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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
OCTOBER 6, 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 600, DALLAS, TEXAS 75219-4421
(Address of Principal Executive Office)
(214) 520-9292
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
On October 6, 1997, Citadel Computer Systems Incorporated ("Citadel")
closed a Purchase Agreement (the "Agreement") with CORESTAFF, Inc.
("CORESTAFF") wherein CORESTAFF purchased 2,500,000 shares of Common Stock of
Citadel, par value $.01 per share, for $750,000, together with other valuable
consideration.
Pursuant to the Agreement, CORESTAFF also received warrants to purchase
1,000,000 shares of the Common Stock of Citadel at a purchase price of $4.00 per
share and to purchase 1,000,000 shares of the Common Stock of Citadel at a
purchase price of $5.00 per share for a ten-year term.
Pursuant to the Agreement, Citadel and CORESTAFF also entered into a
registration rights agreement (the "Registration Agreement") for Citadel's
Common Stock acquired by or acquirable by CORESTAFF. The Registration Agreement
provides that CORESTAFF has the right to require Citadel to register CORESTAFF's
shares of Common Stock for resale with the Securities and Exchange Commission at
the election of CORESTAFF at any time after October 6, 1998. In addition, the
Registration Agreement also provides CORESTAFF with the right to participate in
any public offering of equity securities effected by Citadel. All costs of such
registrations (other than selling expenses or underwriting discounts) are at
Citadel's expense.
Pursuant to the Agreement, Kenneth R. Johnsen, an executive officer of
CORESTAFF, has been elected to Citadel's Board of Directors. In addition, so
long as CORESTAFF owns more than 5% of Citadel's Common Stock, CORESTAFF has
the right to approve, which approval can not be unreasonably withheld,
certain fundamental transactions involving Citadel, including dividends,
sales or redemptions of stock in excess of certain thresholds, mergers and
acquisitions, affiliated transactions, sales of substantial assets, changes
in the nature of the business, incurrence of additional funded indebtedness
and liquidation.
The Agreement also contemplates that CORESTAFF will provide core
technology and development services to Citadel through its subsidiary,
Millennium Computer Corporation, and that each company will cross-sell the
other company's products and/or services. Citadel and Millennium entered
into a Software Development Services Agreement wherein Millennium will
provide software development and related services to Citadel and supplement
Citadel's research and development activities at their standard customer
rates, less a ten percent (10%) discount, and Citadel will purchase a minimum
of $250,000 of Millennium's development services through September 1, 1998.
The Agreement also contemplates that Citadel and Millennium will enter
into a Software License Agreement with respect to CORESTAFF's software
product "First Step" on an exclusive basis on terms to be negotiated. It is
also contemplated that Millennium will further develop and integrate First
Step with Citadel's technology to create a secure desktop environment for
networks and internet/intranet users. The Agreement further contemplates
that Citadel and CORESTAFF will also enter into a Citadel Products Sales
Agreement wherein CORESTAFF will sell Citadel's products.
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Copies of the agreements are filed as exhibits to this Current Report on
Form 8-K and incorporated herein, and the disclosure in this Form 8-K is
qualified in its entirety by reference to the attached exhibits.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(C) EXHIBITS.
The following exhibits are furnished in accordance with Item 601 of
Regulation S-B.
2.1 Purchase Agreement, dated October 6, 1997, among CORESTAFF, Inc. and
Citadel Computer Systems Incorporated. (without exhibits) (the
exhibits and schedules to the Agreement have been omitted pursuant to
Item 601(b)(2) of Regulation S-B). (Incorporated by reference to
Exhibit 10.10 to the Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1997).
2.2 Warrant to Purchase 1,000,000 Shares of Common Stock of Citadel
Computer Systems Incorporated for $4.00 per share (the Warrant to
Purchase an additional 1,000,000 shares of Common Stock of Citadel
Computer Systems Incorporated for $5.00 per share has been omitted
because the terms are identical other than the exercise price of the
Warrant).
2.3 Registration Rights Agreement between Citadel and CORESTAFF.
2.4 Software Development Services Agreement, dated October 6, 1997, by and
between Millennium Computer Corporation and Citadel Computer Systems
Incorporated.
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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: October 21, 1997 By: /s/ Steven B. Solomon
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Steven B. Solomon,
President and Chief Executive Officer
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INDEX TO EXHIBITS
Exhibit
No. Page
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2.1 Purchase Agreement, dated October 6, 1997, among CORESTAFF,
Inc. and Citadel Computer Systems Incorporated. (without
exhibits) (the exhibits and schedules to the Agreement have
been omitted pursuant to Item 601(b)(2) of Regulation S-B).
(Incorporated by reference to Exhibit 10.10 to the Annual
Report on Form 10-KSB for the fiscal year ended February 28,
1997).
2.2 Warrant to Purchase 1,000,000 Shares of Common Stock
of Citadel Computer Systems Incorporated for $4.00 per share
(the Warrant to Purchase an additional 1,000,000 shares of
Common Stock of Citadel Computer Systems Incorporated for
$5.00 per share has been omitted because the terms are
identical other than the exercise price of the Warrant).
2.3 Registration Rights Agreement between Citadel and
CORESTAFF.
2.4 Software Development Services Agreement, dated
October 6, 1997, by and between Millennium Computer
Corporation and Citadel Computer Systems Incorporated.
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WARRANT
TO PURCHASE COMMON SHARES OF
CITADEL COMPUTER SYSTEMS INCORPORATED
Warrant No. I
No. of Common Shares: 1,000,000
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THIS WARRANT AND THE SHARES OF COMMON SHARES PURCHASABLE HEREUNDER HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAWS AND CANNOT BE OFFERED, SOLD OR TRANSFERRED IN THE
ABSENCE OF REGISTRATION OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, APPLICABLE STATE SECURITIES LAWS AND REGULATIONS PROMULGATED
THEREUNDER. THE TRANSFERABILITY OF THE WARRANT ALSO IS RESTRICTED AS PROVIDED
IN SECTION 9 HEREOF.
No. of Common Shares: 1,000,000 Warrant No. 1
October 6, 1997
WARRANT
TO PURCHASE COMMON SHARES OF
CITADEL COMPUTER SYSTEMS INCORPORATED
THIS IS TO CERTIFY THAT CORESTAFF, INC. or registered assigns, is
entitled, during the Exercise Period (as hereinafter defined), to purchase from
Citadel Computer Systems Incorporated, a Delaware corporation (the "Company"),
One Million (1,000,000) Common Shares (as hereinafter defined and subject to
adjustment as provided herein), at a purchase price of Four Dollars ($4.00) per
share, all on the terms and conditions and pursuant to the provisions
hereinafter set forth.
1. DEFINITIONS
As used in this Warrant, the following terms have the respective
meanings set forth below:
"ADDITIONAL COMMON SHARES" means all Common Shares of any class
issued by the Company after the date hereof, other than Warrant Shares.
"AFFILIATE" of a Person means a Person Controlled By, Controlling or
Under Common Control with such Person.
"BUSINESS DAY" means any day that is not a Saturday or Sunday or a
day on which banks are generally closed for business in the State of
Connecticut.
"COMMISSION" means the United States Securities and Exchange
Commission or any other agency then administering the Securities Act and other
securities laws.
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"COMMON SHARES" means (except where the context otherwise indicates)
shares of the common stock, par value $.01 per share, of the Company as
constituted on the date hereof, and any shares into which such Common Shares
may thereafter be changed, and shall also include (i) shares of the Company of
any other class (regardless of how denominated) issued to the holders of shares
of any class of Common Shares upon any reclassification thereof which is also
not preferred as to dividends or assets over any other class of shares of the
Company and which is not subject to redemption and (ii) common shares of any
successor or acquiring corporation (as defined in Section 4.8) received by or
distributed to the holders of any class of Common Shares of the Company in the
circumstances contemplated by Section 4.8.
"CONTROLLED BY" or "CONTROLLING" or "UNDER COMMON CONTROL" shall mean
possession, directly or indirectly, of power to direct or cause direction of
management or policies (whether through ownership of voting securities, by
contract or otherwise).
"CONVERTIBLE SECURITIES" means evidences of indebtedness, shares or
other securities which are convertible into or exchangeable, with or without
payment of additional consideration in cash or property, for Additional Common
Shares, either immediately or upon the occurrence of a specified date or a
specified event.
"CURRENT STOCK PRICE" means the average of the high and low price of
the Common Shares in the Company's trading market over the last 20 trading days
prior to the date in question.
"CURRENT WARRANT PRICE" in respect of a Common Share, means $4.00, as
adjusted after the Issuance Date in accordance with the provisions of this
Warrant.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE DATE" means the Issuance Date.
"EXERCISE PERIOD" means the period during which this Warrant is
exercisable pursuant to Section 2.1.
"EXPIRATION DATE" means the tenth anniversary of the Issuance Date.
"GAAP" means generally accepted accounting principles, applied on a
consistent basis.
"HOLDER" means the Person in whose name the Warrant is registered on
the books of the Company maintained for such purpose.
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"ISSUANCE DATE" means the date of this Warrant.
"MAJORITY HOLDERS" means the holders of Warrants exercisable for more
than 50% of the aggregate number of Common Shares purchasable upon exercise of
all Warrants, whether or not then exercisable.
"OTHER PROPERTY" has the meaning set forth in Section 4.8.
"OUTSTANDING" means, when used with reference to Common Shares, at
any date as of which the number of shares thereof is to be determined, all
issued shares of Common Shares, except Common Shares then owned or held by or
for the account of the Company or any subsidiary thereof, and shall include all
Common Shares issuable in respect of outstanding scrip or any certificates
representing fractional interests in shares of Common Shares and shall also
include all Common Shares issuable upon conversion or exercise of securities
convertible or exercisable for Common Shares, if such securities are issued at
any date as of which the number of Common Shares is to be determined, excluding
any such securities then owned or held by or for the account of the Company or
any subsidiary thereof.
"PERMITTED ISSUANCES" means (i) Common Shares issued upon exercise of
this Warrant, (ii) Common Shares issued to employees and directors of the
Company or its subsidiaries pursuant to any stock purchase, stock ownership,
stock bonus or stock option plans heretofore or hereafter duly adopted or
assumed by the Company or any subsidiary thereof, (iii) Common Shares issued
pursuant to any dividend reinvestment plan heretofore or hereafter duly adopted
or assumed by the Company, (iv) Common Shares issued by the Company in
connection with the conversion of Convertible Securities outstanding on the
date of the Purchase Agreement, (v) other Common Shares which may become
issuable pursuant to the exercise of certain warrants to purchase up to 500,000
shares at $3 per share that may be granted to Novell Inc. as disclosed to
CORESTAFF, and (vi) 500,000 Common Shares which may become issuable pursuant to
stock options issued to employees.
"PERSON" means any individual, sole proprietorship, partnership,
joint venture, trust, incorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"RESTRICTED COMMON SHARES" shall mean Common Shares which are, or
which upon their issuance on the exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 9.1.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations thereunder, all as the same shall be in effect at the
time.
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"TRANSFER" means any disposition of any Warrant or of any interest
thereof, with or without consideration.
"WARRANTS" means this Warrant and all Warrants issued upon transfer,
division or combination of, or in substitution for, any thereof in accordance
with the terms of this Warrant. All Warrants shall at all times be identical
as to terms and conditions and date, except as to the number of Common Shares
for which they may be exercised.
"WARRANT PRICE" means an amount equal to (i) the number of Common
Shares being purchased upon exercise of this Warrant pursuant to Section 2.1,
multiplied by (ii) the Current Warrant Price as of the date of such exercise.
"WARRANT SHARES" means the Common Shares purchased by the holders of
the Warrants upon the exercise thereof.
2. EXERCISE OF WARRANT
2.1. MANNER OF EXERCISE
From and after the Exercise Date and until 5:00 P.M., Dallas time, on
the Expiration Date, Holder may exercise this Warrant, on any Business Day, for
all (but not less than all) of the number of Common Shares purchasable
hereunder as specified in Section 2.2 hereof.
In order to exercise this Warrant, Holder shall deliver to the
Company at its principal office at 3811 Turtle Creek Boulevard, Suite 600,
Dallas, Texas 75219 or at the office or agency designated by the Company
pursuant to Section 12, (i) a written notice of Holder's election to exercise
this Warrant, which notice shall specify the number of Common Shares to be
purchased, (ii) payment of the Warrant Price by Holder's wire transfer of
immediately available funds and (iii) this Warrant. Such notice shall be
substantially in the form of the subscription form appearing at the end of this
Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon
receipt thereof, the Company shall, as promptly as practicable, and in any
event within ten (10) Business Days thereafter, execute or cause to be executed
and deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Common Shares issuable upon
such exercise, as hereinafter provided. The share certificate or certificates
so delivered shall be, to the extent possible, in such denomination or
denominations as such Holder shall request in the notice and shall be
registered in the name of Holder or, if permitted by to Section 9, such other
name as shall be designated in the notice. This Warrant shall be deemed to
have been exercised and such certificate or certificates shall be deemed to
have been issued, and Holder or any other Person so designated to be named
therein shall be deemed to have
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become a holder of record of such shares for all purposes, as of the date the
notice, together with the wire transfer and this Warrant, is received by the
Company as described above and all taxes required to be paid by Holder, if
any, pursuant to Section 2.3 prior to the issuance of such shares have been
paid. Notwithstanding any provision herein to the contrary, the Company
shall not be required to register shares in the name of any Person who
acquired this Warrant (or part hereof) or any Warrant Stock other than in
accordance with this Warrant.
2.2 COMMON SHARES PURCHASABLE UPON EXERCISE OF THE WARRANT
The number of Common Shares purchasable under this Warrant shall be
One Million (1,000,000), as such number may be adjusted in accordance with the
terms of this Warrant.
2.3. PAYMENT OF TAXES
All Common Shares issuable upon the exercise of this Warrant pursuant
to the terms hereof shall be validly issued, fully paid and nonassessable and
without any preemptive rights. The Company shall pay all expenses in
connection with, and all taxes and other governmental charges, if any, that may
be imposed with respect to, the issue or delivery thereof (other than income or
similar taxes imposed on a Holder). The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for Common Shares issuable upon
exercise of this Warrant in any name other than that of Holder, and in such
case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
2.4. NO FRACTIONAL SHARES
The Company shall not issue a fractional Common Share upon exercise
of any Warrant. Any entitlement of the Holder to any fractional Common Share
shall be deemed to be canceled upon such exercise.
2.5. CONTINUED VALIDITY
A holder of Common Shares issued upon the exercise of this Warrant
(other than a holder who acquires such shares after the same have been publicly
sold pursuant to a prospectus under the Securities Act or otherwise distributed
to the public under such legislation or comparable legislation of any other
jurisdiction), shall continue to be entitled with respect to such shares to all
rights (subject to related obligations) to which it would have been entitled as
Holder under Sections 9, 10 and 14 of this Warrant. The Company will, at the
time of each
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exercise of this Warrant, upon the request of the holder of the Common Shares
issued upon such exercise hereof, acknowledge in writing, in form reasonably
satisfactory to such holder, its continuing obligation to afford to such
holder all such rights; PROVIDED, HOWEVER, that if such holder shall fail to
make any such request, such failure shall not affect the continuing
obligation of the Company to afford to such holder all such rights.
2.6. CONDITIONAL EXERCISE
The exercise of this Warrant may, at the Holder's election, be made
conditional upon the closing of the sale of the Warrant Shares pursuant to a
registered public offering thereof effected in accordance with the Registration
Rights Agreement referred to in Section 9.3 hereof.
3. TRANSFER, DIVISION AND COMBINATION
3.1. TRANSFER
Subject to compliance with Section 9, transfer of this Warrant and
all rights hereunder, in whole or in part, shall be registered on the books of
the Company to be maintained for such purpose, upon surrender of this Warrant
at the principal office of the Company referred to in Section 2.1 or the office
or agency designated by the Company pursuant to Section 12, together with a
written assignment of this Warrant substantially in the form of Exhibit B
hereto duly executed by Holder or its agent or attorney and funds sufficient to
pay any transfer taxes payable upon the making of such transfer. Upon such
surrender the Company shall, subject to Section 9, execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination specified in such instrument of assignment, and shall issue to the
assignor a new Warrant evidencing the portion of this Warrant not so assigned,
and this Warrant shall promptly be canceled. A Warrant, if properly assigned
in compliance with Section 9, may be exercised by a new Holder for the purchase
of Common Shares without having a new Warrant issued.
3.2. DIVISION AND COMBINATION
Subject to Section 9, this Warrant may be divided or combined with
other Warrants upon presentation hereof at the aforesaid office or agency of
the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by Holder or its
agent or attorney. Subject to compliance with Section 3.1 and with Section 9,
as to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
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3.3. EXPENSES
The Company shall prepare, issue and deliver at its own expense
(other than transfer taxes) the new Warrant or Warrants under this Section 3.
3.4. MAINTENANCE OF BOOKS
The Company agrees to maintain, at its aforesaid office or agency,
books for the registration and the registration of transfer of the Warrants.
4. ADJUSTMENTS
The number of Common Shares for which this Warrant is exercisable, or
the price at which such shares may be purchased upon exercise of this Warrant,
shall be subject to adjustment from time to time as set forth in this Section
4. The Company shall give each Holder notice of any event described below
which requires an adjustment pursuant to this Section 4 at the time of such
event.
4.1. STOCK DIVIDENDS. SUBDIVISIONS AND COMBINATIONS
If at any time the Company shall:
(a) take a record of the holders of its Common Shares for the
purpose of entitling them to receive a dividend payable in, or other
distribution of Additional Common Shares,
(b) subdivide its outstanding Common Shares into a larger number of
Common Shares, or
(c) combine its outstanding Common Shares into a smaller number of
Common Shares,
then (i) the number of Common Shares for which this Warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
the number of Common Shares which a record holder of the same number of Common
Shares for which this Warrant is exercisable immediately prior to the
occurrence of such event would own or be entitled to receive after the
happening of such event, and (ii) the Current Warrant Price shall be adjusted
to equal the amount obtained by multiplying the Current Warrant Price by a
fraction, the numerator of which is the number of Common Shares for which this
Warrant is exercisable immediately prior to the adjustment and the denominator
of which is the number of shares for which this Warrant is exercisable
immediately after such adjustment.
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4.2. CERTAIN OTHER DISTRIBUTIONS
If at any time the Company shall declare or pay any dividend on the
Common Shares or make a distribution on the Common Shares of:
(a) cash (other than a cash distribution or dividend payable out of
earnings or earned surplus legally available for the payment of dividends under
the laws of the jurisdiction of incorporation of the Company),
(b) any evidences of its indebtedness, any of its shares or any
other securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Common Shares), or
(c) any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness, any of its shares or any other securities or
property of any nature whatsoever (other than cash, Convertible Securities,
Additional Common Shares or rights pursuant to any shareholders' rights plans
of the Company),
then in each such event provision shall be made so that the Holder of this
Warrant shall receive upon exercise hereof, in addition to the number of Common
Shares issuable upon exercise hereof, the cash, securities or other property
which such Holder would have received as a dividend or distribution (other than
out of earnings or earned surplus legally available for the payment of
dividends under applicable law) if continuously since the Issuance Date such
Holder (i) had been the holder of record of the Common Shares issuable upon
such exercise and (ii) had retained all dividends in stock or other securities
(other than Common Shares or Convertible Securities) paid or payable in respect
of such Common Shares or in respect of any such securities so paid or payable
in respect of such securities so paid or payable as such dividends or
distributions. For purposes of this Section 4.2, a dividend or distribution
payable other than in cash shall be considered to be payable out of earnings or
earned surplus only to the extent that such earnings or earned surplus shall be
charged in an amount equal to the fair value of such dividend or distribution,
as determined by the Company's Board of Directors.
4.3. ISSUANCE OF ADDITIONAL COMMON SHARES
(a) If at any time the Company shall (except as hereinafter
provided) issue or sell any Additional Common Shares, other than Permitted
Issuances, for total consideration in an amount per Additional Common Share
less than the Current Stock Price, then the Current Warrant Price as to the
number of shares for which this Warrant is exercisable prior to such adjustment
shall be adjusted by multiplying such Current Warrant Price by a fraction, the
numerator of which shall be the sum of (i) the number of Common Shares
(including for purposes of this Section 4.3(a), all of the Common Shares
issuable upon exercise hereof)
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Outstanding immediately prior to such issuance or sale of such Additional
Common Shares, multiplied by the Current Warrant Price in effect immediately
prior to such issuance or sale of such Additional Common Shares (the "Current
Value"), plus (ii) the total consideration received by the Company upon such
issuance or sale of such Additional Common Shares, and the denominator of
which shall be the sum of (x) the Current Value and (y) the total
consideration which would have been received by the Company upon such
issuance or sale of Additional Common Shares if they had been sold at the
Current Stock Price.
(b) The provisions of paragraph (a) of Section 4.3 shall not apply
to any issuance of Additional Common Shares for which an adjustment is provided
under Section 4.1. No adjustment of the Current Warrant Price shall be made
under paragraph (a) of Section 4.3 upon the issuance of any Additional Common
Shares which are issued pursuant to the conversion or exchange rights in any
Convertible Securities, if any such adjustment shall previously have been made
upon the issuance of such Convertible Securities (or upon the issuance of any
option or other rights therefor) pursuant to Section 4.4 or Section 4.5.
4.4. ISSUANCE OF WARRANTS OR OTHER RIGHTS
If at any time the Company shall take a record of the holders of its
Common Shares for the purpose of entitling them to receive a distribution of,
or shall in any manner (whether directly or by assumption in a merger in which
the Company is the surviving corporation other than a merger described in
Section 4.8) issue or sell, any warrants or other rights to subscribe for or
purchase any Additional Common Shares or any Convertible Securities, other than
Permitted Issuances, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which
Common Shares are issuable upon the exercise of such warrants or other rights
or upon conversion or exchange of such Convertible Securities shall be less
than the Current Stock Price, then the Current Warrant Price shall be adjusted
as provided in Section 4.3 on the basis that the maximum number of Additional
Common Shares issuable pursuant to all such warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued and outstanding and the Company
shall have received all of the minimum consideration payable therefor, if any,
as of the date of the actual issuance of such warrants or other rights. No
additional adjustment of the Current Warrant Price shall be made upon the
actual issue of such Common Shares or of such Convertible Securities upon
exercise of such warrants or other rights or upon the actual issue of such
Common Shares upon such conversion or exchange of such Convertible Securities.
4.5. ISSUANCE OF CONVERTIBLE SECURITIES
If at any time the Company shall take a record of the holders of its
Common Shares for the purpose of entitling them to receive a distribution of,
or
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shall in any manner (whether directly or by assumption in a merger in which
the Company is the surviving corporation other than a merger described in
Section 4.8) issue or sell, any Convertible Securities, other than Permitted
Issuances, whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Common Shares are
issuable upon such conversion or exchange shall be less than the Current
Stock Price, then the Current Warrant Price shall be adjusted as provided in
Section 4.3 on the basis that the maximum number of Additional Common Shares
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued and outstanding and the
Company shall have received all of the consideration payable therefor, if
any, as of the date of actual issuance of such Convertible Securities. No
additional adjustment of the Current Warrant Price shall be made under this
Section 4.5 upon the actual issue of any Convertible Securities which are
issued pursuant to the exercise of any warrants or other subscription or
purchase rights therefor, if any such adjustment shall previously have been
made upon the issuance of such warrants or other rights pursuant to Section
4.4. No further adjustments of the Current Warrant Price shall be made upon
the actual issue of such Common Shares upon conversion or exchange of such
Convertible Securities and, if any issue or sale of such Convertible
Securities is made upon exercise of any warrant or other right to subscribe
for or to purchase any such Convertible Securities for which adjustments of
the Current Warrant Price has been or is to be made pursuant to other
provisions of this Section 4, no further adjustments of the number of shares
for which this Warrant is exercisable shall be made by reason of such issue
or sale.
4.6. SUPERSEDING ADJUSTMENT
If, at any time after any adjustment of the Current Warrant Price
shall have been made pursuant to Section 4.4 or Section 4.5 as the result of
any issuance of warrants, rights or Convertible Securities,
(a) such warrants or rights, or the right of conversion or exchange
in such other Convertible Securities, shall expire, and all or a portion of
such warrants or rights, or the right of conversion or exchange with respect to
all or a portion of such other Convertible Securities, as the case may be,
shall not have been exercised, or
(b) the consideration per share for which Common Shares are issuable
pursuant to such warrants or rights, or the terms of such other Convertible
Securities, shall be increased solely by virtue of provisions therein contained
for an automatic increase in such consideration per share upon the occurrence
of a specified date or event,
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then such previous adjustment shall be rescinded and annulled. Thereupon, a
recomputation shall be made of the effect of such rights or options or other
Convertible Securities on the basis of
(c) treating the number of Additional Common Shares or other
property, if any, theretofore actually issued or issuable pursuant to the
previous exercise of any such warrants or rights or any such right of
conversion or exchange, as having been issued on the date or dates of any such
exercise and for the consideration actually received and receivable therefor,
and
(d) treating any such warrants or rights or any such other
Convertible Securities which then remain outstanding as having been granted or
issued immediately after the time of such increase of the consideration per
share for which Common Shares or other property are issuable under such
warrants or rights or other Convertible Securities, whereupon a new adjustment
of the Current Warrant Price shall be made, which new adjustment shall
supersede the previous adjustment so rescinded and annulled.
4.7. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION
The following provisions shall be applicable to the making of
adjustments of the number of Common Shares for which this Warrant is
exercisable and the Current Warrant Price provided for in this Section 4:
(a) COMPUTATION OF CONSIDERATION. To the extent that any Additional
Common Shares or any Convertible Securities or any warrants or other rights to
subscribe for or purchase any Additional Common Shares or any Convertible
Securities shall be issued for cash consideration, the consideration received
by the Company therefor shall be the amount of the cash received by the Company
therefor, or, if such Additional Common Shares or Convertible Securities are
offered by the Company for subscription, the subscription price, or, if such
Additional Common Shares or Convertible Securities are sold to underwriters or
dealers for public offering without a subscription offering, the initial public
offering price (in any such case subtracting any amounts paid or receivable for
accrued interest or accrued dividends and without taking into account any
compensation discounts or expenses paid or incurred by the Company for and in
the underwriting of, or otherwise in connection with, the issuance thereof).
To the extent that such issuance shall be for a consideration other than cash,
then, except as herein otherwise expressly provided, the amount of such
consideration shall be deemed to be the fair value of such consideration at the
time of such issuance as determined in good faith by the Board of Directors of
the Company. In case any Additional Common Shares or any Convertible
Securities or any warrants or other rights to subscribe for or purchase such
Additional Common Shares or Convertible Securities shall be issued in
connection with any merger in which the Company issues any securities, the
amount of consideration therefor shall be deemed to be the fair value,
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as determined in good faith by the Board of Directors of the Company, of such
portion of the assets and business of the nonsurviving corporation as such
Board in good faith shall determine to be attributable to such Additional
Common Shares, Convertible Securities, warrants or other rights, as the case
may be. The consideration for any Additional Common Shares issuable pursuant
to any warrants or other rights to subscribe for or purchase the same shall
be the consideration received by the Company for issuing such warrants or
other rights plus the additional minimum consideration payable to the Company
upon exercise of such warrants or other rights. The consideration for any
Additional Common Shares issuable pursuant to the terms of any Convertible
Securities shall be the consideration received by the Company for issuing
warrants or other rights to subscribe for or purchase such Convertible
Securities, plus the minimum consideration paid or payable to the Company in
respect of the subscription for or purchase of such Convertible Securities,
plus the additional minimum consideration, if any, payable to the Company
upon the exercise of the right of conversion or exchange in such Convertible
Securities. In case of the issuance at any time of any Additional Common
Shares or Convertible Securities in payment or satisfaction of any dividends
upon any class of stock other than Common Shares, the Company shall be deemed
to have received for such Additional Common Shares or Convertible Securities
a consideration equal to the amount of such dividend so paid or satisfied.
(b) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by this
Section 4 shall be made whenever and as often as any specified event requiring
an adjustment shall occur, except that any adjustment of the number of Common
Shares for which this Warrant is exercisable that would otherwise be required
may be postponed (except in the case of a subdivision or combination of the
Common Shares, as provided for in Section 4.1) up to, but not beyond the date
of exercise if such adjustment either by itself or with other adjustments not
previously made adds or subtracts less than 1% of the Common Shares for which
this Warrant is exercisable immediately prior to the making of such adjustment.
Any adjustment representing a change of less than such minimum amount (except
as aforesaid) which is postponed shall be carried forward and made as soon as
such adjustment, together with other adjustments required by this Section 4 and
not previously made, would result in a minimum adjustment or on the date of
exercise. For the purpose of any adjustment, any specified event shall be
deemed to have occurred at the close of business on the date of its occurrence.
(c) FRACTIONAL INTERESTS. In computing adjustments under this
Section 4, fractional interests in Common Shares shall be taken into account to
the nearest 1/10th of a share.
(d) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a record
of the holders of its Common Shares for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and
shall,
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thereafter and before the distribution to stockholders thereof, legally
abandon its plan to pay or deliver such dividend, distribution, subscription
or purchase rights, then thereafter no adjustment shall be required by reason
of the taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.
4.8. REORGANIZATION. RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS
In case the Company shall reorganize its capital, reclassify its
capital stock, consolidate or merge with or into another corporation (where the
Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Shares of the Company), or sell,
transfer or otherwise dispose of all or substantially all its property, assets
or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common shares of the successor or acquiring
corporation ("Other Property"), are to be received by or distributed to the
holders of Common Shares of the Company, then each Holder shall have the right
thereafter to receive, upon exercise of such Warrant, the number of common
shares of the successor or acquiring corporation or of the Company, if it is
the surviving corporation, and Other Property receivable upon or as a result of
such reorganization, reclassification, merger, consolidation or disposition of
assets by a holder of the number of Common Shares for which this Warrant is
exercisable immediately prior to such event. In case of any such
reorganization, reclassification, merger, consolidation or disposition of
assets, the successor or acquiring corporation (if other than the Company)
shall expressly assume the due and punctual observance and performance of each
and every covenant and condition of this Warrant to be performed and observed
by the Company and all the obligations and liabilities hereunder, subject to
such modifications as may be deemed appropriate (as determined by resolution of
the Board of Directors of the Company) in order to provide for adjustments of
the Common Shares for which this Warrant is exercisable which shall be as
nearly equivalent as practicable to the adjustments provided for in this
Section 4. For purposes of this Section 4.8 "common shares of the successor or
acquiring corporation" shall include shares of such corporation of any class
which is not preferred as to dividends or assets over any other class of shares
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares or other securities which are
convertible into or exchangeable for any such shares, either immediately or
upon the arrival of a specified date or the happening of a specified event and
any warrants or other rights to subscribe for or purchase any such shares. The
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foregoing provisions of this Section 4.8 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
4.9. OTHER ACTION AFFECTING COMMON SHARES
In case at any time or from time to time the Company shall take any
action in respect of its Common Shares, other than the payment of dividends
permitted by Section 4.2(a) or any other action described in this Section 4,
then, unless such action will not have an adverse effect upon the rights of the
Holders, the number of Common Shares or other shares for which this Warrant is
exercisable and/or the purchase price thereof shall be adjusted in such manner
as may be equitable in the circumstances.
4.10. CERTAIN LIMITATIONS
Notwithstanding anything herein to the contrary, the Company agrees
not to enter into any transaction which, by reason of any adjustment hereunder,
would cause the Current Warrant Price to be less than the par value per share
of the Common Shares.
5. NOTICES TO WARRANT HOLDERS
5. 1. NOTICE OF ADJUSTMENTS
Whenever the number of Common Shares for which this Warrant is
exercisable, or whenever the price at which a Common Share may be purchased
upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the
Company shall forthwith prepare a certificate to be executed by the chief
financial officer of the Company setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment was calculated
(including a description of the basis on which the Board of Directors of the
Company determined the fair value of any evidences of indebtedness, shares,
other securities or property or warrants or other subscription or purchase
rights referred to in Section 4.2 or 4.7(a)), specifying the number of Common
Shares for which this Warrant is exercisable and (if such adjustment was made
pursuant to Section 4.8 or 4.9) describing the number and kind of any other
shares or Other Property for which this Warrant is exercisable, and any change
in the purchase price or prices thereof; after giving effect to such adjustment
or change. The Company shall promptly cause a signed copy of such certificate
to be delivered to each Holder in accordance with Section 14.2. The Company
shall keep at its office or agency designated pursuant to Section 12 copies of
all such certificates and cause the same to be available for inspection at said
office during normal business hours by any Holder or any prospective purchaser
of a Warrant designated by a Holder thereof.
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<PAGE>
5.2. NOTICE OF CERTAIN CORPORATE ACTION
The Holder shall be entitled to the same rights to receive notice of
corporate action as any holder of Common Shares.
6. NO IMPAIRMENT
The Company shall not by any action including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of
all such actions as may be necessary or appropriate to protect the rights of
Holder against impairment. Without limiting the generality of the foregoing,
the Company will (a) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable Common Shares upon the exercise of this Warrant, and (b) use its
best efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to
enable the Company to perform its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON SHARES: REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY
From and after the date hereof, the Company shall at all times
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued Common Shares as will be sufficient to permit
the exercise in full of all outstanding Warrants. All Common Shares which
shall be so issuable, when issued upon exercise of any Warrant and paid for in
accordance with the terms of such Warrant, shall be duly and validly issued and
fully paid and nonassessable, and not subject to preemptive rights.
Before taking any action which would cause an adjustment reducing
the Current Warrant Price below the then par value per share of the Common
Shares issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and nonassessable Common Shares at such adjusted
Current Warrant Price.
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<PAGE>
Before taking any action which would result in an adjustment in the
number of Common Shares for which this Warrant is exercisable or in the Current
Warrant Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction in respect thereof.
If any Common Shares required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any
governmental authority in the United States or any other jurisdiction
(otherwise than as provided in Section 9) or any stock exchange before such
shares may be so issued, the Company will in good faith and as expeditiously as
possible and at its expense endeavor to cause such shares to be duly
registered.
8. TAKING OF RECORD: SHARE AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the Company to
the holders of its Common Shares with respect to which any provision of Section
4 refers to the taking of a record of such holders, the Company will in each
such case take such a record as of the close of business on a Business Day.
The Company will not at any time, except upon dissolution, liquidation or
winding, up of the Company, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise or transfer of any
Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
This Warrant shall not be transferred or assigned, in whole or in
part, without the prior written consent of the Company, except to a direct or
indirect subsidiary of Holder. In addition to obtaining such consent, no
transfer or assignment of this Warrant or the Warrant Shares shall be made
before satisfaction of the conditions specified in this Section 9, which
conditions are intended to ensure compliance with the provisions of the
Securities Act with respect to the Transfer of any Warrant and the Warrant
Shares. Holder, by acceptance of this Warrant, agrees to be bound by the
provisions of this Section 9.
9.1. RESTRICTIVE LEGEND
Except as otherwise provided in this Section 9, each certificate for
Warrant Shares initially issued upon the exercise of this Warrant, and each
certificate for Warrant Shares issued to any subsequent transferee of any such
certificate, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act"),
or
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any state securities laws and cannot be offered, sold or transferred in
the absence of registration or the availability of an exemption from
registration under the Act, applicable state securities laws and
regulations promulgated thereunder."
9.2. PROPOSED TRANSFERS
Prior to any Transfer or attempted Transfer of any Warrants or any
Restricted Common Shares, the holder of such Warrants or Restricted Common
Shares shall obtain from counsel to such Holder an opinion reasonably
satisfactory to the Company and upon which it may rely that the proposed
Transfer of such Warrants or such Restricted Common Shares may be effected
without registration under the Securities Act. Each certificate, if any,
evidencing such Restricted Common Shares issued upon such Transfer shall bear
the restrictive legend set forth in Section 9.1, and each Warrant issued upon
such Transfer shall bear the restrictive legend set forth on the first page
hereof unless in the opinion of Holder's counsel, which opinion shall be
reasonably satisfactory to the Company and upon which it may rely, such legend
is not required in order to ensure compliance with the Securities Act.
9.3. REGISTRATION.
The Holders of the Warrants and Warrant Shares have rights to request
and obtain registration of such Warrant Shares as provided for in a
Registration Rights Agreement made at even date herewith between the Company
and CORESTAFF, Inc. to which reference is hereby made.
10. SUPPLYING INFORMATION
The Company shall cooperate with each Holder of a Warrant and each
holder of Restricted Common Shares in supplying such information as may be
reasonably necessary for such holder to complete and file any information
reporting forms presently or hereafter required by the Commission as a
condition to the availability of an exemption from the Securities Act for the
sale of any Warrant or Restricted Common Shares.
11. LOSS OR MUTILATION
Upon receipt by the Company from any Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and indemnity reasonably satisfactory to it (it
being understood that the written agreement of CORESTAFF, Inc. shall be
sufficient indemnity) and in case of mutilation upon surrender and cancellation
hereof, the Company will
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execute and deliver in lieu hereof a new Warrant of like tenor to such
Holder; PROVIDED, in the case of mutilation, no indemnity shall be required
if this Warrant in identifiable form is surrendered to the Company for
cancellation.
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company shall
maintain an office or agency (which may be the principal executive offices of
the Company) where the Warrants may be presented for exercise, registration of
transfer, division or combination as provided in this Warrant and shall advise
the holders of the Warrants of any change in such office or agency.
13. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by Holder
to purchase Common Shares, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of such Holder
for the purchase price of any Common Shares or as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
14. MISCELLANEOUS
14.1 NONWAIVER AND EXPENSES
No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights, powers or remedies. If the Company fails
to make, when due, any payments provided for hereunder, or fails to comply with
any other provision of this Warrant, the Company shall pay to Holder such
amounts as shall be sufficient to cover any costs and expenses including, but
not limited to, reasonable legal fees, including those of court proceedings,
incurred by Holder in collecting any amounts due pursuant hereto or in
otherwise enforcing any of its rights, powers and remedies hereunder. However,
if such court proceedings are unsuccessfully instituted by Holder against the
Company, then Holder shall pay to the Company such amount as shall be
sufficient to cover the costs and expenses, including reasonable legal fees, of
the Company in its defense in such court proceedings.
14.2. NOTICE GENERALLY
Any notice, demand, request, consent, approval, declaration, delivery
or other communication hereunder to be made pursuant to the provisions of this
Warrant shall be sufficiently given or made if in writing and either delivered
in
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person with receipt acknowledged or sent by registered or certified mail,
return receipt requested, postage prepaid or by telecopier or other form of
facsimile transmission, addressed as follows:
(a) If to the Company:
Citadel Computer Systems Incorporated
3811 Turtle Creek Boulevard, Suite 600
Dallas, TX 75219
Facsimile number: (214) 520-0034
Telephone number: (214) 520-9292
Attention: Steven B. Solomon,
President and Chief Executive Officer
With a copy to:
Wood, Exall & Bonnet, L.L.P.
12222 Merit Drive, Suite 880
Dallas, TX 75251
Facsimile number: (972) 991-9261
Telephone number: (972) 991-8510
Attention: David Wood, Esq.
If to Holder:
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 2000
Houston, TX 77027
Facsimile number: (281) 602-3430
Telephone number: (713) 548-3485
Attention: Kenneth R. Johnsen
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<PAGE>
With a copy to:
Peter T. Dameris, Esq.
CORESTAFF, Inc.
4400 Post Oak Parkway, Suite 1130
Houston, TX 77027
Tel No.: (713) 548-3400
Fax No.: (713) 627-1059
or in either case at such other address as may be substituted by notice given
as herein provided. The giving of any notice required hereunder may be waived
in writing by the party entitled to receive such notice. Every notice, demand,
request, consent, approval, declaration, delivery or other communication
hereunder shall be deemed to have been duly given or served on the date on
which personally delivered, with receipt acknowledged, or three (3) Business
Days after the same shall have been deposited in the United States mail or on
the day on which received if given by telecopier or other form of facsimile
transmission or on the next Business Day if received after normal business
hours of the recipient party. Failure or delay in delivering copies of any
notice, demand, request, approval, declaration, delivery or other communication
to the person designated above to receive a copy shall in no way adversely
affect the effectiveness of such notice, demand, request, approval,
declaration, delivery or other communication.
14.3. REMEDIES
Each holder of Warrant and Warrant Shares, in addition to being
entitled to exercise all rights granted by law, including recovery of damages,
will be entitled to specific performance of its rights under this Warrant.
14.4. SUCCESSORS AND ASSIGNS
Subject to the provisions of Section 3.1, this Warrant and the rights
evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant, and shall be enforceable by any such Holder.
14.5. AMENDMENT
This Warrant and all other Warrants may be modified or amended or the
provisions hereof waived with the written consent of the Company and the
Majority Holders, provided that no such Warrant may be modified or amended to
reduce the number of shares of Common Shares for which such Warrant is
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exercisable (before giving effect to any adjustment as provided therein)
without the prior written consent of the Holder thereof.
14.6. SEVERABILITY
Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Warrant.
14.7. HEADINGS
The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be considered in the
interpretation of this Warrant.
14.8. GOVERNING LAW
This Warrant shall be governed by the laws of the State of Delaware,
without regard to the provisions thereof relating to conflict of laws.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and attested by its Secretary or an Assistant Secretary.
Dated: October 6, 1997 CITADEL COMPUTER SYSTEMS
INCORPORATED
By: /s/ STEVEN B. SOLOMON
-----------------------------------
Steven B. Solomon
President and Chief
Executive Officer
Accepted and Agreed To:
CORESTAFF, INC.
By: /s/ PETER T. DAMERIS
--------------------------------------
Peter T. Dameris
Senior Vice President, General Counsel
and Secretary
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<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of Common Shares of Citadel Computer
Systems Incorporated, and herewith makes payment therefor, all at the price and
on the terms and conditions specified in this Warrant and requests that
certificates for the Common Shares hereby purchased (and any securities or
other property issuable upon such exercise) be issued in the name of and
delivered to _______________________ whose address is _________________________.
---------------------------------------
(Name of Registered Owner)
---------------------------------------
(Signature of Registered Owner)
---------------------------------------
(Street Address)
---------------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the name as
written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
Common Shares set forth below:
NAME AND ADDRESS OF ASSIGNEE NO. OF COMMON SHARES
- -------------------------------------------------
and does hereby irrevocably constitute and appoint attorney-in-fact to register
such transfer on the books of Citadel Computer Systems Incorporated maintained
for the purpose, with full power of substitution in the premises.
Dated: _______________________ Print Name:
-----------------------------
Signature:
------------------------------
Witness:
--------------------------------
NOTICE: (1) The signature on this assignment must correspond with the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
(2) The sale, transfer or assignment of this Warrant shall not be
effective, unless made in full compliance with Section 9 hereof.
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of October 6, 1997, by and among CITADEL
COMPUTER SYSTEMS INCORPORATED, a Delaware corporation (the "COMPANY") and
CORESTAFF, INC., a Delaware corporation (the "INVESTOR").
RECITALS
A. The Company and the Investor are parties to a Purchase Agreement
of even date herewith (the "PURCHASE AGREEMENT"). In order to induce the
Investor to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement. The execution and
delivery of this Agreement is a condition to the Closing under the Purchase
Agreement.
B. Unless otherwise provided in this Agreement, capitalized terms
used herein shall have the meanings set forth in SECTION 8 hereof.
AGREEMENT
The parties hereto agree as follows:
1. DEMAND REGISTRATIONS.
(a) REQUESTS FOR REGISTRATION. At any time after the first
anniversary of the date hereof, the holders of a majority of the Registrable
Securities may request registration under the Securities Act of all or any
portion of their Registrable Securities on Form S-1, SB-2 or any similar
long-form registration ("LONG-FORM REGISTRATIONS"), and the holders of a
majority of the Registrable Securities may request registration under the
Securities Act of all or any portion of their Registrable Securities on Form
S-2 or S-3) or any similar short-form registration ("SHORT-FORM REGISTRATIONS")
if available. All registrations requested pursuant to this SECTION 1(a) are
referred to herein as "DEMAND REGISTRATIONS". Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering. Within ten days after receipt of any such request, the Company shall
give written notice of such requested registration to all other holders of
Registrable Securities and shall include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within 15 days after the receipt of the Company's notice.
(b) LONG-FORM REGISTRATIONS. The holders of Registrable
Securities shall be entitled to request (i) one (1) Long-Form Registration in
which the Company shall pay all Registration Expenses ("COMPANY-PAID LONG-FORM
REGISTRATIONS") and (ii) an unlimited number of Long-Form Registrations each in
which the holders of Registrable Securities shall pay
<PAGE>
their share of the Registration Expenses as set forth in SECTION 5 hereof.
Each such Long Form Registration shall be for at least $1,000,000 of the
Registrable Securities or 25% of such Registrable Securities. A registration
shall not count as one of the permitted Long-Form Registrations until it has
become effective and no Company-paid Long-Form Registration shall count as
one of the permitted Long-Form Registrations unless the holders of
Registrable Securities are able to register and sell at least 75% of the
Registrable Securities requested to be included in such registration (unless
such registration is a shelf registration, in which event the holders of
Registrable Securities have been able to register at least 75% of the
Registrable Securities requested to be included in such registration);
provided that in any event the Company shall pay all Registration Expenses in
connection with any registration initiated as a Company-paid Long-Form
Registration whether or not it has become effective and whether or not such
registration has counted as one of the permitted Company-paid Long-Form
Registrations.
(c) SHORT-FORM REGISTRATIONS. In addition to the Long-Form
Registrations provided pursuant to SECTION 1(b), the holders of at least 40% of
the Registrable Securities shall be entitled to request an unlimited number of
Short-Form Registrations in which the Company shall pay all Registration
Expenses. Demand Registrations shall be Short-Form Registrations whenever the
Company is permitted to use any applicable short form.
(d) PRIORITY ON DEMAND REGISTRATIONS. The Company shall not
include in any Demand Registration any securities which are not Registrable
Securities without the prior written consent of the holders of a majority of
the Registrable Securities included in such registration. If a Demand
Registration is an underwritten offering and the managing underwriters advise
the Company in writing that in their opinion the number of Registrable
Securities and, if permitted hereunder, other securities requested to be
included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold in an orderly manner in such
offering within a price range acceptable to the holders of a majority of the
Registrable Securities to be included in such registration therein, without
adversely affecting the marketability of the offering, the Company shall
include in such registration prior to the inclusion of any securities which are
not Registrable Securities (i) first, the number of Registrable Securities
requested to be included held by the Investor or its permitted transferees
which in the opinion of such underwriters can be sold in an orderly manner
within the price range of such offering, pro rata among the respective holders
thereof on the basis of the amount of Registrable Securities owned by each such
holder and (ii) second, other registrable securities of the Company included
therein, pro rata among such holders on the basis of the amount of Registrable
Securities owned by each such holder. Without the consent of the Company and
the holders of a majority of the registrable securities included in such
registration, any Persons other than holders of Registrable Securities who
participate in Demand Registrations which are not at the Company's expense must
pay their share of the Registration Expenses as provided in SECTION 5 hereof.
(e) RESTRICTIONS ON LONG-FORM REGISTRATIONS. The Company shall
not be obligated to effect any Long-Form Registration within 180 days after the
effective date of a previous Long-Form Registration or a previous registration
in which the holders of Registrable Securities were given piggyback rights
pursuant to SECTION 2 and in which there was no reduction
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in the number of Registrable Securities requested to be included.
Notwithstanding the foregoing, in the event that all Registrable Securities
are eligible for immediate resale under Rule 144(k), the holders shall sell
such Shares under Rule 144 and shall not be entitled to any Long-Form
Registration. The Company may postpone for up to 180 days the filing or the
effectiveness of a registration statement for a Demand Registration if the
Company and the holders of a majority of the Registrable Securities agree
that such Demand Registration would reasonably be expected to have a material
adverse effect on any proposal or plan by the Company or any of its
Subsidiaries to engage in any acquisition of assets (other than in the
ordinary course of business) or any merger, consolidation, tender offer,
reorganization or similar transaction; provided that in such event, the
holders of Registrable Securities initially requesting such Demand
Registration shall be entitled to withdraw such request and, if such request
is withdrawn, such Demand Registration shall not count as one of the
permitted Demand Registrations hereunder and the Company shall pay all
Registration Expenses in connection with such registration. The Company may
delay a Demand Registration hereunder only once in any twelve-month period.
(f) SELECTION OF UNDERWRITERS. The holders of a majority of
the Registrable Securities included in any Demand Registration/Long-Form
Registration shall have the right to select the investment banker(s) and
manager(s) to administer the offering.
(g) OTHER REGISTRATION RIGHTS. Except as provided in this
Agreement, the Company shall not grant to any Persons the right to request the
Company to register any equity securities of the Company, or any securities
convertible or exchangeable into or exercisable for such securities, without
the prior written consent of the holders of a majority of the Registrable
Securities.
2. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to
register any of its securities under the Securities Act (other than pursuant to
a Demand Registration) and the registration form to be used may be used for the
registration of Registrable Securities (a "PIGGYBACK REGISTRATION"), the
Company shall give prompt written notice (in any event within three business
days after its receipt of notice of any exercise of demand registration rights
other than under this Agreement) to all holders of Registrable Securities of
its intention to effect such a registration and shall include in such
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 25 days after the
receipt of the Company's notice.
(b) PIGGYBACK EXPENSES. The Registration Expenses of the
holders of Registrable Securities shall be paid by the Company in all Piggyback
Registrations.
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback
Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in an orderly manner in such offering
within a price range acceptable to the Company, the Company shall include in
such
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<PAGE>
registration (i) first, the securities the Company proposes to sell, (ii)
second, the Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities on
the basis of the number of shares owned by each such holder, and (iii) third,
other securities requested to be included in such registration; PROVIDED,
HOWEVER, that in any Piggyback Registration other than the Initial Public
Offering of the Company's Common Stock, the holders of Registrable Securities
shall be permitted to include in any such registration on pro rata basis not
less than 25% of the number of shares of Common Stock proposed to be sold in
such offering, unless the holders of a majority of the Registrable Securities
requesting such Piggyback Registration agree in writing to reduce such
position or to waive their rights under this proviso.
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback
Registration is an underwritten secondary registration on behalf of holders of
the Company's securities, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in an orderly manner
in such offering within a price range acceptable to the holders of a majority
of the Registrable Securities to be included in such registration, the Company
shall include in such registration (i) first, the securities requested to be
included therein by the holders requesting such registration, (ii) second, the
Registrable Securities requested to be included in such registration, pro rata
among the holders of such Registrable Securities on the basis of the number of
shares owned by each such holder, and (iii) third, other securities requested
to be included in such registration.
(e) SELECTION OF UNDERWRITERS. If any Piggyback Registration
is an underwritten offering, the selection of investment banker(s) and
manager(s) for the offering must be approved by the holders of a majority of
the Registrable Securities included in such Piggyback Registration. Such
approval shall not be unreasonably withheld or delayed.
(f) OTHER REGISTRATIONS. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to
SECTION 1 or pursuant to this SECTION 2, and if such previous registration has
not been withdrawn or abandoned, the Company shall not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-4, Form S-8 or any successor form),
whether on its own behalf or at the request of any holder or holders of such
securities, until a period of at least 180 days has elapsed from the effective
date of such previous registration, unless a shorter period of time is approved
by the holders of a majority of the Registrable Securities included in such
previous registration, or unless such registration is a "shelf registration" on
Form S-3 that the holders of Registrable Securities have requested to be kept
effective for a period of more than 180 days.
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<PAGE>
3. HOLDBACK AGREEMENTS.
(a) Each holder of Registrable Securities shall not effect any
public sale or distribution (including sales pursuant to Rule 144) of equity
securities of the Company, or any securities convertible into or exchangeable
or exercisable for such securities, during the seven days prior to and the
180-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration in which Registrable
Securities are included (except as part of such underwritten registration),
unless the underwriters managing the registered public offering otherwise
agree.
(b) The Company (i) shall not effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and during the 180-day period beginning on the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration
(except as part of such underwritten registration or pursuant to registrations
on Form S-4, Form S-8 or any successor form), unless the underwriters managing
the registered public offering otherwise agree, and (ii) shall cause each
holder of its Common Stock, or any securities convertible into or exchangeable
or exercisable for Common Stock, purchased from the Company at any time after
the date of this Agreement (other than in a registered public offering) to
agree not to effect any public sale or distribution (including sales pursuant
to Rule 144) of any such securities during such period (except as part of such
underwritten registration, if otherwise permitted), unless the underwriters
managing the registered public offering otherwise agree.
4. REGISTRATION PROCEDURES. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered
pursuant to this Agreement, the Company shall use its best efforts to effect
the registration and the sale of such Registrable Securities in accordance with
the intended method of disposition thereof, and pursuant thereto the Company
shall as expeditiously as possible:
(a) prepare and file with the Securities and Exchange
Commission a registration statement with respect to such Registrable Securities
and use its best efforts to cause such registration statement to become
effective (provided that before filing a registration statement or prospectus
or any amendments or supplements thereto, the Company shall furnish to the
counsel selected by the holders of a majority of the Registrable Securities
covered by such registration statement copies of all such documents proposed to
be filed, which documents shall be subject to the review and comment of such
counsel);
(b) notify each holder of Registrable Securities of the
effectiveness of each registration statement filed hereunder and prepare and
file with the Securities and Exchange Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for a period of not less than 180 days and comply with the provisions
of the Securities Act with respect to the disposition of all securities covered
by such registration statement during such period in accordance with the
intended methods of disposition by the sellers thereof set forth in
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<PAGE>
such registration statement; PROVIDED, HOWEVER, that if the Company is
eligible to use Form S-3, the holders of Registrable Securities may require
the Company to keep such registration effective as a "shelf registration" for
a period of up to two (2) years;
(c) furnish to each seller of Registrable Securities such
number of copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller (provided that the Company shall not be
required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subparagraph, (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to general
service of process in any such jurisdiction);
(e) notify each seller of such Registrable Securities, at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the NASD automated quotation
system and, if listed on the NASD automated quotation system, use its best
efforts to secure designation of all such Registrable Securities covered by
such registration statement as a NASDAQ "national market system security"
within the meaning of Rule 11Aa2-1 of the Securities and Exchange Commission
or, failing that, to secure NASDAQ authorization for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange
for at least two market makers to register as such with respect to such
Registrable Securities with the NASD;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including
underwriting agreements in customary form) and take all such other actions as
the holders of a majority of the Registrable Securities being sold or the
underwriters, if any, reasonably request in order to
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<PAGE>
expedite or facilitate the disposition of such Registrable Securities
(including effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all
applicable rules and regulations of the Securities and Exchange Commission, and
make available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months beginning with
the first day of the Company's first full calendar quarter after the effective
date of the registration statement, which earnings statement shall satisfy the
provisions of SECTION 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which holder,
in its sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included;
(l) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order;
(m) use its best efforts to cause such Registrable Securities
covered by such registration statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to enable
the sellers thereof to consummate the disposition of such Registrable
Securities;
(n) obtain a cold comfort letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters as the holders of a majority of the
Registrable Securities being sold reasonably request (provided that such
Registrable Securities constitute at least 10% of the securities covered by
such registration statement); and
(o) If the offering is underwritten and at the request of any
seller of Registrable Securities, use its best efforts to furnish on the date
that Registrable Securities are delivered to the underwriters for sale pursuant
to such registration an opinion dated such date of counsel representing the
Company for the purposes of such registration, addressed to the
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<PAGE>
underwriters and to such seller, stating that such registration statement has
become effective under the Securities Act and that (i) to the best knowledge
of such counsel, no stop order suspending the effectiveness thereof has been
issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act, (ii) the registration
statement, the related prospectus and each amendment or supplement thereof
comply as to form in all material respects with the requirements of the
Securities Act (except that such counsel need not express any opinion as to
financial statements contained therein) and (iii) to such other effects as
reasonably may be requested by counsel for the underwriters or by such seller
or its counsel.
5. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, fees and
disbursements of custodians, and fees and disbursements of counsel for the
Company and all independent certified public accountants, underwriters
(excluding discounts and commissions) and other Persons retained by the Company
(all such expenses being herein called "REGISTRATION EXPENSES"), shall be borne
as provided in this Agreement, except that the Company shall, in any event, pay
its internal expenses (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties), the
expense of any annual audit or quarterly review, the expense of any liability
insurance and the expenses and fees for listing the securities to be registered
on each securities exchange on which similar securities issued by the Company
are then listed or on, the NASD automated quotation system.
(b) In connection with each Demand Registration and each
Piggyback Registration, the Company shall reimburse the holders of Registrable
Securities included in such registration for the reasonable fees and
disbursements (up to $5,000) of one counsel chosen by the holders of a majority
of the Registrable Securities included in such registration for the purpose of
rendering a legal opinion on behalf of such holders in connection with any
underwritten Demand Registration or Piggyback Registration.
(c) To the extent Registration Expenses are not required to be
paid by the Company, each holder of securities included in any registration
hereunder shall pay those Registration Expenses allocable to the registration
of such holder's securities so included, and any Registration Expenses not so
allocable shall be payable by all sellers of securities included in such
registration in proportion to the aggregate selling price of the securities to
be so registered.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify, to the extent permitted by
law, each holder of Registrable Securities, its officers and directors and each
Person who controls such holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
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<PAGE>
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for
use therein or by such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after the
Company has furnished such holder with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company shall indemnify
such underwriters, their officers and directors and each Person who controls
such underwriters (within the meaning of the Securities Act) to the same extent
as provided above with respect to the indemnification of the holders of
Registrable Securities.
(b) In connection with any registration statement in which a
holder of Registrable Securities is participating, each such holder shall
furnish to the Company in writing such information and affidavits as the
Company reasonably requests for use in connection with any such registration
statement or prospectus and, to the extent permitted by law, shall indemnify
the Company, its directors and officers and each Person who controls the
Company (within the meaning of the Securities Act) against any losses, claims,
damages, liabilities and expenses resulting from any untrue or alleged untrue
statement of material fact contained in the registration statement, prospectus
or preliminary prospectus or any amendment thereof or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only to the
extent that such untrue statement or omission is contained in any information
or affidavit so furnished in writing by such holder; provided that the
obligation to indemnify shall be individual, not joint and several, for each
holder and shall be limited to the net amount of proceeds received by such
holder from the sale of Registrable Securities pursuant to such registration
statement.
(c) Any Person entitled to indemnification hereunder shall (i)
give prompt written notice to the indemnifying party of any claim with respect
to which it seeks indemnification (provided that the failure to give prompt
notice shall not impair any Person's right to indemnification hereunder to the
extent such failure has not prejudiced the indemnifying party) and (ii) unless
in such indemnified party's reasonable judgment a conflict of interest between
such indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not
be unreasonably withheld). An indemnifying party who is not entitled to, or
elects not to, assume the defense of a claim shall not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to
such claim.
(d) The indemnification provided for under this Agreement shall
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling Person
of such indemnified party and
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<PAGE>
shall survive the transfer of securities. The Company also agrees to make
such provisions, as are reasonably requested by any indemnified party, for
contribution to such party in the event the Company's indemnification is
unavailable for any reason.
7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may
participate in any registration hereunder unless such Person:
(a) in the case of a registration which is underwritten, agrees
to sell such Person's securities on the basis provided in any underwriting
arrangements approved by the Person or Persons entitled hereunder to approve
such arrangements; PROVIDED, HOWEVER, that no holder of Registrable Securities
included in any underwritten registration shall be required to make any
representations or warranties to the Company or the underwriters (other than
representations and warranties regarding such holder and such holder's intended
method of distribution) or to undertake any indemnification obligations to the
Company or the underwriters with respect thereto, except as otherwise provided
in SECTION 6 hereof;
(b) as expeditiously as possible, notifies the Company, at any
time when a prospectus relating to such Person's Registrable Securities is
required to be delivered under the Securities Act, of the happening of any
event as a result of which such prospectus contains an untrue statement of a
material fact or omits any fact necessary to make the statements therein not
misleading;
(c) complies with all reasonable requests made by the Company
or its counsel with respect to the registration of such Person's Registrable
Securities, including, without limitation, providing access to all relevant
books and records; and
(d) completes, executes and delivers all questionnaires, powers
of attorney, indemnities, underwriting agreements and other usual and customary
documents necessary or appropriate with respect to the offering of such
Person's Registrable Securities, and in the case of a registration which is
underwritten, necessary or appropriate under the terms of such underwriting
arrangements (subject to the provision in PARAGRAPH (a) above).
8. DEFINITIONS.
(a) The term "INITIAL PUBLIC OFFERING" shall mean the first
registered public offering of the Company's Common Stock by the Company after
the date hereof under the Securities Act with net proceeds to the Company of
not less than $5 million.
(b) "REGISTRABLE SECURITIES" means (i) any Common Stock issued
to the Investor pursuant to the Purchase Agreement or upon exercise of the
Warrants, (ii) any other Common Stock issued or issuable with respect to the
securities referred to in clause (i) by way of a stock dividend or stock split
or in connection with an exchange or combination of shares, recapitalization,
merger, consolidation or other reorganization, and (iii) any other shares of
Common Stock held by the Investor. As to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when they
have been distributed to the public pursuant to
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<PAGE>
a offering registered under the Securities Act or are eligible to be
immediately sold to the public through a broker, dealer or market maker in
compliance with Rule 144(k) under the Securities Act (or any similar rule
then in force). For purposes of this Agreement, a Person shall be deemed to
be a holder of Registrable Securities whenever such Person has the right to
acquire such Registrable Securities (upon conversion or exercise in
connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually be effected.
(b) Unless otherwise stated, other capitalized terms contained
herein have the meanings set forth in the Purchase Agreement.
9. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company shall not
hereafter enter into any agreement with respect to its securities which is
inconsistent with or violates the rights granted to the holders of Registrable
Securities in this Agreement.
(b) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company
shall not take any action, or permit any change to occur, with respect to its
securities which would adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement or which would adversely affect the
marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(c) REMEDIES. Any Person having rights under any provision of
this Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(d) AMENDMENTS AND WAIVERS. Except as otherwise provided
herein, the provisions of this Agreement may be amended or waived only upon the
prior written consent of the Company and holders of at least 75% of the
Registrable Securities.
(e) SUCCESSORS AND ASSIGNS. All covenants and agreements in
this Agreement by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto whether so expressed or not. In addition, whether or not any express
assignment has been made, the provisions of this Agreement which are for the
benefit of purchasers or holders of Registrable Securities are also for the
benefit of, and enforceable by, any subsequent holder of registrable
Securities.
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<PAGE>
(f) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
(g) COUNTERPARTS. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
(h) DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of
this Agreement.
(i) GOVERNING LAW. The corporate law of the State of Delaware
shall govern all issues and questions concerning the relative rights of the
Company and its stockholders. All other issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of Texas, without giving effect to any
choice of law or conflict of law rules or provisions (whether of the State of
Texas or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Texas.
(j) NOTICES. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable overnight
courier service (charges prepaid) or 48 hours after deposited in the United
States mail, first class, to the recipient by postage prepaid or by facsimile.
Such notices, demands and other communications shall be sent to the Investor
and each other holder at the addresses indicated on the Schedule of Holders and
to the Company at the address of its corporate headquarters or to such other
address or to the attention of such other person as the recipient party has
specified by prior written notice to the sending party.
(k) NEW PARTIES. During the term of this Agreement, the
Company may, with the consent of the Company's Board of Directors and the
holders of more than 60% of the Registrable Securities, add new Persons as
parties to this Agreement by executing a supplemental signature page hereto,
and the SCHEDULE OF HOLDERS attached hereto as EXHIBIT A shall be revised and
updated accordingly.
(l) TERMINATION OF REGISTRATION RIGHTS. All registration
rights granted hereunder will expire at such time as 75% of the Registrable
Securities originally issued by the Company to the Investor (including those
issuable upon exercise of the Warrants) have been sold to the public (either in
an offering registered under the Securities Act or pursuant to Rule 144
promulgated under the Securities Act), and the average daily trading volume of
the Common Stock over the six-month period immediately preceding the
termination is at least one-quarter of one percent (1/4%) of the Company's
outstanding Common Stock.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
CITADEL COMPUTER SYSTEMS
INCORPORATED
By: /s/ STEVEN B. SOLOMON
----------------------------------------------
Name: Steven B. Solomon
Title: President and Chief Executive Officer
CORESTAFF, INC.
By: /s/ PETER T. DAMERIS
----------------------------------------------
Name: Peter T. Dameris
Title: Senior Vice President
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<PAGE>
EXHIBIT A TO
REGISTRATION RIGHTS AGREEMENT
SCHEDULE OF HOLDERS
INVESTOR:
CORESTAFF, INC.
4400 Post Oak Parkway
Suite 1130
Houston, Texas 77027
Attention: Peter T. Dameris
Senior Vice President, General Counsel
and Secretary
A-1
<PAGE>
SOFTWARE DEVELOPMENT SERVICES AGREEMENT
This Agreement is made as of October 6, 1997 by and between MILLENNIUM
COMPUTER CORPORATION ("MILLENNIUM") having its principal place of business at
2851 Clover Street, Pittsford, New York 14534, and CITADEL COMPUTER SYSTEMS,
INC. ("CITADEL") having its principal place of business at 3811 Turtle Creek
Boulevard, Dallas, Texas 75219.
BACKGROUND
1. MILLENNIUM is a provider of computer programming services, and it is
contemplated that MILLENNIUM may from time to time furnish software development
and related services (hereinafter referred to as "Development Services") to
CITADEL.
2. CITADEL desires to have MILLENNIUM perform certain services.
3. Both parties desire to enter into a general agreement setting forth the
terms and conditions which shall apply to the performance of such services.
IN CONSIDERATION of the mutual covenants contained herein the parties,
intending to be legally bound, agree as follows:
1. SCOPE
This Agreement shall apply to any Order for Development Services issued by
CITADEL after the date hereof and accepted by MILLENNIUM in the form of a
CITADEL Purchase Order or Development Services Schedule Attachment to this
Agreement ("Order"). CITADEL covenants and agrees that it shall purchase
Development Services from MILLENNIUM between the effective date of this
Agreement and September 1, 1998 which result in payments to MILLENNIUM, in
accordance with SECTION 2 hereof, of not less than of Two Hundred Fifty
Thousand ($250,000.00).
Each Order shall constitute a separate and distinct contract between the
parties; the terms and conditions of this Agreement shall be deemed
incorporated in each such Order and, except as specified herein, shall
supersede and replace all terms or conditions appearing or referred to on the
face or on the reverse of the Order and on any proposal, acknowledgment, or
acceptance issued by MILLENNIUM. Specific written exception may be taken by
either CITADEL or MILLENNIUM to any provision of this Agreement in connection
with any individual Order prior to acceptance thereof and subject to the
agreement of the other party.
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2. CONTRACT PRICE AND PAYMENT
MILLENNIUM shall be compensated for all Development Services performed for
CITADEL in connection with each such Order at a discount of ten percent (10%)
off MILLENNIUM's standard rates in effect at the time an order is accepted.
The Order will define the method of payment. MILLENNIUM will invoice CITADEL
weekly for all services provided and expenses incurred under this Agreement
through the date of such invoice. CITADEL shall pay all invoices within thirty
(30) days. A late fee of 1.5% per month will be charged for invoices paid
after 30 days.
3. SUPERVISION
Unless otherwise stated in an attached addendum, MILLENNIUM personnel will work
under MILLENNIUM'S supervision and assignment, based on product design,
specifications and direction given to MILLENNIUM by CITADEL.
4. NON-SOLICITATION
CITADEL will not solicit, hire, contract with, or engage the employment of any
employee or contractor or former employee or contractor of MILLENNIUM or any
MILLENNIUM affiliate, with whom CITADEL's personnel have had contact in the
course of performance of this Agreement without prior written consent.
MILLENNIUM will not solicit, hire, contract with, or engage the employment of
any employee or contractor or former employee or contractor of CITADEL, with
whom MILLENNIUM'S personnel have had contact in the course of performance of
this Agreement without prior written consent.
5. TRAVEL AND PER DIEM PAYMENTS
When MILLENNIUM personnel, at CITADEL'S request, are assigned to perform
Development Services at other locations, arrangements for reasonable travel
expense payments shall be made, when appropriate, by MILLENNIUM and reimbursed
by CITADEL.
MILLENNIUM personnel so required to travel will submit to CITADEL satisfactory
receipts for expenses incurred. Expenses will be billed by MILLENNIUM at
actual cost.
6. LIABILITY OF MILLENNIUM AND ITS CONTRACTORS
IN NO EVENT SHALL EITHER PARTY OR ITS CONTRACTORS BE LIABLE TO THE OTHER PARTY
FOR LOSS OF PROFITS OR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
INCURRED BY THE OTHER
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PARTY AND ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT.
THE LIABILITY OF MILLENNIUM IN CONNECTION WITH ANY ORDER UNDER THIS AGREEMENT,
WHETHER ARISING OUT OF BREACH OF CONTRACT (INCLUDING BUT NOT LIMITED TO BREACH
OF WARRANTY) OR TORT (INCLUDING BUT NOT LIMITED TO NEGLIGENCE AND STRICT
LIABILITY), SHALL IN NO EVENT EXCEED THE TOTAL AMOUNT ACTUALLY PAID TO
MILLENNIUM BY CITADEL IN ACCORDANCE WITH THE TERMS OF THAT ORDER.
The parties acknowledge that MILLENNIUM determines the charges it will make for
Development Services in reliance on the disclaimers of warranty and limitations
and exclusions of liability set forth in this Agreement and that the same form
an essential basis of the bargain between the parties.
7. BOOKS AND RECORDS
MILLENNIUM shall maintain complete and accurate accounting records for each
Order in connection with the work required under any time-and-materials Order
and all charges for labor or services will be substantiated by proper time
records.
8. PROPERTY RIGHTS
The parties acknowledge and agree that CITADEL wishes to engage MILLENNIUM to
perform the Development Services because of MILLENNIUM's reputation, skills and
experience with the performance of services of this type. Ownership of the
results of all development services performed by MILLENNIUM for CITADEL shall
be as follows:
MILLENNIUM shall retain all rights, title and interest, including the
copyright, in and to any and all results of Development Services that relate to
the FIRST STEP product; provided, however, that in the event that the parties
agree to combine any portion(s) of the FIRST STEP product with any portion(s)
of a CITADEL product, the parties shall enter into a separate written agreement
which makes specific ownership provisions for such combined product.
MILLENNIUM hereby grants to CITADEL all rights, title and interest, including
the copyright, in and to all results of Development Services that relate to any
product owned by CITADEL or any new program contracted for by CITADEL;
provided, however, that the parties expressly acknowledge that MILLENNIUM has
developed an extensive programming toolkit which enables MILLENNIUM to
implement pre-existing program code and other technology in new client projects
in order maximize the reliability and minimize the cost of new programming and
related services. Accordingly, unless otherwise expressly agreed upon in a
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particular order, MILLENNIUM shall retain ownership of all Preexisting Designs
and Preexisting Materials and shall grant to CITADEL, effective upon receipt by
MILLENNIUM of payment in full of all charges specified in any Order, a
perpetual, paid-up license to use, and reproduce, assign and/or sublicense,
only as a part of the CITADEL product for which they were developed, all
Preexisting Designs and Preexisting Materials delivered to CITADEL in
connection with Development Services provided under such Order. The term
"Preexisting Designs" shall mean all designs, discoveries and inventions
conceived or developed by MILLENNIUM alone or with others which result from or
relate to the Development Services. The term "Preexisting Materials" shall
mean preexisting program code and other technology delivered to CITADEL in
connection with the Development Services.
9. CONFIDENTIAL INFORMATION
Any information concerning either party's finances, business, future business
plans, products, specifications, and any other information that may be marked
"Confidential" and exchanged between the parties shall be used only for the
performance of Development Services under the terms of this Agreement
("Confidential").
The Parties agree that information relating to the business of the other party
that may come into the possession of, or come to the attention of, the
receiving party as a result of Development Services performed hereunder shall
remain Confidential and shall not be disclosed to any third party. The parties
further agree that the Preexisting Designs and Preexisting Materials shall
remain the Confidential property of MILLENNIUM and shall not be disclosed by
CITADEL to any third party apart from the CITADEL products in connection with
which they were provided without the prior written consent of MILLENNIUM.
10. MODIFICATION; ASSIGNMENT
No waiver, alternation, or modification of any of the provisions of the
Agreement shall be binding upon either party unless in writing, signed by the
fully authorized representative of the party intended to be bonded thereby.
Either party shall have the right to assign this Agreement in its entirety or
as it relates to a particular Order to any entity which controls, is controlled
by, or is under common control with such party.
11. TERMINATION
This Agreement may be terminated at any time by either party upon thirty (30)
days written notice to the other party. Any such termination, however, shall
not
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affect any Order or Orders which may then be outstanding in connection with
this Agreement.
12. PRIOR AGREEMENTS
This instrument contains the entire Agreement between MILLENNIUM and CITADEL
with respect to contracts or arrangements made or placed hereafter for
Development Services and supersedes all pre-existing agreements or arrangements
with respect thereto.
13. NOTICES
Any notice sent hereunder shall be sent:
(i) by registered mail, return receipt requested;
(ii) by electronic mail, telex or facsimile, where both parties have
access to the required equipment, return receipt requested; or
(iii) by personal delivery.
Notices sent by registered mail shall be deemed to be effective on the fifth
business day following mailing, except in the case of mail strike or disruption
of postal services and notices sent by personal delivery, electronic mail,
telex or facsimile shall be deemed received when delivered. Notices shall be
addressed to the president of the receiving party, at the address set forth on
the first page of this Agreement. Any party may change its address for
purposes of receipt notices by giving ten (10) days prior written notice of
such change to the other party in the matter described herein.
14. SEVERABILITY
Each provision of this Agreement is severable. If any provision is found to be
unenforceable or illegal, the remainder of this Agreement will continue in full
force and effect and this Agreement will apply as if such provision was not
included herein.
15. GOVERNING LAW
This Agreement shall be governed by, subject to, and interpreted in all
respects in accordance with the laws of the State of New York.
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IN WITNESS WHEREOF the parties have by their duly authorized representatives
executed this Agreement as of the date first above written.
MILLENNIUM COMPUTER CORPORATION
By: /s/ Peter T. Dameris
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Title: Senior Vice President
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Date: 10-6-97
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CITADEL COMPUTER SYSTEMS, INC.
By: /s/ Steven B. Solomon
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Title: President and Chief Executive Officer
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Date: 10-6-97
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