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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
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subsequent holder hereof (the "Holder"), has the right to purchase from CITADEL
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SECUIRTY SOFTWARE INC., a
Delaware corporation (the "Company"), up to 1,200,000 fully paid and
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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
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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
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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
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Purchase Agreement, dated as of February 10, 2004 (the "Securities Purchase
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Agreement"). Capitalized terms used herein and not otherwise defined shall have
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the respective meanings set forth in the Securities Purchase Agreement.
1. Exercise.
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(a) Right to Exercise; Exercise Price. The Holder shall have the right
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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
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"Exercise Price" for each Warrant Share purchased by the Holder upon the
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exercise of this Warrant shall be equal to $5.15 subject to adjustment for the
events specified in Section 6 below.
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(b) Exercise Notice. In order to exercise this Warrant, the Holder
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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
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in the form attached hereto as Exhibit A (the "Exercise Notice"), and a copy of
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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
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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
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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
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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
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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
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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
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to be delivered to
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<PAGE>
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")
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Fast Automated Securities Transfer program ("FAST"), crediting the account of
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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.
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(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
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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)
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(N/365) multiplied by (ii) the aggregate Exercise Price of the Warrant Shares
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which are the subject of such Exercise Default multiplied by (iii) the lower of
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fifteen percent (15%) and the maximum rate permitted by applicable law (the
"Default Interest Rate"), where "N" equals the number of days elapsed between
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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
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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
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Common Stock so purchased minus (B) the aggregate amount of net proceeds, if
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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
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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
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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
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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
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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
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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
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Exercise"). The Holder may effect a Cashless Exercise by surrendering this
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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;
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<PAGE>
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
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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
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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
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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"),
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the Company shall deliver written notice of such Distribution (a "Distribution
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Notice") to the Holder at least fifteen (15) Business Days prior to the earlier
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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
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made (the "Distribution Date"). The Holder shall be entitled to receive, at its
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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 t
