THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE, SOLD OR
TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. SUBJECT TO COMPLIANCE
WITH THE REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS, THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY
BE PLEDGED OR HYPOTHECATED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY THIS WARRANT OR ANY OF THE SECURITIES ISSUABLE UPON
EXERCISE OF THIS WARRANT.
WARRANT TO PURCHASE COMMON STOCK
OF
CITADEL SECURITY SOFTWARE INC.
Issue Date: February 10, 2004 Warrant No. ____
THIS CERTIFIES that Satellite Strategic Finance Associates, LLC or any
---------------------------------------------
subsequent holder hereof (the "Holder"), has the right to purchase from CITADEL
------
SECUIRTY SOFTWARE INC., a
Delaware corporation (the "Company"), up to 1,200,000 fully paid and
-------
nonassessable shares of the Company's common stock, par value $0.01 per share
(the "Common Stock"), subject to adjustment as provided herein, at a price per
-------------
share equal to the Exercise Price (as defined below), at any time beginning on
the date on which this Warrant is issued (the "Issue Date") and ending at 6:00
----------
p.m., eastern time, on the date that is the fifth (5th) anniversary of the Issue
Date (the "Expiration Date"). This Warrant is issued pursuant to a Securities
---------------
Purchase Agreement, dated as of February 10, 2004 (the "Securities Purchase
------------ -------------------
Agreement"). Capitalized terms used herein and not otherwise defined shall have
---------
the respective meanings set forth in the Securities Purchase Agreement.
1. Exercise.
--------
(a) Right to Exercise; Exercise Price. The Holder shall have the right
---------------------------------
to exercise this Warrant at any time and from time to time during the period
beginning on the Issue Date and ending on the Expiration Date as to all or any
part of the shares of Common Stock covered hereby (the "Warrant Shares"). The
--------------
"Exercise Price" for each Warrant Share purchased by the Holder upon the
---------------
exercise of this Warrant shall be equal to $5.15 subject to adjustment for the
events specified in Section 6 below.
(b) Exercise Notice. In order to exercise this Warrant, the Holder
----------------
shall send by facsimile transmission, at any time prior to 6:00 p.m., eastern
time, on the Business Day on which the Holder wishes to effect such exercise
(the "Exercise Date"), to the Company an executed copy of the notice of exercise
-------------
in the form attached hereto as Exhibit A (the "Exercise Notice"), and a copy of
---------------
the original Warrant, and, in the case of a Cash Exercise (as defined below),
shall forward to the Company the Exercise Price. The Exercise Notice shall also
state the name or names (with address) in which the shares of Common Stock that
are issuable on such exercise shall be issued. In the case of a dispute as to
the calculation of the Exercise Price or the number of Warrant Shares issuable
hereunder (including, without limitation, the calculation of any adjustment
pursuant to Section 6 below), the Company shall promptly issue to the Holder the
number of Warrant Shares that are not disputed and shall submit the disputed
calculations to its certified public accounting firm within two (2) Business
Days following the date on which the Exercise Notice is delivered to the
Company. The Company shall cause such accountant to calculate the Exercise Price
and/or the number of Warrant Shares issuable hereunder and to notify the Company
and the Holder of the results in writing no later than three (3) Business Days
following the day on which such accountant received the disputed calculations
(the "Dispute Procedure"). Such accountant's calculation shall be deemed
------------------
conclusive absent manifest error. The fees of any such accountant shall be borne
by the party whose calculations were most at variance with those of such
accountant.
(c) Holder of Record. The Holder shall, for all purposes, be deemed to
----------------
have become the holder of record of the Warrant Shares specified in an Exercise
Notice on the Exercise Date specified therein, irrespective of the date of
delivery of such Warrant Shares. Except as specifically provided herein,
nothing in this Warrant shall be construed as conferring upon the Holder hereof
any rights as a stockholder of the Company prior to the Exercise Date.
(d) Cancellation of Warrant. This Warrant shall be canceled upon its
-------------------------
exercise and, if this Warrant is exercised in part, the Company shall, at the
time that it delivers Warrant Shares to the Holder pursuant to such exercise as
provided herein, issue a new warrant, and deliver to the Holder a certificate
representing such new warrant, with terms identical in all respects to this
Warrant (except that such new warrant shall be exercisable into the number of
shares of Common Stock with respect to which this Warrant shall remain
unexercised); provided, however, that the Holder shall be entitled to exercise
-------- -------
all or any portion of such new warrant at any time following the time at which
this Warrant is exercised, regardless of whether the Company has actually issued
such new warrant or delivered to the Holder a certificate therefore.
2. Delivery of Warrant Shares Upon Exercise. Upon receipt of an
---------------------------------------------
Exercise Notice pursuant to Section 1 above, the Company shall, (A) in the case
of a Cash Exercise no later than the close of business on the later to occur of
(i) the third (3rd) Business Day following the Exercise Date set forth in such
Exercise Notice and (ii) such later date on which the Company shall have
received payment of the Exercise Price, (B) in the case of a Cashless Exercise
(as defined below), no later than the close of business on the third (3rd)
Business Day following the Exercise Date set forth in such Exercise Notice, and
(C) with respect to Warrant Shares that are the subject of a Dispute Procedure,
the close of business on the third (3rd) Business Day following the
determination made pursuant to Section 1(b) (each of the dates specified in (A),
(B) or (C) being referred to as a "Delivery Date"), issue and deliver or caused
-------------
to be delivered to
2
the Holder the number of Warrant Shares as shall be determined as provided
herein. The Company shall effect delivery of Warrant Shares to the Holder by, as
long as the Transfer Agent participates in the Depository Trust Company ("DTC")
---
Fast Automated Securities Transfer program ("FAST"), crediting the account of
----
the Holder or its nominee at DTC (as specified in the applicable Exercise
Notice) with the number of Warrant Shares required to be delivered, no later
than the close of business on such Delivery Date. In the event that the Transfer
Agent is not a participant in FAST, or if the Warrant Shares are not otherwise
eligible for delivery through FAST, or if the Holder so specifies in an Exercise
Notice or otherwise in writing on or before the Exercise Date, the Company shall
effect delivery of Warrant Shares by delivering to the Holder or its nominee
physical certificates representing such Warrant Shares, no later than the close
of business on such Delivery Date.
3. Failure to Deliver Warrant Shares.
-------------------------------------
(a) In the event that the Company fails for any reason to deliver to
the Holder the number of Warrant Shares specified in the applicable Exercise
Notice on or before the Delivery Date therefore (an "Exercise Default"), and
----------------
such default continues for seven (7) Business Days following delivery of a
written notice of such default by the Holder to the Company, the Company shall
pay to the Holder payments ("Exercise Default Payments") in the amount of (i)
-------------------------
(N/365) multiplied by (ii) the aggregate Exercise Price of the Warrant Shares
--------------
which are the subject of such Exercise Default multiplied by (iii) the lower of
-------------
fifteen percent (15%) and the maximum rate permitted by applicable law (the
"Default Interest Rate"), where "N" equals the number of days elapsed between
-----------------------
the original Delivery Date of such Warrant Shares and the date on which all of
such Warrant Shares are issued and delivered to the Holder. Cash amounts payable
hereunder shall be paid on or before the fifth (5th) Business Day of the
calendar month following the calendar month in which such amount has accrued.
(b) In the event that the Holder has not received certificates
representing the Warrant Shares by the seventh (7th) Business Day following an
Exercise Default, the Holder may, upon written notice to the Company (an
"Exercise Default Notice"), regain on the date of such notice the rights of the
------------------------
Holder under the exercised portion of this Warrant that is the subject of such
Exercise Default, in which case the Exercise Price upon any subsequent exercise
of such portion of this Warrant will be equal to the lesser of (x) the lowest
Exercise Price occurring during the period beginning on related Delivery Date
and ending on the date on which the Exercise Default Notice is delivered to the
Company and (y) the Exercise Price in effect on the applicable Exercise Date (it
being understood that the Holder may deliver an Exercise Notice at any time
following delivery of an Exercise Default Notice to the Company). In such
event, the Holder shall retain all of the Holder's rights and remedies with
respect to the Company's failure to deliver such Warrant Shares (including
without limitation the right to receive the cash payments specified in Section
3(a) above).
(c) Nothing herein shall limit the Holder's right to pursue actual
damages for the Company's failure to issue and deliver Warrant Shares on the
applicable Delivery Date (including, without limitation, damages relating to any
purchase of Common Stock by the Holder to make delivery on a sale effected in
anticipation of receiving Warrant Shares upon exercise, such damages to be in an
amount equal to (A) the aggregate amount paid by the Holder for the
3
Common Stock so purchased minus (B) the aggregate amount of net proceeds, if
-----
any, received by the Holder from the sale of the Warrant Shares issued by the
Company pursuant to such exercise), and the Holder shall have the right to
pursue all remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief);
provided, however, that, in the event, following an Exercise Default, the
-------- -------
Company delivers to the Holder the Warrant Shares that are required to be issued
by the Company pursuant to such exercise, the Holder shall use commercially
reasonable efforts to sell such shares promptly following such delivery.
4. Exercise Limitations. In no event shall the Holder be permitted to
---------------------
exercise this Warrant, or part thereof, if, upon such exercise, the number of
shares of Common Stock beneficially owned by the Holder (other than shares which
would otherwise be deemed beneficially owned except for being subject to a
limitation on conversion or exercise analogous to the limitation contained in
this Section 4), would exceed 4.99% of the number of shares of Common Stock then
issued and outstanding. As used herein, beneficial ownership shall be determined
in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules thereunder. To the extent that the limitation contained
in this Section 4 applies, the submission of an Exercise Notice by the Holder
shall be deemed to be the Holder's representation that this Warrant is
exercisable pursuant to the terms hereof and the Company shall be entitled to
rely on such representation without making any further inquiry as to whether
this Section 4 applies. Nothing contained herein shall be deemed to restrict the
right of a Holder to exercise this Warrant, or part thereof, at such time as
such exercise will not violate the provisions of this Section 4. This Section 4
may not be amended unless such amendment is approved by the holders of a
majority of the Common Stock then outstanding; provided, however, that this
-------- -------
Section 4 shall not apply, effective upon written notice from the Holder to the
Company, at any time after the public announcement of a Major Transaction (as
defined below).
5. Payment of the Exercise Price; Cashless Exercise. The Holder may
---------------------------------------------------
pay the Exercise Price in either of the following forms or, at the election of
Holder, a combination thereof:
(a) through a cash exercise (a "Cash Exercise") by delivering
--------------
immediately available funds, or
(b) if an effective Registration Statement is not available for the
resale of all of the Warrant Shares issuable hereunder at the time an Exercise
Notice is delivered to the Company, through a cashless exercise (a "Cashless
--------
Exercise"). The Holder may effect a Cashless Exercise by surrendering this
--------
Warrant to the Company and noting on the Exercise Notice that the Holder wishes
to effect a Cashless Exercise, upon which the Company shall issue to the Holder
the number of Warrant Shares determined as follows:
X = Y x (A-B)/A
where: X = the number of Warrant Shares to be issued to the Holder;
4
Y = the number of Warrant Shares with respect to which this
Warrant is being exercised;
A = the Market Price as of the Exercise Date; and
B = the Exercise Price.
For purposes of Rule 144, it is intended and acknowledged that the Warrant
Shares issued in a Cashless Exercise transaction shall be deemed to have been
acquired by the Holder, and the holding period for the Warrant Shares required
by Rule 144 shall be deemed to have been commenced, on the Issue Date.
6. Anti-Dilution Adjustments; Distributions; Other Events. The Exercise
------------------------------------------------------
Price and the number of Warrant Shares issuable hereunder shall be subject to
adjustment from time to time as provided in this Section 6. In the event that
any adjustment of the Exercise Price or the number of Warrant Shares as required
herein results in a fraction of a cent or fraction of a share, as applicable,
such Exercise Price or number of Warrant Shares shall be rounded up or down to
the nearest cent or share, as applicable.
(a) Subdivision or Combination of Common Stock. If the Company, at any
------------------------------------------
time after the Issue Date, subdivides (by any stock split, stock dividend,
recapitalization, reorganization, reclassification or otherwise) its shares of
Common Stock into a greater number of shares, then after the date of record for
effecting such subdivision, the Exercise Price in effect immediately prior to
such subdivision will be proportionately reduced. If the Company, at any time
after the initial issuance of this Warrant, combines (by reverse stock split,
recapitalization, reorganization, reclassification or otherwise) its shares of
Common Stock into a smaller number of shares, then, after the date of record for
effecting such combination, the Exercise Price in effect immediately prior to
such combination will be proportionally increased.
(b) Distributions. If the Company shall declare or make any
-------------
distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend or otherwise (including any
dividend or distribution to the Company's stockholders in cash or shares (or
rights to acquire shares) of capital stock of a subsidiary) (a "Distribution"),
------------
the Company shall deliver written notice of such Distribution (a "Distribution
------------
Notice") to the Holder at least fifteen (15) Business Days prior to the earlier
------
to occur of (i) the record date for determining stockholders entitled to such
Distribution (the "Record Date") and (ii) the date on which such Distribution is
-----------
made (the "Distribution Date"). The Holder shall be entitled to receive, at its
-----------------
option (to be exercised by written notice delivered to the Company following the
date on which a Distribution Notice is delivered to the Holder), either (A) the
same amount and type of assets being distributed in such Distribution as though
the Holder were a holder on the Record Date therefore of a number of shares of
Common Stock into which this Warrant is exercisable as of such Record Date (such
number of shares to be determined at the Exercise Price then in effect and
without giving effect to any limitations on such exercise contained in this
Warrant or the Securities Purchase Agreement) or (B) a reduction in the Exercise
Price as of the Record Date therefore, such reduction to be effected by reducing
the Exercise Price in effect on the Business Day immediately preceding the
Record Date by an amount equal to the fair market
5
value of the assets to be distributed divided by the number of shares of Common
----------
Stock as to which such Distribution is to be made, such fair market value to be
reasonably determined in good faith by the independent members of the Company's
Board of Directors. Notwithstanding anything herein to the contrary, if the
Holder does not notify the Company of whether the Holder has elected clause (A)
or (B) in the preceding sentence on or prior to the Distribution Date, the
Holder shall be deemed to have elected clause (B) of the preceding sentence.
(c) Dilutive Issuances.
-------------------
(i) Adjustment Upon Dilutive Issuance. If, at any time after the
----------------------------------
Issue Date, the Company issues or sells, or in accordance with subparagraph (ii)
of this Section 6(c), is deemed to have issued or sold, any shares of Common
Stock for no consideration or for a consideration per share less than the
Exercise Price on the date of such issuance or sale (or deemed issuance or sale)
(a "Dilutive Issuance"), then the Exercise Price shall be adjusted as follows:
------------------
(A) If such Dilutive Issuance occurs prior to the Effective
Date (as defined in the Registration Rights Agreement), then effective
immediately upon the Dilutive Issuance, the Exercise Price shall be
adjusted so as to equal the consideration received or receivable by the
Company (on a per share basis) for the additional shares of Common Stock so
issued, sold or deemed issued or sold in such Dilutive Issuance (which, in
the case of a deemed issuance or sale, shall be calculated in accordance
with subparagraph (ii) below). Notwithstanding the foregoing, prior to the
Effective Date, the Company shall not engage in any transaction that would
result in the issuance or deemed issuance of shares of Common Stock (other
than Excluded Securities (as defined below) for no consideration.
(B) If such Dilutive Issuance occurs on or after the Effective
Date, then effective immediately upon the Dilutive Issuance, the Exercise
Price shall be adjusted so as to equal an amount determined by multiplying
such Exercise Price by the following fraction:
N0 + N1
-------
N0 + N2
where:
N0 = the number of shares of Common Stock outstanding
immediately prior to the issuance, sale or deemed issuance
or sale of such additional shares of Common Stock in such
Dilutive Issuance (without taking into account any shares of
Common Stock issuable upon conversion, exchange or exercise
of any securities or other instruments which are convertible
into or exercisable or exchangeable for Common Stock
("Convertible Securities") or options, warrants or other
-----------------------
rights to purchase or subscribe for Common Stock or
Convertible Securities ("Purchase Rights");
----------------
6
N1 = the number of shares of Common Stock which the aggregate
consideration, if any, received or receivable by the Company
for the total number of such additional shares of Common
Stock so issued, sold or deemed issued or sold in such
Dilutive Issuance (which, in the case of a deemed issuance
or sale, shall be calculated in accordance with subparagraph
(ii) below) would purchase at the Exercise Price in effect
immediately prior to such Dilutive Issuance; and
N2 = the number of such additional shares of Common Stock so
issued, sold or deemed issued or sold in such Dilutive
Issuance.
Notwithstanding the foregoing, no adjustment shall be made
pursuant hereto if such adjustment would result in an increase in the
Exercise Price.
(ii) Effect On Exercise Price Of Certain Events. For purposes of
-------------------------------------------
determining the adjusted Exercise Price under subparagraph (i) of this Section
6(c), the following will be applicable:
(A) Issuance Of Purchase Rights. If the Company issues or
------------------------------
sells any Purchase Rights, whether or not immediately exercisable, and the
price per share for which Common Stock is issuable upon the exercise of
such Purchase Rights (and the price of any conversion of Convertible
Securities, if applicable) is less than the Exercise Price in effect on the
date of issuance or sale of such Purchase Rights, then the maximum total
number of shares of Common Stock issuable upon the exercise of all such
Purchase Rights (assuming full conversion, exercise or exchange of
Convertible Securities, if applicable) shall, as of the date of the
issuance or sale of such Purchase Rights, be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For
purposes of the preceding sentence, the "price per share for which Common
Stock is issuable upon the exercise of such Purchase Rights" shall be
determined by dividing (x) the total amount, if any, received or receivable
by the Company as consideration for the issuance or sale of all such
Purchase Rights, plus the minimum aggregate amount (without giving effect
to anti-dilution provisions) of additional consideration, if any, payable
to the Company upon the exercise of all such Purchase Rights, plus, in the
----
case of Convertible Securities issuable upon the exercise of such Purchase
Rights, the minimum aggregate amount of additional consideration payable
upon the conversion, exercise or exchange of all such Convertible
Securities (determined in accordance with the calculation method set forth
in subparagraph (ii)(B) below), by (y) the maximum total number of shares
of Common Stock issuable upon the exercise of all such Purchase Rights
(assuming full conversion, exercise or exchange of Convertible Securities,
if applicable). Except as provided in Section 6(c)(ii)(C) hereof, no
further adjustment to the Exercise Price shall be made upon the actual
issuance of such Common Stock upon the exercise of such Purchase Rights or
upon the conversion, exercise or exchange of Convertible Securities
issuable upon exercise of such Purchase Rights.
7
(B) Issuance Of Convertible Securities. If the Company
-------------------------------------
issues or sells any Convertible Securities, whether or not immediately
convertible, exercisable or exchangeable, and the price per share for which
Common Stock is issuable upon such conversion, exercise or exchange is less
than the Exercise Price in effect on the date of issuance or sale of such
Convertible Securities, then the maximum total number of shares of Common
Stock issuable upon the conversion, exercise or exchange of all such
Convertible Securities (without giving effect to anti-dilution provisions)
shall, as of the date of the issuance or sale of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by
the Company for such price per share. If the Convertible Securities so
issued or sold do not have a fluctuating conversion or exercise price or
exchange ratio, then for the purposes of the immediately preceding
sentence, the "price per share for which Common Stock is issuable upon such
conversion, exercise or exchange" shall be determined by dividing (A) the
total amount, if any, received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any,
payable to the Company upon the conversion, exercise or exchange of all
such Convertible Securities (determined in accordance with the calculation
method set forth in this subparagraph (ii)(B)), by (B) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. If the Convertible Securities
so issued or sold have a fluctuating conversion or exercise price or
exchange ratio (a "Variable Rate Convertible Security"), then for purposes
----------------------------------
of the first sentence of this subparagraph (ii)(B), the "price per share
for which Common Stock is issuable upon such conversion, exercise or
exchange" shall be deemed to be the lowest price per share which would be
applicable (assuming all holding period and other conditions to any
discounts contained in such Variable Rate Convertible Security have been
satisfied) if the conversion price of such Variable Rate Convertible
Security on the date of issuance or sale thereof were seventy-five percent
(75%) of the actual conversion price on such date (the "Assumed Variable
----------------
Market Price"), and, further, if the conversion price of such Variable Rate
------------
Convertible Security at any time or times thereafter is less than or equal
to the Assumed Variable Market Price last used for making any adjustment
under this Section 6(c) with respect to any Variable Rate Convertible
Security, the Exercise Price in effect at such time shall be readjusted to
equal the Exercise Price which would have resulted if the Assumed Variable
Market Price at the time of issuance of the Variable Rate Convertible
Security had been seventy-five percent (75%) of the actual conversion price
of such Variable Rate Convertible Security existing at the time of the
adjustment required by this sentence. No further adjustment to the Exercise
Price shall be made upon the actual issuance of such Common Stock upon
conversion, exercise or exchange of such Convertible Securities.
(C) Change In Option Price Or Conversion Rate. If there is a
-----------------------------------------
change at any time in (x) the amount of additional consideration payable to
the Company upon the exercise of any Purchase Rights; (y) the amount of
additional consideration, if any, payable to the Company upon the
conversion, exercise or exchange of any Convertible Securities the
adjustment for which is not otherwise covered under Section 6(c)(ii)(B)
above; or (z) the rate at which any Convertible Securities are convertible
into or exercisable or exchangeable for Common Stock, then in any such
case, the Exercise Price in effect at the time of such change shall be
readjusted to the Exercise Price which would
8
have been in effect at such time had such Purchase Rights or Convertible
Securities still outstanding provided for such changed additional
consideration or changed conversion, exercise or exchange rate, as the case
may be, at the time initially issued or sold.
(D) Calculation Of Consideration Received. If any Common
----------------------------------------
Stock, Purchase Rights or Convertible Securities are issued or sold for
cash, the consideration received therefore will be the amount received by
the Company therefore. In case any Common Stock, Purchase Rights or
Convertible Securities are issued or sold for a consideration part or all
of which shall be other than cash, including in the case of a strategic or
similar arrangement in which the other entity will provide services to the
Company, purchase services from the Company or otherwise provide intangible
consideration to the Company, the amount of the consideration other than
cash received by the Company (including the net present value of the
consideration expected by the Company for the provided or purchased
services) shall be the fair market value of such consideration, except
where such consideration consists of securities, in which case the amount
of consideration received by the Company will be the average of the last
sale prices thereof on the principal market for such securities during the
period of ten Trading Days immediately preceding the date of receipt. In
case any Common Stock, Purchase Rights or Convertible Securities are issued
in connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration therefore will be deemed
to be the fair market value of such portion of the net assets and business
of the non-surviving corporation as is attributable to such Common Stock,
Purchase Rights or Convertible Securities, as the case may be. The
independent members of the Company's Board of Directors shall calculate
reasonably and in good faith, using standard commercial valuation methods
appropriate for valuing such assets, the fair market value of any
consideration other than cash or securities; provided, however, that if the
Holder does not agree to such fair market value calculation within three
Business Days after receipt thereof from the Company, then such fair market
value shall be determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the Holder and
reasonably acceptable to the Company, with the costs of such appraisal to
be borne by the Company.
(iii) Exceptions To Adjustment Of Exercise Price. Notwithstanding
------------------------------------------
the foregoing, no adjustment to the Exercise Price shall be made pursuant to
this Section 6(c) upon the issuance of any Excluded Securities. For purposes
hereof, "Excluded Securities" means (I) securities purchased under the
--------------------
Securities Purchase Agreement; (II) securities issued upon conversion or
exercise of the Preferred Stock or the Warrants; (III) shares of Common Stock
issuable or issued to employees, consultants or directors from time to time upon
the exercise of options, in such case granted or to be granted in the discretion
of the Board of Directors pursuant to one or more stock option plans or
agreements or restricted stock plans or agreements in effect as of the Issue
Date and up to an additional 500,000 shares of Common Stock issuable or issued
to employees or directors from time to time upon the exercise of options, which
may be granted in the discretion of the Board of Directors pursuant to one or
more stock option plans or agreements or restricted stock plans or agreements
approved by the independent directors of the Board of Directors after the Issue
Date; (IV) shares of Common Stock issued in connection with any stock split,
stock dividend or recapitalization of the Company; and (V) shares of Common
Stock issued in connection with the acquisition by the Company of any
corporation or other
9
entity occurring after the Effective Date and as long as a fairness opinion with
respect to such acquisition is rendered by an investment bank of national
recognition.
(iv) Notice Of Adjustments. Upon the occurrence of each
-----------------------
adjustment or readjustment of the Exercise Price pursuant to this Section 6(c)
resulting in a change in the Exercise Price by more than one percent (1%), or
any change in the number or type of stock, securities and/or other property
issuable upon exercise of this Warrant, the Company, at its expense, shall
promptly compute such adjustment or readjustment or change and prepare and
furnish to the Holder a certificate setting forth such adjustment or
readjustment or change and showing in detail the facts upon which such
adjustment or readjustment or change is based. The Company shall, upon the
written request at any time of the Holder, furnish to the Holder a like
certificate setting forth (i) such adjustment or readjustment or change, (ii)
the Exercise Price at the time in effect and (iii) the number of shares of
Common Stock and the amount, if any, of other securities or property which at
the time would be received upon exercise of this Warrant.
(d) Major Transactions. In the event of a merger, consolidation,
-------------------
business combination, tender offer, exchange of shares, recapitalization,
reorganization, redemption or other similar event, as a result of which shares
of Common Stock of the Company shall be changed into the same or a different
number of shares of the same or another class or classes of stock or securities
or other assets of the Company or another entity or the Company shall sell all
or substantially all of its assets (each of the foregoing being a "Major
-----
Transaction"), the Company will give the Holder at least thirty (30) days
-----------
written notice prior to the closing of such Major Transaction, and: (i) the
Holder shall be permitted to exercise this Warrant in whole or in part at any
time prior to the record date for the receipt of such consideration and shall be
entitled to receive, for each share of Common Stock issuable to Holder for such
exercise, the same per share consideration payable to the other holders of
Common Stock in connection with such Major Transaction, and (ii) if and to the
extent that the Holder retains any portion of this Warrant following such record
date, the Company will cause the surviving or, in the event of a sale of assets,
purchasing entity, as a condition precedent to such Major Transaction, to assume
the obligations of the Company under this Warrant, with such adjustments to the
Exercise Price and the securities covered hereby as may be necessary in order to
preserve the economic benefits of this Warrant to the Holder.
(e) Adjustments; Additional Shares, Securities or Assets. In the event
----------------------------------------------------
that at any time, as a result of an adjustment made pursuant to this Section 6,
the Holder of this Warrant shall, upon exercise of this Warrant, become entitled
to receive securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 6. Any adjustment
made herein other than pursuant to Section 6(c) hereof that results in a
decrease in the Exercise Price shall also effect a proportional increase in the
number of shares of Common Stock into which this Warrant is exercisable.
7. Fractional Interests.
---------------------
10
No fractional shares or scrip representing fractional shares shall be
issuable upon the exercise of this Warrant, but on exercise of this Warrant, the
Holder hereof may purchase only a whole number of shares of Common Stock. If,
on exercise of this Warrant, the Holder hereof would be entitled to a fractional
share of Common Stock or a right to acquire a fractional share of Common Stock,
the Company shall, in lieu of issuing any such fractional share, pay to the
Holder an amount in cash equal to the product resulting from multiplying such
fraction by the Market Price as of the Exercise Date.
8. Transfer of this Warrant.
---------------------------
The Holder may sell, transfer, assign, pledge or otherwise dispose of
this Warrant, in whole or in part, as long as such sale or other disposition is
made pursuant to an effective registration statement or an exemption from the
registration requirements of the Securities Act, and applicable state security
laws, and is otherwise made in accordance with the applicable provisions of the
Securities Purchase Agreement. Upon such transfer or other disposition, the
Holder shall deliver this Warrant to the Company together with a written notice
to the Company, substantially in the form of the Transfer Notice attached hereto
as Exhibit B (the "Transfer Notice"), indicating the person or persons to whom
---------------
this Warrant shall be transferred and, if less than all of this Warrant is
transferred, the number of Warrant Shares to be covered by the part of this
Warrant to be transferred to each such person. Within three (3) Business Days of
receiving a Transfer Notice and the original of this Warrant, the Company shall
deliver to the transferee designated by the Holder a Warrant or Warrants of like
tenor and terms for the appropriate number of Warrant Shares and, if less than
all this Warrant is transferred, shall deliver to the Holder a Warrant for the
remaining number of Warrant Shares.
9. Benefits of this Warrant.
---------------------------
This Warrant shall be for the sole and exclusive benefit of the Holder
of this Warrant and nothing in this Warrant shall be construed to confer upon
any person other than the Holder of this Warrant any legal or equitable right,
remedy or claim hereunder.
10. Loss, theft, destruction or mutilation of Warrant.
-------------------------------------------------------
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity reasonably satisfactory to the Company, and upon
surrender of this Warrant, if mutilated, the Company shall execute and deliver a
new Warrant of like tenor and date.
11. Notice or Demands.
-------------------
Any notice, demand or request required or permitted to be given by the
Company or the Holder pursuant to the terms of this Warrant shall be in writing
and shall be deemed delivered (i) when delivered personally or by verifiable
facsimile transmission, unless such delivery is made on a day that is not a
Business Day, in which case such delivery will be deemed to be made on the next
succeeding Business Day, (ii) on the next Business Day after timely delivery to
an overnight courier and (iii) on the Business Day actually received if
deposited in
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the U.S. mail (certified or registered mail, return receipt requested, postage
prepaid), addressed as follows:
If to the Company:
Citadel Security Software Inc.
0000 X. Xxxxxxx Xxxx.
Xxxxx 000
Xxxxxx, XX 00000
Attn: Xxxxxx X. Xxxxxxx, Chief Executive Officer
Phone: (000) 000-0000
Fax: (000) 000-0000
with a copy to:
Xxxxx Xxxxx Wood, P.C.
00000 Xxxx Xxxx, Xxxxx 0000
Xxxxxx, Xxxxx 00000
Attn: Xxxxx X. Xxxx
Tel: (000) 000-0000
Fax: (000) 000-0000
and if to the Holder, to such address as shall be designated by the Holder in
writing to the Company.
12. Applicable Law.
---------------
This Warrant is issued under and shall for all purposes be governed by
and construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within the State of New York.
13. Amendments.
----------
No amendment, modification or other change to, or waiver of any
provision of, this Warrant may be made unless such amendment, modification or
change is (A) set forth in writing and is signed by the Company and the Holder
and (B) agreed to in writing by the holders of at least two-thirds (2/3) of the
number of shares into which the Warrants are exercisable (without regard to any
limitation contained herein on such exercise), it being understood that upon the
satisfaction of the conditions described in (A) and (B) above, each Warrant
(including any Warrant held by the Holder who did not execute the agreement
specified in (B) above) shall be deemed to incorporate any amendment,
modification, change or waiver effected thereby as of the effective date
thereof.
14. Entire Agreement.
-----------------
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This Warrant, the Securities Purchase Agreement, the Certificate of
Designation, the Registration Rights Agreement, and the other Transaction
Documents constitute the entire agreement among the parties hereto with respect
to the subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Warrant, the Securities Purchase Agreement, the Certificate of
Designation, the Registration Rights Agreement, and the other Transaction
Documents supersede all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof and thereof.
15. Headings.
--------
The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
[Signature Page to Follow]
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IN WITNESS WHEREOF, the Company has duly executed and delivered this
Warrant as of the Issue Date.
CITADEL SECURITY SOFTWARE INC.
By: /s/ Xxxxxx X. Xxxxxxx
-------------------------------
Name: Xxxxxx X. Xxxxxxx
Title: Chief Executive Officer
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EXHIBIT A to WARRANT
--------------------
EXERCISE NOTICE
---------------
The undersigned Holder hereby irrevocably exercises the right to
purchase___________ of the shares of Common Stock ("Warrant Shares") of Citadel
--------------
Security Software Inc. evidenced by the attached Warrant (the "Warrant").
-------
Capitalized terms used herein and not otherwise defined shall have the
respective meanings set forth in the Warrant.
1. Form of Exercise Price. The Holder intends that payment of the
Exercise Price shall be made as:
______ a Cash Exercise with respect to _________________ Warrant
--------------
Shares; and/or
______ a Cashless Exercise with respect to _________________ Warrant
-----------------
Shares, as permitted by Section 5(b) of the attached Warrant.
2. Payment of Exercise Price. In the event that the Holder has elected
a Cash Exercise with respect to some or all of the Warrant Shares to be issued
pursuant hereto, the Holder shall pay the sum of $________________ to the
Company in accordance with the terms of the Warrant.
Date: ______________________
____________________________________
Name of Registered Holder
By: _______________________________
Name:
Title:
15
EXHIBIT B to WARRANT
--------------------
TRANSFER NOTICE
---------------
FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells,
assigns and transfers unto the person or persons named below the right to
purchase __________ shares of the Common Stock of Citadel Security Software Inc.
evidenced by the attached Warrant.
Date: ______________________
____________________________________
Name of Registered Holder
By: _______________________________
Name:
Title:
Transferee Name and Address:
____________________________________
____________________________________
____________________________________
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