agreement or obligation of the Company
under this Note and such failure shall continue uncured for a period
of thirty (30) days after notice from the Holder of such failure; or
(d) The Company shall (1) become insolvent; (2) admit in writing its
inability to pay its debts as they mature; (3) make an assignment for
the benefit of creditors or commence proceedings for its dissolution;
or (4) apply for or consent to the appointment of a trustee,
liquidator or receiver for it or for a substantial part of its
property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the Company
or for a substantial part of its property or business without its
consent and shall not be discharged within thirty (30) days after
such appointment; or
(f) Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control
of the whole or any substantial portion of the properties or assets
of the Company and shall not be dismissed within thirty (30) days
thereafter; or
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(g) Any money judgment, writ or warrant of attachment, or similar process
except mechanics and materialmen's liens incurred in the ordinary
course of business in excess of Two Hundred Thousand Dollars
($200,000) in the aggregate shall be entered or filed against the
Company or any of its properties or other assets and shall remain
unsatisfied, unvacated, unbonded or unstayed for a period of thirty
(30) days (unless such order provides for delayed payment) or in any
event later than five (5) days prior to the date of any proposed sale
thereunder; or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against the Company
and, if instituted against the Company, shall not be dismissed,
stayed or bonded within sixty (60) days after such institution or the
Company shall by any action or answer approve of, consent to, or
acquiesce in any such proceedings or admit the material allegations
of, or default in answering a petition filed in any such proceeding;
or
(i) The Company shall have its common stock delisted from an exchange or
The Nasdaq Stock Market.
Then, or at any time thereafter, and in each and every such case, unless
such Event of Default shall have been waived in writing by the holders of
a majority of all Notes then outstanding (which waiver shall not be deemed
to be a waiver of any subsequent default) at the option of the holders of
a majority of all Notes outstanding and in their discretion, the Holder
may consider this Note immediately due and payable, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly
waived, anything herein or in any note or other instruments contained to
the contrary notwithstanding, and the Holder may immediately, and without
expiration of any period of grace, enforce any and all of the Holder's
rights and remedies provided herein or any other rights or remedies
afforded by law. In such event, this Note shall be redeemed by the
Company at a redemption price per Note equal to (i) the lesser of (a) 125%
of the Outstanding Principal Amount due hereunder or (b) the maximum
redemption premium which may be permitted under the laws of Delaware
(including any provision of law relating to usury) and (ii) accrued and
unpaid interest.
14. If at any time on or after the date hereof and prior to the first
anniversary of the Closing Date, trading in the shares on the Common Stock
is suspended on the principal market or exchange for such shares
(including The Nasdaq Stock Market), for a period of five (5) consecutive
trading days, other than as a result of the suspension or trading in
securities in general, or if such Shares are delisted, then, at the
Holder's option, the Company shall redeem the Note at a redemption date
designated by Holder, and for the redemption price provided in Paragraph
13.
15. Notwithstanding anything to the contrary contained herein, each Conversion
Notice shall contain a representation that, after giving effect to the
Shares to be issued pursuant to such conversion notice, the total number
of Shares deemed beneficially owned by the Holder, together with all
Shares deemed beneficially owned by the Holder's "affiliates" as defined
in Rule 144 of the Act, will not exceed 4.9% of the total issued and
outstanding Shares.
16. The Holder may, subject to compliance with the Subscription Agreement and
the provisions of Regulation S, without notice, transfer, assign, mortgage
or encumber this Note, any interest herein or any part hereof integral
multiples of $25,000 or the entire outstanding balance to an "accredited
investor" as defined in the 1933 Act (other than to a U.S. Person or on
behalf of a U.S. Person) that will be acquiring the Note or interest
herein for its account for the purpose of investment and not with a view
to, or for sale in
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connection with any distribution hereof and, each assignee, transferee and
mortgagee (which may include any affiliate of the Holder) shall have the
right to transfer or assign its interest subject to the same limitations.
Each such assignee, transferee and mortgagee shall have all of the rights
of the Holder under this Note. The Company may condition registrations of
transfers on the receipt of a certificate from the assignee, transferee or
mortgagee in a form acceptable to the Company that contains
representations and warranties similar to those of the Holder contained in
Section 3 of the Subscription Agreement, and IRS Form W-8 or an equivalent
certification under penalty of perjury in compliance with Section
871(h)(4)(B) of the Internal Revenue Code of 1986.
17. For so long as any amount payable under this Note remains unpaid, the
Company shall furnish to the Holder, upon request by the Holder, the
following information:
(a) No later than one hundred five (105) days following the end of each
fiscal year, beginning with the fiscal year ending February 28, 1997,
consolidated balance sheets, statements of operations and statements
of cash flow and shareholders' equity of the Company and its
subsidiaries, if any, prepared in accordance with generally accepted
accounting principles, and audited by a firm of independent public
accountants. The Company may satisfy this requirement by delivering
its report on Form 10-KSB for each such year.
(b) Within fifty-one (51) days after the end of each quarter (except the
fourth quarter) of each fiscal year, consolidated balance sheets,
statements of operations and statements of cash flow and
shareholders' equity of the Company and its subsidiaries. The
Company may satisfy this requirement by delivering its report on Form
10-QSB for each such quarter.
18. The Company covenants and agrees that until all amounts due under this
Note have been paid in full, by conversion or otherwise, unless the Holder
waives compliance in writing, the Company shall:
(a) Give prompt written notice to the Holder of any Event of Default or
of any other matter which has resulted in, or could reasonably be
expected to result in, a materially adverse change in its financial
condition or operations.
(b) Give prompt notice to the Holder of any claim, action or proceeding
which, in the event of any unfavorable outcome, would or could
reasonably be expected to have a Material Adverse Effect (as defined
in the Subscription Agreement) on the financial condition of the
Company.
(c) At all times reserve and keep available out of its authorized but
unissued stock, for the purpose of effecting the conversion of this
Note such number of its duly authorized Shares as shall from time to
time be sufficient to effect the conversion of the outstanding
principal balance of this Note into Shares. If the Company does not
have a sufficient number of Shares available to satisfy the Company's
obligations to the Holder upon receipt of a Conversion Notice or is
otherwise unable to issue such Shares in accordance with the terms of
this Note (a "Conversion Default"), from and after the fifth (5th)
day following a Conversion Default (which for all purposes shall be
deemed to have occurred upon the Company's receipt of the applicable
conversion notice), the Holder shall have the right to demand from
the Company immediate redemption of this Note in cash at a redemption
price equal to 125% of the Outstanding Principal Amount, plus accrued
but unpaid interest on the Note; provided, however, that no
Redemption Notice may be delivered by the Holder subsequent to the
Holder's receipt of notice from the Company (sent by overnight or 2-
day courier with a copy sent by facsimile) of availability of
sufficient Shares to permit conversion (a "Post-Default Conversion")
of the Note; provided further that such right shall be
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<PAGE>
reinstated if the Company shall thereafter fail to perfect such Post-
Default Conversion by delivery of Common Stock certificates in
accordance with the applicable provision of Paragraph 4 hereof and
payment of all accrued and unpaid interest in cash with respect
thereto within five business days of delivery of the notice of Post-
Default Conversion. In addition to the foregoing, upon a Conversion
Default, the rate of interest on the Note shall, to the maximum
extent of the law, be increased by two percent (2%) (i.e., from 5% to
7% commencing on the first day of the thirty (30) day period (or part
thereof) following a Conversion Default; an additional two percent
(2%) commencing on the first day of each of the second and third such
thirty (30) day periods (or part thereof); an additional one percent
(1%) on the first day of each consecutive thirty (30) day period (or
part thereof) thereafter until such securities have been duly
converted or redeemed as herein provided. Any such interest which is
not paid when due shall, to the maximum extent permitted by law,
accrue interest until paid at the rate from time to time applicable
to interest on the Note as to which the Conversion Default has
occurred.
(d) Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Note and
(i) in the case of loss, theft or destruction, upon provision of
indemnity reasonably satisfactory to it and/or its transfer agent, or
(ii) in the case of mutilation, upon surrender and cancellation of
this Note,
the Company at its expense will execute and deliver a new Note, dated
the date of the lost, stolen, destroyed or mutilated Note.
19. The Holder of this Note, by acceptance hereof, agrees that this Note is
being acquired for investment and that such Holder will not offer, sell or
otherwise dispose of this Note or the Shares issuable upon exercise
thereof except under circumstances which will not result in a violation of
the 1933 Act or any applicable state securities laws.
20. In case any provision of this Note is held by a court of competent
jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if
possible, so that it is enforceable to the maximum extent possible, and
the validity and enforceability of the remaining provisions of this Note
will not in any way be affected or impaired thereby.
21. This Note, the Warrant, the Subscription Agreement and the Registration
Rights Agreement (as defined in the Subscription Agreement) between the
Company and the Holder constitute the full and entire understanding and
agreement between the Company and the Holder with respect to the subject
hereof. Neither this Note nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the
Company and the Holder.
22. This Note shall be governed by and construed in accordance with the laws
of the state of Delaware.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
CITADEL COMPUTER SYSTEMS INCORPORATED
DATED: BY:
---------------------------- ---------------------------------------
Name: Steven B. Solomon
Title: Chief Operating Officer
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BUYER: OFFSHORE NOMINEES
DATED: BY:
---------------------------- ---------------------------------------
Name:
Title:
Buyer certifies under penalty of perjury that Buyer is neither a citizen
nor a resident of the United States and that Buyer's full name and address
are as set out below:
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<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
RE: A CONVERTIBLE NOTE OF CITADEL COMPUTER SYSTEMS INCORPORATED
IN THE PRINCIPAL AMOUNT OUTSTANDING OF $ __________________.
The undersigned hereby irrevocably elects to convert $ __________________ of the
outstanding principal amount of the above referenced Note No. __ (the "Note")
into shares of common stock of CITADEL COMPUTER SYSTEMS INCORPORATED (the
"Company") according to the conditions hereof, as of the date written below. The
undersigned represents and warrants that (i) all of the requirements of
Regulation S promulgated under the Securities Act of 1933, as amended (the
"Securities Act") applicable to the undersigned have been complied with by the
undersigned, (ii) the undersigned is not a "U.S. Person" as defined in
Regulation S and the Note is not being converted on behalf of any "U.S. Person,"
(iii) the undersigned has not engaged in any transaction or series of
transactions that is a part of or a plan or scheme to evade the registration
requirements of the Securities Act, (iv) on the date of the conversion the
undersigned was located outside the United States and (iv) the undersigned has
complied with the terms and conditions of the Note and the Subscription
Agreement (as defined in the Note) pertaining to conversion of the Note.
Further, the undersigned represents and warrants that after giving effect to the
conversion hereby requested, the undersigned will not beneficially own, together
with its affiliates, more than 4.9% of the Company's issued and outstanding
common stock.
----------------------------------------
Date of Conversion*
----------------------------------------
Applicable Conversion Price
----------------------------------------
Signature
----------------------------------------
Name
Address:
----------------------------------------
----------------------------------------
* The original Note and this Notice of Conversion must be received by the
Company by the fifth business day following the Date of Conversion (as defined
in the Note).
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EXHIBIT 99.3
FORM OF WARRANT
THE SECURITIES REPRESENTED HEREBY AND ANY SHARES ISSUED UPON THE EXERCISE OF
THIS WARRANT HAVE BEEN AND WILL BE ISSUED PURSUANT TO REGULATION S ("REGULATION
S") PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
HAVE NOT BEEN REGISTERED UNDER THE ACT. SUCH SECURITIES MAY NOT BE TRANSFERRED,
OFFERED OR SOLD PRIOR TO THE END OF THE RESTRICTED PERIOD CONTAINED HEREIN.
THIS WARRANT MAY NOT BE EXERCISED INTO SHARES BY OR ON BEHALF OF ANY "U.S.
PERSON" (AS DEFINED IN REGULATION S) FOLLOWING THE EXPIRATION OF THE RESTRICTED
PERIOD. THIS WARRANT AND ANY SHARES ISSUED UPON THE EXERCISE OF THIS WARRANT
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A
U.S. PERSON UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE
STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
THIS WARRANT MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THIS WARRANT THAT THE
TRANSFEREE IS AN AFFILIATE OF THE HOLDER WITHIN THE MEANING OF RULE 144 UNDER
THE ACT AND IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF REGULATION D UNDER
THE ACT.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK OF
CITADEL COMPUTER SYSTEMS INCORPORATED
W-(6)
This certifies that (1) (the "Holder"), for value received, is
entitled to purchase from Citadel Computer Systems Incorporated, a Delaware
corporation (the "Company"), having a place of business at 3811 Turtle Creek
Blvd., Suite 330, Dallas Texas 75219, a maximum of (5) fully paid and
nonassessable shares of the Company's Common Stock, $0.01 par value ("Common
Stock") for cash at the Stock Purchase Price (as defined below) at any time or
from time to time up to and including 5:00 p.m. (Texas time) on _______ __,
1999 (the "Expiration Date"), upon surrender to the Company at its principal
office (or at such other location as the Company may advise the Holder in
writing) of this Warrant properly endorsed with the Subscription Form attached
hereto duly filled in and signed and upon payment in cash or by check of the
aggregate Stock Purchase Price for the number of shares for which this Warrant
is being exercised determined in accordance with the provisions hereof. The
"Stock Purchase Price" shall equal $2.00 per share. The Stock Purchase Price
and the number of shares purchasable hereunder are subject to adjustment as
provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions.
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES. This Warrant is
exercisable at the option of the Holder of record hereof, at any time or from
time to time after the Restricted Period (as defined below), up to the
Expiration Date for all or any part of the shares of Common Stock (but not for a
fraction of a share) which may be purchased hereunder pursuant to the
vesting schedule contained in the next sentence, provided, however, that in no
event shall the Holder be entitled to exercise any portion of the Warrant in
excess of that portion of the Warrant upon exercise of which the sum of (1) the
number of shares of Common Stock beneficially owned by the Holder and its
affiliates (other than shares of Common Stock which may be
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<PAGE>
deemed beneficially owned through the ownership of the unexercised portion of
the Warrant and the unconverted portion of the Company's Convertible Notes
issued to the Holder) and (2) the number of shares of Common Stock issuable upon
the exercise of the portion of the Warrant with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.9% of the outstanding
shares of Common Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13 D-G
thereunder, except as otherwise provided in clause (1) of such proviso. The
Warrant shall vest as follows: (a) 33-1/3% shall vest in respect of that portion
of the Note still held by the Holder after the expiration of 90 days following
the Closing Date; (b) 33-1/3% shall vest in respect of that portion of the Note
still held by the Holder after the expiration of 135 days following the Closing
Date; and (c) 33-1/3% shall vest in respect of that portion of the Note still
held by the Holder after the expiration of 180 days following the Closing Date.
The Company agrees that the shares of Common Stock purchased under this Warrant
shall be and are deemed to be issued to the Holder hereof as the record owner of
such shares as of the close of business on the date on which this Warrant shall
have been surrendered, properly endorsed, the completed, executed Subscription
Form (attached as Exhibit A) delivered and payment made for such shares.
Certificates for the shares of Common Stock so purchased, together with any
other securities or property to which the Holder hereof is entitled upon such
exercise, shall be delivered to the Holder hereof by the Company within a
reasonable time after the rights represented by this Warrant have been so
exercised and will contain a legend indicating that the shares have not been
registered under the Act. In case of a purchase of less than all the shares
which may be purchased under this Warrant, the Company shall cancel this Warrant
and execute and deliver a new Warrant or Warrants of like tenor for the balance
of the shares purchasable under the Warrant surrendered upon such purchase to
the Holder hereof within a reasonable time. Each stock certificate so delivered
shall be in such denominations of Common Stock as may be required by the Holder
hereof and shall be registered in the name of such Holder.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Common Stock which may be issued upon
the valid exercise of the rights represented by this Warrant will, upon
issuance, be duly authorized, validly issued, fully paid and nonassessable and
free from all preemptive rights of any stockholder and free of all taxes, liens
and charges with respect to the issue thereof. The Company further covenants
and agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved, for the purpose of issue or transfer upon exercise of the subscription
rights evidenced by this Warrant, a sufficient number of shares of authorized
but unissued Common Stock, or other securities and property, when and as
required to provide for the exercise of the rights represented by this Warrant.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The
Stock Purchase Price and the number of shares purchasable upon the exercise of
this Warrant shall be subject to adjustment from time to time upon the
occurrence of certain events described in this Section 3. Upon each adjustment
of the Stock Purchase Price, the Holder of this Warrant shall thereafter be
entitled to purchase, at the Stock Purchase Price resulting from such
adjustment, the number of shares obtained by multiplying the Stock Purchase
Price in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment, and dividing
the product thereof by the Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
2
<PAGE>
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(A) Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution,
(B) any cash paid or payable otherwise than as a cash dividend,
or
(C) Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than (i) shares
of Common Stock issued as a stock split, adjustments in respect of which shall
be covered by the terms of Section 3.1 above or (ii) an event for which
adjustment is otherwise made pursuant to Section 3.3 below), then and in each
such case, the Holder hereof shall, upon the exercise of this Warrant, be
entitled to receive, in addition to the number of shares of Common Stock
receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including in
the cases referred to in clauses (B) and (C) above) which such Holder would hold
on the date of such exercise had he been the holder of record of such Common
Stock as of the date on which holders of Common Stock received or became
entitled to receive such shares or all other additional stock and other
securities and property.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
If any capital reorganization of the capital stock of the Company, or any
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation shall be effected
in such a way that holders of Common Stock shall be entitled to receive stock,
securities, or other assets or property, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provisions shall be made whereby the holder hereof shall thereafter
have the right to purchase and receive (in lieu of the shares of the Common
Stock of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby) such shares of stock, securities or
other assets or property as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby. In any
reorganization described above, appropriate provision shall be made with respect
to the rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions for adjustments of
the Stock Purchase Price and of the number of shares purchasable and receivable
upon the exercise of this Warrant) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof. The Company will not effect any such
consolidation, merger or sale unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or the corporation purchasing such assets shall assume by written
instrument, executed and mailed or delivered to the registered Holder hereof at
the last address of such Holder appearing on the books of the Company, the
obligation to deliver to such Holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such Holder may be entitled to
purchase.
3.4 NOTICE OF ADJUSTMENT. Upon any adjustment of the Stock Purchase
Price or any increase or decrease in the number of shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered Holder of this
Warrant at the address of such Holder as shown on the books of the Company, and,
in case of a Holder with an address or record outside of the United States, by
facsimile, and confirmed in writing by first class air mail. The notice shall
be signed by the Company's chief financial officer and shall state the Stock
Purchase Price resulting from such
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<PAGE>
adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of this Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
3.5 OTHER NOTICES. If at any time:
(1) the Company shall declare any cash dividend upon its Common
Stock;
(2) the Company shall declare any dividend upon its Common Stock
payable in stock or make any special dividend or other distribution to the
holders of its Common Stock;
(3) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(4) there shall be any capital reorganization or
reclassification of the capital stock of the company; or consolidation or merger
of the Company; or consolidation or merger of the Company with, or sale of all
or substantially all of its assets to, another corporation; or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the Holder of this Warrant at the address of
such Holder as shown on the books of the Company, (a) at least thirty (30) days'
prior written notice (by the method set forth in Section 3.4 above) of the date
on which the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up, and (b) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, at least thirty (30) days' prior written notice of
the date when the same shall take place; provided, however, that the Holder
shall make a best efforts attempt to respond to such notice as early as possible
after the receipt thereof. Any notice given in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto. Any notice given in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall been
entitled to exchange their Common Stock for securities or to other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, winding-up or conversion, as the case may be.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATIONS OF LIABILITY. Nothing
contained in this Warrant shall be construed as conferring upon the holder
hereof the right to vote or to consent or to receive notice as a stockholder of
the Company or any other matters or any rights whatsoever as a stockholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until and only to the extent that this Warrant shall have been
exercised. No provisions
4
<PAGE>
hereof, in the absence of affirmative action by the holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
holder hereof, shall give rise to any liability of such holder for the Stock
Purchase Price or as a stockholder of the Company, whether such liability is
asserted by the Company or by its creditors
7. TRANSFER. After giving effect to the vesting provisions of Paragraph
1, and subject to compliance with applicable federal and state securities laws,
this Warrant and all rights hereunder are transferable only to affiliates of the
Holder (as such term is defined in Rule 144 of the Act) who are not U.S. Persons
(as defined in Regulation S) and who are "accredited investors" within the
meaning of Regulation D under the Act, in whole or in part, upon surrender of
this Warrant properly endorsed. Neither this Warrant nor any rights hereunder
are transferrable other than to affiliates of the Holder who are not U.S.
Persons (as defined in Regulation S) and who "accredited investors" within the
meaning of Regulation D under the Act. Each taker and holder of this Warrant, by
taking or holding the same, consents and agrees that this Warrant, when endorsed
in blank, shall be deemed negotiable, and that the holder hereof, when this
Warrant shall have been so endorsed, may be treated by the Company, at the
Company's option, and all other persons dealing with this Warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented by this Warrant, or to the transfer hereof on the books of
the Company any notice to the contrary notwithstanding; but until such transfer
on such books, the Company may treat the registered owner hereof as the owner
for all purposes. The Company may condition registrations of transfers on the
receipt of a certificate from transferee in a form acceptable to the Company
that contains representations and warranties similar to those of the Holder
contained in Section 9.
8. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights,
obligations, representations and warranties of the Company, of the holder of
this Warrant and of the holder of shares of Common Stock issued upon exercise of
this Warrant referred to in Section 7 shall survive the exercise of this
Warrant.
9. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Holder understands
and represents and warrants to, and agrees with Company that:
(a) The Holder understands that no federal or state agencies have
passed on, or made any recommendation or endorsement with respect to this
Warrant or any of the shares of Common Stock issuable upon the exercise of this
Warrant.
(b) The Holder acknowledges, in making the decision to acquire this
Warrant and exercise this Warrant, that the Holder has relied solely upon
independent investigations made by the Holder and not upon any representations
made by the Company or with respect to the Company or with respect to the shares
of Common Stock.
(c) The Holder understands that this Warrant and the shares of Common
Stock issuable upon the exercise of this Warrant are being offered and sold to
it in reliance on specific exemptions from or non-application of the
registration requirements of federal and state securities laws and that the
Company is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgements and understandings of the Holder set
forth herein in order to determine the applicability of such exemptions and the
suitability of the Holder.
(d) The Holder is not a U.S. Person (as defined in Regulation S)
under the Act and is not and will not be an affiliate (as defined in the U.S.
Securities Exchange Act of 1934, as amended) of the Company. The Holder
certifies under penalty of perjury that it is neither a citizen nor a resident
of the United States and that its address set forth in the Escrow Agreement,
dated ________ __, 1997, among the Holder, the Company and the Escrow Agent
named therein, is correct.
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(e) No public offer or solicitation of this Warrant or the shares of
Common Stock issuable upon the exercise of this Warrant was made to the Holder.
No offer of this Warrant or the shares of Common Stock issuable upon the
exercise of this Warrant was made to the Holder while Holder was present in the
United States. At the time Holder acquires this Warrant, the Holder is located
outside the United States.
(f) The Holder is aware that this Warrant and the Common Stock
issuable upon the exercise of this Warrant have not been and will not be
registered under the Act (except as may be required under Section 10 below) and
will only be offered or sold pursuant to registration under the Act or an
available exemption therefrom and the Holder has not, and will not, engage in
any public offering or distribution of the Warrant or the shares of Common Stock
issuable upon its exercise.
(g) The Holder (i) will not, during the period of time commencing
from the date of this Warrant and ending forty (40) days from the date of this
Warrant (the "Restricted Period"), offer or sell or agree to sell any of the
shares of Common Stock issuable upon the exercise of this Warrant in the United
States, to a U.S. Person or for the benefit of a U.S. Person or other than in
accordance with Rule 903 or 904, as applicable, of Regulation S, and (ii) will,
after the expiration of the Restricted Period, offer, sell, pledge or otherwise
transfer the shares of Common Stock issuable upon the exercise of this Warrant
only pursuant to registration under the Act or an available exemption therefrom
and, in any case, in accordance with applicable federal and state securities
laws.
(h) The Holder has been advised of and is familiar with, has
complied, and will comply, with the offering restrictions, and all other
requirements, of Regulation S.
(i) The transactions contemplated by this Warrant (i) have not been
prearranged by the Holder with a purchaser located in the United States or a
U.S. Person and (ii) are not part of a plan or scheme by the Holder to evade the
registration provisions of the Act.
(j) The Holder is an "accredited investor" as defined in the Act and
will be acquiring this Warrant for its account for the purpose of investment and
not (i) with a view to, or for sale in connection with, any distribution thereof
or (ii) for the account or on behalf of any U.S. Person.
(k) The Holder will acquire the shares of Common Stock issued upon
the exercise of this Warrant for the purpose of investment and not (i) with a
view to, or for sale in connection with, any distribution thereof or (ii) for
the account of or on behalf of any U.S. Person.
(l) Neither the Holder nor any of its affiliates has entered, has any
intention of entering, or will, while any portion of this Warrant remains
unexercised, enter into with any person, any put option, short position or other
similar instruments or position with respect to the shares of Common Stock
issuable upon the exercise of this Warrant or participate in any other attempt
designed to lower the trading prices of the Common Stock.
(m) The Holder shall indemnify the Company against any loss, cost or
damages (including reasonable attorney's fees and expenses) incurred as a result
of such parties' breach of any representation, warranty, covenant or agreement
in this Warrant.
10. REGISTRATION RIGHTS.
10.1 "PIGGY BACK" REGISTRATION.
(a) Each time the Company shall determine to file a registration
statement under the Act (other than on Form S-4, S-8 or a registration statement
on Form S-1 covering an employee benefit plan) in connection with the proposed
offer and sale for money of any of its securities either for its own account or
on behalf of any other security holder, the
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Company agrees to give prompt written notice of its determination to the Holder.
Upon the written request of the Holder given within thirty (30) days after the
receipt of such written notice from the Company, the Company agrees to cause all
Registrable Securities as to which the Holder has requested registration, to be
included in such registration statement and registered under the Act, all to the
extent requisite to permit the sale or other disposition by the Holder of the
Registrable Securities to be so registered. "Registrable Securities" shall mean
the shares of Common Stock issued to the Holder or its permitted transferee upon
exercise of the Warrant or upon any stock split, stock dividend,
recapitalization or similar event with respect to such shares; provided,
however, that Registrable Securities shall cease to be Registrable Securities
when they may be sold pursuant to Rule 144 under the Act or other exemption from
registration provided, further, that the vesting limitations shall still apply
to the Registrable Securities underlying the Warrant. Registrable Securities
shall not include the Warrant.
(b) If the registration of which the Company gives written
notice pursuant to 10.1(a) is for a public offering involving an underwriting,
the Company agrees to so advise the Holder as a part of its written notice. In
such event the right of the Holder to registration pursuant to this Section 10
shall be conditioned upon the Holder's participation in such underwriting and
the inclusion of the Holder's Registrable Securities in the underwriting to the
extent provided herein. The Holder agrees to enter into (together with the
Company and any other holders distributing their securities through such
underwriting) an underwriting agreement with the underwriter or underwriters
selected for such underwriting by the Company, provided that such underwriting
agreement is in customary form and is reasonably acceptable to the Holder.
(c) Notwithstanding any other provision of this Section 10, if
the managing underwriter of an underwritten distribution advises the Company and
the Holder in writing that in its good faith judgment the number of shares of
Registrable Securities and the other securities requested to be registered
exceeds the number of shares of Registrable Securities and other securities
which can be sold in such offering, then (i) the number of shares of Registrable
Securities and other securities so requested to be included in the offering
shall be reduced to that number of shares which in the good faith judgment of
the managing underwriter can be sold in such offering (except for shares to be
included pursuant to registration rights granted by the Company, (y) which are
by their terms senior to the rights of the Holder, in an offering initiated upon
the exercise of such rights, and (z) except for shares to be issued by the
Company in an offering initiated by the Company, each of which shall have
priority over the Registrable Securities), and (ii) such reduced number of
shares shall be allocated among the Holder and the holders of other securities
in proportion, as nearly as practicable, to the respective number of shares of
Registrable Securities and other securities held by the Holder and other holders
at the time of filing the registration statement. All Registrable Securities and
other securities which are excluded from the underwriting by reason of the
underwriter's marketing limitation and all other Registrable Securities not
originally requested to be so included shall not be included in such
registration and shall be withheld from the market by the Holder for a period,
not to exceed one hundred eighty days (180), which the managing underwriter
reasonably determines is necessary to effect the underwritten public offering.
10.2 EXPENSES OF REGISTRATION. All expenses incurred by the Company
in connection with the Holder's exercise of its registration rights under this
warrant, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue sky
fees and expenses, and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular employees of
the Company, which shall be paid in any event by the Company) shall be borne by
the Company. All underwriting discounts and selling commissions applicable to
the sale of Registrable Securities and all fees and disbursements of counsel for
the Holder shall be borne by the Holder.
10.3 REGISTRATION ON FORM S-3. Although the Company shall use its
commercially reasonable efforts to qualify for registration on Form S-3 or any
comparable or successor form or
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forms, or in the event that the Company is ineligible to use such form, such
form as the Company is eligible to use under the Act, nothing in this Warrant is
intended to require the Company to pay dividends in order to use Form S-3.
10.4 INDEMNIFICATION.
(a) Company Indemnity. The Company will indemnify the Holder,
-----------------
each of its officers, directors and partners, and each person controlling
Holder, within the meaning of Section 15 of the Act and the rules and
regulations thereunder with respect to which registration, qualification or
compliance has been effected pursuant to this Warrant against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any prospectus, (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Act or any state
securities law or in either case, any rule or regulation thereunder applicable
to the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse the Holder, each of its officers, directors and partners, and each
person controlling the Holder, for any legal and any other expenses reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company by the Holder or the underwriter and stated
to be specifically for use therein. The indemnity agreement contained in this
Section 10.4(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company (which consent will not be unreasonably withheld).
(b) Holder Indemnity. The Holder will, if Registrable Securities
----------------
held by it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors, officers, partners, of the Company's securities covered by such a
registration statement, each person who controls the Company within the meaning
of Section 15 of the Act and the rules and regulations thereunder, each other
Holder (if any), and each of their officers, directors and partners, and each
person controlling such other Holder against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, and will reimburse the Company and such other Holders and their
directors, officers and partners, or control persons for any legal or any other
expenses reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by the Holder and
stated to be specifically for use therein, and provided that the maximum amount
for which the Holder shall be liable under this indemnity shall not exceed the
net proceeds received by the Holder from the sale of the Registrable Securities.
The indemnity agreement contained in this Section 10.4(b) shall not apply to
amounts paid in settlement of any such claims, losses, damages or liabilities if
such settlement is effected without the consent of Holder (which consent shall
not be unreasonably withheld).
(c) Procedure. Each party entitled to indemnification under this
---------
Section 10.4 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume
8
<PAGE>
the defense of any such claim in any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of such
claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not be unreasonably withheld), and the
Indemnified Party may participate in such defense at such party's expense, and
provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 10.4 except to the extent that the Indemnifying Party is
materially and adversely affected by such failure to provide notice. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with the defense of such claim and
litigation resulting therefrom.
10.5 CONTRIBUTION. If the indemnification provided for in Section
10.4 herein is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein (other than by reason of the
exceptions provided therein), then each such Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) as between the Company and the Holder in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Holder as the case may be, on the other from the offering of the Registrable
Securities, or if such allocation is not permitted by applicable law, in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and of the Holder as the case
may be, on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations and (ii) as between the Company on the one
hand and the Holder on the other, in such proportion as is appropriate to
reflect the relative fault of the Company and of the Holder in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Holder, as the case may be, on the other shall be deemed to be in the same
proportion as the proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company from the
initial sale of the Registrable Securities by the Company to the Holder pursuant
to this Warrant bear to the gain realized by the Holder. The relative fault of
the Company on the one hand and of the Holder, as the case may be, on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or by the
Holder.
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 10.5 exceed the amount that such Indemnifying
Party would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 10.4(a) or 10.4(b) hereof had been
available under the circumstances.
The Company and the Holder agree that it would not be just and
equitable if contribution pursuant to this Section 10.5 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraphs. The amount paid or payable by an Indemnified Party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraphs shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this section, no Holder shall be required to
contribute any amount in excess of the amount by which in the case of the
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Holder, the net proceeds received by the Holder from the sale of Registrable
Securities exceeds, in any such case, the amount of any damages that the Holder
or underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
10.6 SURVIVAL. The indemnity and contribution agreements contained
in Sections 10.4 and 10.5 shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Indemnified Party or
by or on behalf of the Company and the consummation of the sale or successive
resales of the Registrable Securities.
10.7 INFORMATION BY HOLDER. The Holder shall furnish to the Company
such information regarding the Holder and the distribution proposed by the
Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Warrant.
11. MODIFICATION AND WAIVER. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
12. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall be
delivered or shall be sent by certified mail, postage prepaid, to each such
holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant or such
other address as either may from time to time provide to the other and shall be
sent to each such holder located outside of the United States by facsimile
confirmed in writing by first class air mail.
13. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets. All of the obligations of
the Company relating to the Common Stock issuable upon the exercise of this
Warrant shall survive the exercise and termination of this Warrant. All of the
covenants and agreements of the Company shall inure to the benefit of the
successors and assigns of the Holder hereof.
14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of Delaware.
15. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
16. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.
IN WITNESS WHEREOF, the undersigned have caused this Warrant to be
duly executed by their respective officers, thereunto duly authorized as of the
____ day of ________, 1997.
10
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CITADEL COMPUTER SYSTEMS INCORPORATED
a Delaware corporation
By:
-----------------------------------------------
Title:
--------------------------------------------
"Holder"
FIELD 1
By:
-----------------------------------------------
Title:
--------------------------------------------
11
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EXHIBIT A
SUBSCRIPTION FORM
Date:_______________
_____________________
_____________________
_____________________
Gentlemen:
The undersigned hereby elects to exercise the warrant issued to it by
Citadel Computer Systems Incorporated (the "Company") and dated ____________ __,
1997, Warrant No. W-_____ (the "Warrant") and to purchase thereunder
_____________________ shares of the Common Stock of the Company (the "Shares")
at a purchase price of _________________________________________________ Dollars
($____________) per Share or an aggregate purchase price of
__________________________________________________ Dollars ($_____________) (the
"Purchase Price").
The undersigned represents and warrants that (i) all the requirements
of Regulation S promulgated under the Securities Act of 1933, as amended (the
"Act") applicable to the undersigned have been complied with by the undersigned,
(ii) the undersigned is not a "U.S. Person" as defined in Regulation S and this
Warrant is not being exercised on behalf of any "U.S. Person," (iii) the
undersigned has not engaged in any transaction or series of transactions that is
a part of or a plan or scheme to evade the registration requirements of the Act,
(iv) on the date of exercise the undersigned was located outside of the United
States, (iv) the undersigned has complied with the terms and conditions of the
Warrant and (v) the representations and warranties of the Holder set forth in
Section 9 of the Warrant are true and correct in all aspects as of the date set
forth above. Further, the undersigned represents and warrants that after giving
effect to the exercise hereby requested, the undersigned will not beneficially
own, together with its affiliates, more than 4.9% of the Company's issued and
outstanding common stock.
The undersigned represents that the Shares to be issued to the
undersigned are not being issued in a transaction involving a public offering
and are being issued pursuant to an exemption from registration under the Act.
The undersigned is acquiring the Shares for its own account, to hold
for an investment, and the undersigned will not make any sale, transfer or
disposition of the Shares in violation of the Act or the rules and regulations
promulgated by the Securities and Exchange Commission. The undersigned has been
advised that Shares have not been registered for initial issuance under the Act
or state securities laws.
The undersigned has been informed that under the Act, the Shares may
not be transferred unless the Shares are subsequently registered under the Act
or unless an exemption from registration is available for Shares or any proposed
transfer or disposition by the undersigned of the Shares. The undersigned
further agrees that the Company may refuse to permit the undersigned to sell,
transfer or dispose of the Shares unless there is in effect of registration
statement under the Act or unless the undersigned furnishes an opinion of
counsel satisfactory to counsel for the Company, to the effect that such
registration is not required.
The undersigned understands that the Shares may not be delivered
within the United States upon the exercise of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
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Very truly yours,
________________________________
By:_____________________________
Title:__________________________
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EXHIBIT 99.4
FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), entered into as
of ________ ___, 1997 by and between Offshore Nominees, with offices at Jardine
House, 3/rd/ Floor, 33/35 Reid Street, Hamilton, HM12 Bermuda (the "Buyer"), and
Citadel Computer Systems, Inc., Inc., a Delaware corporation with offices at
3811 Turtle Creek Blvd., Suite 330, Dallas, Texas 75219, U. S. A. (the
"Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to a Offshore Securities Subscription Agreement,
dated as of the date hereof (the "Subscription Agreement"), by and between the
Company and the Buyer, the Company has agreed to sell and the Buyer has agreed
to purchase U.S. $1,500,000 of the Company's 5% Redeemable Convertible Notes due
________ ___, 2000 (the "Notes") convertible into shares of the Company's common
stock, $0.01 par value (the "Shares");
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Buyer's agreement to enter into the Subscription Agreement, the Company has
agreed to provide the Buyer with certain registration rights with respect to the
Shares as set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the
Subscription Agreement and this Registration Rights Agreement, the Company and
the Buyer agree as follows:
1. Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Registrable Securities" shall mean the Shares issued to Buyer or its
designee upon conversion of the Notes or upon any stock split, stock dividend,
recapitalization or similar event with respect to such Shares; provided,
however, that Registrable Securities shall cease to be Registrable Securities
when they may be sold pursuant to Rule 144 under the Securities Act.
Registrable Securities shall not include the Notes.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Registration Expenses" shall mean all expenses to be incurred by the
Company in connection with Buyer's exercise of its registration rights under
this Agreement, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue sky
fees and expenses, reasonable fees and disbursements of one counsel to Holders
participating in the registration for a review of the Registration Statement and
related documents, and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular employees of
the Company, which shall be paid in any event by the Company).
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of
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counsel for Holder not included with "Registration Expenses".
"Holder" shall include the Buyer and any permitted transferee of
Notes, Shares or Registrable Securities which have not been sold to the public
to whom the registration rights conferred by this Agreement have been
transferred in compliance with Section 11 herein.
"Registration Statement" shall have the meaning set forth in Section
3(a) herein.
"Regulation S" shall mean Regulation S as promulgated pursuant to the
Securities Act, and as subsequently amended.
"Rule 144" shall mean Rule 144 under the Securities Act, as such rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission.
"Securities Act" shall mean the United States Securities Act of 1933,
as amended.
2. Conditions to Registration Requirement. The Company's obligation
--------------------------------------
hereunder to register Registrable Securities shall arise in the event that
Company receives a written opinion of counsel for the Holder (which counsel
shall be of a law firm experienced in United States securities matters)
indicating that there has been an amendment or change to the Securities Act or
Regulation S after the date hereof, or the promulgation by the Commission of an
interpretative release or other statement after the date hereof, which prohibits
or restricts Holder from reselling Registrable Securities without registration
under the Securities Act (a "Registration Trigger Event"). Notwithstanding the
foregoing, it will not be deemed a "Registration Trigger Event" to the extent
that Holder desires to engage in a distribution of the Registrable Securities
which otherwise requires registration under the Securities Act or in activity
which otherwise deems Holder to be a statutory underwriter under Section 5 of
the Securities Act. In the event that a Registration Trigger Event has
occurred, then Holder shall be entitled to require the Company to register all
of Holder's Registrable Securities in accordance with this Agreement.
3. Request for Registration.
------------------------
(a) Upon the occurrence of a Registration Trigger Event, if the
Company shall receive from a Holder (or, in the event there is more than one
Holder as a result of the issuance by the Company of the Notes, the Company
shall receive written notice from such Holders acting with respect to their
rights under this Agreement according to a vote of a majority-in-interest of the
Holders) a written request that the Company effect any registration with respect
to any Registrable Securities, the Company shall use its commercially reasonable
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request in
the states specified in such request. Notwithstanding the foregoing, the
Company shall not be obligated hereunder to effect such registration unless the
proposed public offering price of the securities to be included in such
registration shall be at least $100,000 (before deducting underwriting discounts
and commissions). If the registration request pertains to any Registrable
Securities not yet outstanding because conversion rights have not been
exercised, Company may condition the registration of such securities on an
irrevocable undertaking to pay all expenses incident to such registration if
such conversion rights are not exercised prior to the effective date of the
registration statement.
Subject to the previous paragraph, the Company shall file (i) a
registration statement with the Commission pursuant to Rule 415 under the
Securities Act on Form S-3 under
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the Securities Act (or in the event that the Company in ineligible to use such
form, such other form as the Company is eligible to use under the Securities
Act) covering the Registrable Securities so requested to be registered
("Registration Statement"); (ii) such state securities filings as shall have
been requested by the Holder; and (iii) any required filings with The Nasdaq
Stock Market, Inc. or exchange where the Shares are traded, as soon as
practicable, after receipt of the request of the Holder. Thereafter the Company
shall use its best efforts to have such Registration Statement and other filings
declared effective.
(b) (i) Subject to the conditions contained in Section 3(a) above,
if the Company fails to file a Registration Statement complying with the
requirements of this Agreement within 45 days from the date of receipt by the
Company of the Holder's written request (provided, however, that under the
circumstances described in 3(e)(i)(ii) or (iii) below the Company may have an
additional 45 days thereafter to file such Registration Statement by providing
written notice to the Holders requesting such registration indicating that the
Company is diligently pursuing the filing of such Registration Statement) or if
such Registration Statement has not become effective within 90 days from the
date of filing thereof, the Holder shall have, in addition to and without
limiting any other rights it may have at law, in equity or under the Notes, the
Subscription Agreement, or this Agreement (including the right to specific
performance), the right to receive, as liquidated damages, the payments as
provided in subparagraph (ii) of this section.
(ii) If after ninety (90) days from the date of filing of the
Registration Statement, the Registration Statement has not been declared
effective by the Commission because the Company (A) has been negligent in timely
responding to any comments from the Commission on the Registration Statement;
(B) has failed to use its commercially reasonable efforts to cause the
Registration Statement to be declared effective by the Commission; (C) has
otherwise acted in bad faith in honoring its commitment to cause the
Registration Statement to be declared effective; (D) has commenced a corporate
action such as an acquisition, merger divestiture, asset sale, reorganization or
similar transaction; or (E) has filed a Registration Statement with the
Commission to issue public securities in accordance with the Securities Act
which does not include a registration of the Registrable Securities, then the
Company shall pay to the Buyer an amount equal to 3% of the Initial Principal
Amount (as defined in the Note) in cash, for each 30-day period after the ninety
(90) day period that such Registration Statement is not effective (which payment
shall be pro rata for any period of less than 30 days). In addition to the
foregoing, if after 180 days from the date hereof the Registration Statement has
not been declared effective by the Commission due to any of the causes described
in clauses (A) through (E) of this paragraph 3(b)(ii), then at the option of
such Holder, the Company shall be required to redeem all the Notes held by such
Holder at a redemption price equal to 140% of the Initial Principal Amount of
the Note plus accrued interest thereon, together with all other payments due
under this paragraph and under the Note and the Agreement.
(iii) The Company acknowledges that its failure to register the
Registrable Securities in accordance with this Agreement will cause the Holder
to suffer damages in an amount that will be difficult to ascertain.
Accordingly, the parties agree that it is appropriate to include in this
Registration Rights Agreement a provision for liquidated damages. The parties
acknowledge and agree that the liquidated damages provisions set forth above
represent the parties' good faith effort to quantify such damages and, as such,
agree that the form and amount of such liquidated damages are reasonable and
will not constitute a penalty.
(iv) In computing the time periods provided in this paragraph
3(b), any delays arising from the failure or refusal of any Holder to provide
information which the Company's counsel or the Commission states in writing is
required for inclusion on the Registration Statement within ten (10) days of a
written request by the Company to provide such information, shall increase the
number of days for the Company to act by a corresponding number.
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(c) If there is more than one Holder, such Holders shall act with
respect to their rights under this Agreement according to the vote of a
majority-in-interest of the Holders.
(d) The Company shall make available for inspection by a
representative or representatives of the Holder, and any attorney or accountant
retained by such Holder, all financial and other records customary for such
purposes, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, attorney or accountant in
connection with such Registration Statement. The Holder will agree to keep all
non-public information supplied to it confidential until such information is
included in a Registration Statement which has been made publicly available.
(e) The Company shall not be obligated to keep such Registration
Statement continuously effective for a period of more than two years from the
date it is declared effective by the Commission; provided, however, that if so
requested by the holders of a majority-in-interest of the Registrable Securities
the Company shall agree to extend the period for which the Registration
Statement remains effective to the same extent that "suspension periods" are
imposed pursuant to the next paragraph, but only so long as the then unsold
Registrable Securities covered by such Registration are too numerous to be sold
under the volume limitations of Rule 144 in any applicable three-month period by
any holder.
Following the effectiveness of the Registration Statement
pursuant to this Agreement, the Company may, at any time, suspend the
effectiveness of such Registration Statement and sales thereunder for up to
forty-five (45) days, as appropriate (a "Suspension Period"), by giving notice
to each holder (or underwriter, if any) selling thereunder, if the Company shall
have determined that the Company may be required to disclose any material
corporate development which disclosure (i) may have a material adverse effect on
the Company, (ii) may have a material adverse affect on the transaction or
matter to be disclosed, or (iii) would be detrimental to the Company or its
stockholders. Notwithstanding the foregoing, no more than two Suspension Periods
(i.e., ninety (90) days) may occur in immediate succession, and the Company
shall use its best efforts to limit the duration and number of any suspension
periods. Holder agrees (and shall require that any underwriter agree) that, upon
receipt of any notice from the Company of any Suspension Period, Holder shall
forthwith discontinue disposition of shares covered by the Registration
Statement and related prospectus or other offering materials (the "Prospectus")
until such Holder (i) is advised in writing by the Company that the use of the
applicable Prospectus may be resumed, (ii) has received copies of a supplemental
or omitted Prospectus, if applicable, and (iii) has received copies of any
additional or supplemental filings which are incorporated or deemed to be
incorporated by reference in such Prospectus.
4. Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance with registration
pursuant to this Agreement shall be borne by the Company, and all Selling
Expenses shall be borne by the Holder.
5. Registration on Form S-3. Although the Company shall use its
------------------------
commercially reasonable efforts to qualify for registration on Form S-3 or any
comparable or successor form or forms, or in the event that the Company is
ineligible to use such form, such form as the Company is eligible to use under
the Securities Act, nothing in the Subscription Agreement or this Agreement is
intended to require the Company to pay dividends in order to use Form S-3.
6. Registration Procedures. In the case of each registration
-----------------------
effected by the Company pursuant to this Agreement, the Company will keep the
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense, the Company
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<PAGE>
will use its best efforts to:
(a) Keep such Registration Statement effective for the period
ending twenty-four (24) months after the registration has been declared
effective by the Commission or until the Holder has completed the distribution
described in the Registration Statement relating thereto, whichever first
occurs.
(b) Furnish such number of Prospectuses and other documents
incident thereto as the Holder from time to time may reasonably request.
7. Indemnification.
---------------
(a) Company Indemnity. The Company will indemnify the Holder,
-----------------
each of its officers, directors and partners, and each person controlling
Holder, within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any Prospectus, (including any related Registration Statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Securities Act or
any state securities law or in either case, any rule or regulation thereunder
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and will reimburse the Holder, each of its officers, directors and partners, and
each person controlling such Holder, for any legal and any other expenses
reasonably incurred in connection with investigating and defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by Holder and
stated to be specifically for use therein. The indemnity agreement contained in
this Section 7(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent will not be unreasonably withheld).
(b) Holder Indemnity. The Holder will, if Registrable
----------------
Securities held by it are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors, officers, partners, and each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act and the rules and regulations thereunder, each
other Holder (if any), and each of their officers, directors and partners, and
each person controlling such other Holder against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, and will reimburse the Company and such other holders and their
directors, officers and partners, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by Holder and
stated to be specifically for use therein, and provided that the maximum amount
for which the Holder shall be liable under this indemnity shall not exceed the
net proceeds received by the Holder from the sale of the Registrable Securities.
The indemnity agreement contained in this Section 7(b) shall not apply to
amounts paid in settlement of any such claims, losses, damages or liabilities if
such
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<PAGE>
settlement is effected without the consent of Holder (which consent shall not be
unreasonably withheld).
(c) Procedure. Each party entitled to indemnification under
---------
this Section 7 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after the
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Section 7
except to the extent that the Indemnifying Party is materially and adversely
affected by such failure to provide notice. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
8. Contribution. If the indemnification provided for in Section 7
------------
herein is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein (other than by reason of the
exceptions provided therein), then each such Indemnifying Party, in lieu of
indemnifying the Indemnified Party, shall contribute to the amount paid or
payable by the Indemnified Party as a result of such losses, claims, damages or
liabilities (i) as between the Company and the Holder on the one hand and the
underwriters on the other, in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Holder on the one hand or
underwriters, as the case may be, on the other from the offering of the
Registrable Securities, or if such allocation is not permitted by applicable
law, in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and of the
Holder or underwriters, as the case may be, on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations and (ii) as
between the Company on the one hand and the Holder on the other, in such
proportion as is appropriate to reflect the relative fault of the Company and of
the Holder in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations.
The relative benefits received by the Company on the one hand and the
Holder or the underwriters, as the case may be, on the other shall be deemed to
be in the same proportion as the proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
from the initial sale of the Notes which can be converted into Registrable
Securities by the Company to the Holder pursuant to the Subscription Agreement
which corresponds to this Agreement bear to the gain realized by such Holder or
the total underwriting discounts and commissions received by the underwriters as
set forth in the table on the cover page of the prospectus, as the case may be.
The relative fault of the Company on the one hand and of the Holder or
underwriters, as the case may be, on the other shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company, by the Holder or by the underwriters.
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 8 exceed the amount that the Indemnifying Party
would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 7(a) or 7(b) hereof
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<PAGE>
had been available under the circumstances.
The Company and the Holder agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Holder or the underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraphs. The amount paid or payable by an Indemnified Party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraphs shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by the Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section, no Holder or underwriter shall
be required to contribute any amount in excess of the amount by which (i) in the
case of the Holder, the net proceeds received by the Holder from the sale of
Registrable Securities or (ii) in the case of an underwriter, the total price at
which the Registrable Securities purchased by it and distributed to the public
were offered to the public exceeds, in any such case, the amount of any damages
that the Holder or underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
9. Survival. The indemnity and contribution agreements contained in
--------
Sections 7 and 8 shall remain operative and in full force and effect regardless
of (i) any termination of the Subscription Agreement or any underwriting
agreement, (ii) any investigation made by or on behalf of any Indemnified Party
or by or on behalf of the Company and (iii) the consummation of the sale or
successive resales of the Registrable Securities.
10. Information by Holder. The Holder shall furnish to the Company
---------------------
such information regarding such Holder and the distribution proposed by such
Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Agreement.
11. Transfer or Assignment of Registration Rights. The rights,
---------------------------------------------
granted to Buyer by the Company under this Registration Rights Agreement, to
cause the Company to register Registrable Securities, may be transferred or
assigned to a transferee or assignee of not less than $50,000 in principal
amount of Notes, provided that the Company is given written notice by Holder at
the time of or within a reasonable time after said transfer or assignment,
stating the name and address of said transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned, and provided further that the transferee or assignee of such rights
is not deemed by the board of directors of the Company, in its reasonable
judgment, to be a competitor of the Company; and provided further that the
transferee or assignee of such rights agrees to be bound by this Agreement.
Buyer is one of a group of holders of Registrable Securities issued or
issuable pursuant to a total aggregate amount of up to $1.5 million of notes
purchased by Buyer and others in a transaction designed to qualify as an
offering pursuant to Regulation S. Any action to be taken under this Agreement
or any term of this Agreement may be amended or waived only with written action
by the Company and the holders of at least a majority-in-interest of the total
of the Registrable Securities. Any action, amendment or waiver effected in
accordance with this paragraph shall be binding upon each of the other holders
of Registrable Securities at the time then outstanding.
12. Miscellaneous.
-------------
(a) Entire Agreement. This Agreement contains the entire
----------------
understanding and agreement of the parties, and may not be modified or
terminated except by a
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<PAGE>
written agreement signed by both parties.
(b) Notices. Any notice or other communication given or
-------
permitted under this Agreement shall be in writing and shall be deemed to have
been duly given if personally delivered or sent by registered or certified mail,
return receipt requested, postage prepaid or by air courier, (a) if to Buyer, at
its address hereinabove set forth, (b) if to the Company, at its address
hereinabove set forth, and (c) if to a holder other than Buyer, at the address
thereof furnished by like notice to the Company, or (d) to any such addresses at
such other address or addresses as shall be so furnished to the other parties by
like notice.
(c) Gender of Terms. All terms used herein shall be deemed to
---------------
include the feminine and the neuter, and the singular and the plural, as the
context requires.
(d) Governing Law; Consent of Jurisdiction. This Agreement and
--------------------------------------
the validity and performance of the terms hereof shall be governed by and
construed in accordance with the laws of the State of Delaware. The parties
hereto hereby consent to, and waive any objection to the exercise of, personal
jurisdiction in the State of Delaware with respect to any action or proceeding
arising out of this Agreement.
(e) Titles. The titles used in this Agreement are used for
------
convenience only and are not to be considered in construing or interpreting this
Agreement.
(f) Prospectus Delivery Requirements. Holder agrees, on
--------------------------------
Holder's behalf, and shall require any transferee or assignee pursuant to
Section 11 above to agree, to comply with all prospectus delivery requirements
applicable to resales of the securities pursuant to the Registration Statement.
(g) Termination. The rights of Holder to require the Company to
-----------
request a registration pursuant to this Agreement shall terminate on the date
which is five (5) years from the date of this Agreement.
(Signature Page Follows)
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[REGISTRATION RIGHTS AGREEMENT - SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
BUYER CITADEL COMPUTER SYSTEMS, INC.
a Delaware Corporation
By: __ By:
Name: __ Name: Steven B. Solomon
Title: __ Title: Chief Operating Officer
9
