Exhibit 4.2
WARRANT
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: CITADEL SECURITY SOFTWARE, INC., a Delaware corporation
Number of Shares: 20,000
Class of Stock: Common
Initial Exercise Price: $1.56
Issue Date: August 22, 2005
Expiration Date: August 22, 2012 (Subject to Section 4.1)
THIS WARRANT CERTIFIES THAT, for good and valuable consideration, the receipt of
which is hereby acknowledged, COMERICA BANK or its assignee ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this warrant, subject to the provisions
and upon the terms and conditions set forth in this warrant.
EXERCISE.
---------
Method of Exercise. Holder may exercise this warrant by delivering this
------------------
warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
Conversion Right. In lieu of exercising this warrant as specified in
----------------
Section 1.1, Holder may from time to time convert this warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities for which this warrant is being
exercised minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.3.
Fair Market Value. If the Shares are traded regularly in a public market,
-----------------
the fair market value of the Shares shall be the closing price of the Shares
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not regularly traded in a public
market, the Board of Directors of the Company shall determine fair market value
in its reasonable good faith judgment.
Delivery of Certificate and New Warrant. Promptly after Holder exercises
---------------------------------------
or converts this warrant, the Company shall deliver to Holder certificates for
the Shares acquired and, if this warrant has not been fully exercised or
converted and has not expired, a new warrant representing the Shares not so
acquired.
Replacement of Warrants. On receipt of evidence reasonably satisfactory to
-----------------------
the Company of the loss, theft, destruction or mutilation of this warrant and,
in the case of loss, theft or destruction, on delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the case of
mutilation, on surrender
1
and cancellation of this warrant, the Company at its expense shall execute and
deliver, in lieu of this warrant, a new warrant of like tenor.
Repurchase on Sale, Merger, or Consolidation of the Company.
------------------------------------------------------------
"Acquisition." For the purpose of this warrant, "Acquisition" means
--------------
any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
Assumption of Warrant. If upon the closing of any Acquisition the
---------------------
successor entity assumes the obligations of this warrant, then this warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this warrant.
Nonassumption. If upon the closing of any Acquisition the successor
-------------
entity does not assume the obligations of this warrant and Holder has not
otherwise exercised this warrant in full, then Holder shall have the option
either to (a) deem this warrant to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the Acquisition on the
same terms as other holders of the same class of securities of the Company; or
(b) require the Company to purchase this warrant for cash upon the closing of
the Acquisition for $31,200.
ADJUSTMENTS TO THE SHARES
-------------------------
Stock Dividends, Splits, Etc. If the Company declares or pays a dividend
----------------------------
on its common stock payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, then upon
exercise of this warrant, for each Share acquired, Holder shall receive, without
cost to Holder, the total number and kind of securities to which Holder would
have been entitled had Holder owned the Shares of record as of the date the
dividend or subdivision occurred.
Reclassification, Exchange or Substitution. Upon any reclassification,
------------------------------------------
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
warrant, Holder shall be entitled to receive, upon exercise or conversion of
this warrant, the number and kind of securities and property that Holder would
have received for the Shares if this warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. The
Company or its successor shall promptly issue to Holder a new warrant for such
new securities or other property. The new warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
Adjustments for Combinations, Etc. If the outstanding Shares are combined
---------------------------------
or consolidated, by reclassification or otherwise, into a lesser number of
shares, the Warrant Price shall be proportionately increased. If the outstanding
Shares are split or subdivided, including a split effected by way of a stock
dividend, by reclassification or otherwise, into a greater number of shares, the
Warrant Price shall be proportionately decreased.
No Impairment. The Company shall not, by amendment of its Certificate of
-------------
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other
2
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this warrant by the Company, but
shall at all times in good faith assist in carrying out all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Xxxxxx's rights under this Article against impairment.
Certificate as to Adjustments. Upon each adjustment of the Warrant Price,
-----------------------------
the Company at its expense shall promptly compute such adjustment, and furnish
Holder with a certificate of its Chief Financial Officer setting forth such
adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
Fractional Shares. No fractional Shares shall be issuable upon exercise or
-----------------
conversion of the Warrant and the Number of Shares to be issued shall be rounded
down to the nearest whole Share. If a fractional share interest arises upon any
exercise or conversion of the Warrant, the Company shall eliminate such
fractional share interest by paying Holder amount computed by multiplying the
fractional interest by the fair market value of a full Share.
REPRESENTATIONS AND COVENANTS OF THE COMPANY.
---------------------------------------------
Representations and Warranties. The Company hereby represents and warrants
-------------------------------
to the Holder as follows:
(a) All Shares which may be issued upon the exercise of the
purchase right represented by this warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
Notice of Certain Events. If the Company proposes at any time (a) to
-------------------------
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; or (d)
to merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up, then, in connection with each such event, the Company shall
give Holder (1) at least 20 days prior written notice of the date on which a
record will be taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (a) and (b) above; and (2) in the case of the matters referred to
in (c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event).
Registration Under Securities Act of 1933, as amended. The Company agrees
------------------------------------------------------
that the Shares shall be subject to the registration rights set forth on
Exhibit A, if attached.
REPRESENTATIONS AND WARRANTIES OF THE HOLDER
--------------------------------------------
4.1 The Holder (and its affiliates) hereby represents and warrants to
-------------------------------------------------------------------------
the Company as follows:
-----------------------
(a) The Holder is acquiring this warrant and the shares to be
issued upon exercise of this Warrant (together, the "Securities") for investment
for such Xxxxxx's own account, not as a nominee or agent, and not with a view to
the resale or distribution of any part thereof, and that such Holder has no
present intention of selling, granting any participation in, or otherwise
distributing the same. The Holder further represents that it does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Securities.
3
(b) The Holder is an "accredited investor" within the meaning of
Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as
presently in effect.
(c) The Holder understands that the Securities it is purchasing
are characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act only
in certain limited circumstances. In this connection, the Holder represents that
it is familiar with SEC Rule 144, as presently in effect, and understands the
resale limitations imposed thereby and by the Securities Act.
MISCELLANEOUS.
--------------
Term: Notice of Expiration. This warrant is exercisable in whole or in
---------------------------
part, at any time and from time to time on or before the Expiration Date set
forth above. If this warrant has not been exercised prior to the Expiration
Date, this warrant shall be deemed to have been automatically exercised on the
Expiration Date by "cashless" conversion pursuant to Section 1.2.
Legends. This warrant and the Shares, if the Shares are not registered at
--------
the time of their issuance, shall be imprinted with a legend in substantially
the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL
THAT SUCH REGISTRATION IS NOT REQUIRED.
Compliance with Securities Laws on Transfer. This warrant and the Shares
--------------------------------------------
issuable upon exercise of this warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee (including, without limitation, the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company). The Company shall not require Holder to provide
an opinion of counsel if the transfer is to an affiliate of Holder or if there
is no material question as to the availability of current information as
referenced in Rule 144(c), Holder represents that it has complied with Rule
144(d) and (e) in reasonable detail, the selling broker represents that it has
complied with Rule 144(f), and the Company is provided with a copy of Holder's
notice of proposed sale.
Transfer Procedure. Subject to the provisions of Section 5.3, Holder may
-------------------
transfer all or part of this warrant or the Shares issuable upon exercise of
this warrant by giving the Company notice of the portion of the warrant being
transferred setting forth the name, address and taxpayer identification number
of the transferee and surrendering this warrant to the Company for reissuance to
the transferee(s) (and Holder, if applicable); provided, however, that Holder
may transfer all or part of this warrant to its affiliates, including, without
limitation, Comerica Incorporated, at any time without notice to the Company,
and such affiliate shall then be entitled to all the rights of Holder under this
warrant and any related agreements, and the Company shall cooperate fully in
ensuring that any stock issued upon exercise of this warrant is issued in the
name of the affiliate that exercises the warrant. The terms and conditions of
this warrant shall inure to the benefit of, and be binding upon, the Company and
the holders hereof and their respective permitted successors and assigns.
Notices. All notices and other communications from the Company to the
--------
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time. All notices to the Holder shall be addressed as follows:
4
Comerica Bank
Attn: Warrant Administrator
Technology and Life Sciences Division
P.O. Box 7279
San Francisco, CA 94120-7279
With a copy to
Comerica Bank
Attn: Warrant Administrator
Technology and Life Sciences Division
0 Xxxx Xxxx Xxxxxx, Xxxxx 000
0000 Xx Xxxxxx Xxxx
Xxxx Xxxx, XX 00000
Amendments. This warrant and any term hereof may be changed, waived,
-----------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
Attorneys' Fees. In the event of any dispute between the parties
----------------
concerning the terms and provisions of this warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
Governing Law. This warrant shall be governed by and construed in
--------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
CITADEL SECURITY SOFTWARE, INC.
By: /s/ Xxxxxx X. Xxxxxxx
----------------------------
Name: Xxxxxx X. Xxxxxxx
---------------------------
Title: Chairman & CEO
--------------------------
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
Authorized signatories under Corporate Resolutions to Borrow or an authorized
signer(s) under a resolution covering warrants must sign the warrant.
Acknowledged and Agreed:
Comerica Bank
By:/s/ Xxxxx Xxxxxxx
----------------------------
Name: Xxxxx Xxxxxxx
--------------------------
Title: SVP
-------------------------
5
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase ______________ shares of the
Common stock of Citadel Security Software, Inc. pursuant to the terms of the
attached warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached warrant into shares
in the manner specified in the warrant. This conversion is exercised with
respect to ______________ of the shares covered by the warrant.
[STRIKE PARAGRAPH THAT DOES NOT APPLY.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
Comerica Bank
Attn: Warrant Administrator
Technology and Life Sciences Division
P.O. Box 7279
San Francisco, CA 94120-7279
3. The undersigned represents it is acquiring the shares solely for its own
account and not as a nominee for any other party and not with a view toward the
resale or distribution thereof except in compliance with applicable securities
laws.
COMERICA BANK or Registered Assignee
____________________________________
(Signature)
____________________________________
(Date)
6
EXHIBIT A
---------
Registration Rights
-------------------
If (but without obligation to do so) the Company proposes to register (including
for this purpose a registration effected by the Company for stockholders other
than the Holder) any of its stock, either for its own account or the account of
a security holder or holders, under the Securities Act in connection with the
public offering of such securities (other than a registration relating solely to
the sale of securities to participants in a Company stock plan or option
agreements, an offering or sale of securities pursuant to a Form S-4 (or
successor form) registration statement, or any registration on any form which
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of the "Registrable
Securities" as such term is defined below, the Company shall, at such time,
promptly give Holder written notice of such registration. Upon the written
request of the Holder given within ten (10) days after mailing of such notice by
the Company, the Company shall, subject to the provisions of this Exhibit A,
cause to be registered under the Securities Act all of the Registrable
Securities that such Holder has requested to be registered. For purposes of this
Section, Registrable Securities shall mean Shares of Company common stock
issuable upon exercise or conversion of this warrant, to the extent such shares
may not be resold under Rule 144 under the Securities Act or otherwise without
registration. It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Exhibit A with respect to the
Registrable Securities of Holder that Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be required to effect
the registration of Holders Registrable Securities, and the Holder further
agrees to indemnify and hold harmless the Company from any liability it may
incur in reliance upon any written communications of the Holder furnished in
connection with such registration; provided, however, that the indemnity
agreement contained in this Exhibit A shall not apply to amounts paid in
settlement of any such liability if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld;
provide, that in no event shall any indemnity under this Exhibit A exceed the
gross proceeds from the offering received by the Holder.
7
