SUBSCRIPTION AGREEMENT
This Subscription Agreement (this "Agreement") is entered into as of the date
set forth on the signature page hereof by and between Citadel Security Software
Inc., a Delaware corporation (together with its successors and permitted
assigns, the "Issuer"), and the undersigned investor (together with its
successors and permitted assigns, the "Investor"). Capitalized terms used but
not otherwise defined herein shall have the meanings set forth in Section 9.1.
RECITALS
Subject to the terms and conditions of this Agreement, the Investor desires to
subscribe for and purchase, and the Issuer desires to issue and sell to the
Investor, shares of the Issuer's common stock, par value $0.01 per share (the
"Common Stock"). The Issuer is offering shares of Common Stock, with warrants to
purchase Common Stock as provided below, in a private placement to the Investor
and other investors at a purchase price of $0.80 per share and on the other
terms and conditions contained in this Agreement (the "Offering"), provided that
the Issuer reserves the right to sell a lesser or greater number of shares.
In connection with entering into this Agreement, the Issuer will issue to each
of the investors Stock Purchase Warrants (the "Warrants") pursuant to which such
investors, in certain instances, may purchase shares of Common Stock at a price
of $1.50 per share.
TERMS OF AGREEMENT
In consideration of the mutual representations and warranties, covenants and
agreements contained herein, the parties hereto agree as follows:
ARTICLE 1
SUBSCRIPTION AND ISSUANCE OF COMMON STOCK AND WARRANTS
1.1 SUBSCRIPTION AND ISSUANCE OF COMMON STOCK. Subject to the terms and
conditions of this Agreement, the Issuer will issue and sell to the Investor and
the Investor subscribes for and will purchase from the Issuer the number of
shares of Common Stock set forth on the signature page hereof (the "Shares") for
the aggregate purchase price set forth on the signature page hereof, which shall
be equal to the product of the number of Shares subscribed for by the Investor
times the per share purchase price specified in the above Recitals to this
Agreement (the "Purchase Price"). In addition, Investor shall receive Warrants
to purchase shares of Common Stock as set forth on the signature page hereof.
1.2 LEGEND. Any certificate or certificates representing the Shares and the
Warrants shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED, OR
OTHERWISE DISPOSED OF BY THE HOLDER EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED AND IN COMPLIANCE WITH APPLICABLE SECURITIES
LAWS OF ANY STATE WITH RESPECT THERETO OR IN ACCORDANCE WITH AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE AND ALSO MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH ANY APPLICABLE RULES OF THE
SECURITIES AND EXCHANGE COMMISSION.
ARTICLE 2
CLOSING
2.1 CLOSING. The closing of the transactions contemplated herein (the "Closing")
shall take place on a date designated by the Issuer, which date shall be on or
before January 22, 2003 (the "Closing Date"). The Closing shall take place at
the offices of the Issuer, ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇,
▇▇▇▇▇, or at such other time and place as the Issuer and RTX Securities
Corporation mutually agree. At the Closing, unless the Investor and the Issuer
otherwise agree (i) the Investor shall pay the Purchase Price to the Issuer, by
wire transfer of immediately available funds to the escrow account designated by
the Issuer in writing; (ii) the Issuer shall issue to the Investor the Shares,
and deliver to the Investor certificates for the Shares and Warrants duly
registered in the name of the Investor; and (iii) all other agreements and other
documents referred to in this Agreement which are required for the Closing shall
be executed and delivered (if that is not done prior to the Closing).
2.2 TERMINATION. This Agreement may be terminated at any time prior to the
Closing:
(a) by mutual written consent of the Issuer and the Investor;
(b) by the Investor, upon a breach of any material representation and warranty,
covenant or agreement on the part of the Issuer set forth in this Agreement, or
if any material representation and warranty of the Issuer shall have become
untrue in any material respect, in either case such that the conditions in
Section 8.1 would be incapable of being satisfied by the date of the Closing; or
(c) by the Issuer upon a breach of any material representation and warranty,
covenant or agreement on the part of the Investor set forth in this Agreement,
or if any material representation and warranty of the Investor shall have become
untrue in any material respect, in either case such that the conditions in
Section 8.2 would be incapable of being satisfied by the date of the Closing.
2.3 EFFECT OF TERMINATION. In the event of termination of this Agreement
pursuant to Section 2.2, this Agreement shall forthwith become void, there shall
be no liability on the part of the Issuer or the Investor to each other and all
rights and obligations of any party hereto shall cease; provided, however, that
nothing herein shall relieve any party from liability for the willful breach of
any of its representations and warranties, covenants or agreements set forth in
this Agreement.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE ISSUER
As a material inducement to the Investor entering into this Agreement and
subscribing for the Shares and Warrants, except as set forth in the Schedule of
Exceptions attached hereto as Exhibit B and delivered to the Investor at or
prior to the date of this Agreement (it being understood that any information
disclosed in any section of the Schedule of Exceptions shall be deemed disclosed
in all other applicable sections of the Schedule of Exceptions even though not
expressly set forth in such other section(s), the Issuer hereby represents and
warrants to the Investor as follows (it being understood that, except in the
case of any representation or warranty that by its terms is made only as of a
specified date, each representation and warranty set forth in this Article 3
shall be deemed to be made by the Issuer both as of the date of this Agreement
and, if the Closing occurs, as of the date of the Closing):
3.1 CORPORATE STATUS. The Issuer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
3.2 CORPORATE POWER AND AUTHORITY. The Issuer has the corporate power and
authority to execute and deliver this Agreement and the Warrants and to perform
its obligations hereunder and consummate the transactions contemplated hereby.
At the time of the closing, the Issuer will have taken all necessary corporate
action to authorize the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby.
3.3 ENFORCEABILITY. This Agreement and the Warrants have been duly executed and
delivered by the Issuer and constitutes a legal, valid and binding obligation of
the Issuer, enforceable against the Issuer in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and general equitable principles, regardless of
whether such enforceability is considered in a proceeding at law or in equity.
3.4 NO VIOLATION. The execution and delivery by the Issuer of this Agreement and
the Warrants, the consummation of the transactions contemplated hereby, and the
compliance by the Issuer with the terms and provisions hereof (including,
without limitation, the Issuer's issuance to the Investor of the Shares as
contemplated by and in accordance with this Agreement), will not result in a
default under (or give any other party the right, with the giving of notice or
the passage of time (or both), to declare a default or accelerate any obligation
under) or violate the Certificate of Incorporation or By-Laws of the Issuer or
any material Contract to which the Issuer is a party (except to the extent such
a default would not, in the case of a Contract, have a Material Adverse Effect
on the Issuer), or any material Requirement of Law applicable to the Issuer, or
result in the creation or imposition of any material Lien upon any of the
properties or assets of the Issuer or any of its Subsidiaries (except where such
Lien would not have a Material Adverse Effect on the Issuer).
3.5 CONSENTS/APPROVALS. Except for the filing of a registration statement in
accordance with Article 6 hereof and as may be required under applicable
securities or blue sky laws of various
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states or foreign jurisdictions in connection with the secondary trading of the
Shares or shares of Common Stock issuable upon exercise of the Warrants, no
consents, filings, authorizations or other actions of any Governmental Authority
are required to be obtained or made by the Issuer for the Issuer's execution,
delivery and performance of this Agreement which have not already been obtained
or made. No consent, approval, waiver or other action by any Person under any
Contract to which the Issuer is a party or by which the Issuer or any of its
properties or assets are bound is required or necessary for the execution,
delivery or performance by the Issuer of this Agreement and the consummation of
the transactions contemplated hereby, except where the failure to obtain such
consents would not have a Material Adverse Effect on the Issuer.
3.6 VALID ISSUANCE. Upon payment of the Purchase Price by the Investor and
delivery to the Investor of the certificates for the Shares, such Shares will be
validly issued, fully paid and nonassessable.
3.7 SEC REPORTS, OTHER FILINGS AND NASDAQ COMPLIANCE. The Issuer has timely made
all filings required to be made by it under the Exchange Act. The Issuer has
made accessible to the Investor true, accurate and complete copies of (i)
Issuer's registration statement on Form 10-SB; and (ii) the Issuer's quarterly
reports on Form 10-QSB for the fiscal quarters ended March 31, 2002, June 30,
2002 and September 30, 2002 (the "SEC Reports"). The SEC Reports, when filed,
complied in all material respects with all applicable requirements of the
Exchange Act. None of the SEC Reports, at the time of filing, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading in light of the circumstances in which they were made. The Issuer has
filed in a timely manner all documents that the Issuer was required to file
under the Exchange Act during the 12 months preceding the date of this
Agreement. The Issuer is currently eligible to register the resale of the Shares
in a secondary offering on a registration statement on Form SB-2 under the
Securities Act. The Issuer's Common Stock is currently traded on the
Over-The-Counter Bulletin Board Market. The Issuer is currently in compliance
with all currently effective inclusion requirements of the Over-The-Counter
Bulletin Board Market. Each balance sheet included in the SEC Reports (including
any related notes and schedules) fairly presents in all material respects the
consolidated financial position of the Issuer as of its date, and each of the
other financial statements included in the SEC Reports (including any related
notes and schedules) fairly presents in all material respects the consolidated
results of operations of the Issuer for the periods or as of the dates therein
set forth in accordance with GAAP consistently applied during the periods
involved (except that the interim reports are subject to adjustments which might
be required as a result of year end audit and except as otherwise stated
therein).
3.8 COMMISSIONS. Except as described on Schedule 3.8 and fees to RTX Securities
Corporation (RTX) in consideration for their services as placement agents for
the Offering, which fees shall be issued in cash in the amount of 7.5% of the
aggregate gross proceeds to the Issuer in the Offering and the warrants to be
issued to RTX, no Person will have, as a result of the transactions contemplated
by this Agreement, any valid right, interest or claim against or upon the
Issuer, any Subsidiary or an Investor for any commission, fee or other
compensation pursuant to any agreement, arrangement or understanding entered
into by or on behalf of the Issuer.
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3.9 CAPITALIZATION. The authorized capital stock of the Issuer consists of
50,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. All
issued and outstanding shares of capital stock of the Issuer have been, and as
of the Closing Date will be, duly authorized and validly issued and are fully
paid and non-assessable. As of the close of business on January 17, 2003, the
Issuer has issued and outstanding 15,140,577 shares of Common Stock and no
shares of Preferred Stock. Except for the Warrants, on Schedule 3.9 of the
Schedule of Exceptions or in the SEC Reports, there are no outstanding options,
warrants, rights (including conversion or preemptive rights and rights of first
refusal and similar rights) or agreements, orally or in writing, for the
purchase or acquisition from the Issuer of any shares of capital stock and the
Issuer is not a party to or subject to any agreement or understanding, and there
is no agreement or understanding between any person and/or entities, which
affects or relates to the voting or giving of written consents with respect to
any security or by a director of the Issuer. The Issuer has no obligation,
contingent or otherwise, to redeem or repurchase any equity security or any
security that is a combination of debt and equity.
3.10 NO MATERIAL ADVERSE CHANGE. Since September 30, 2002, except as disclosed
in the SEC Reports or as described on Schedule 3.10, there has not been:
(i) any change in the consolidated assets, liabilities, financial condition or
operating results of the Issuer from that reflected in the financial statements
included in the SEC Reports, except for potential continuing losses from
operations since September 30, 2002, as described in the Issuer's Risk Factors,
and changes in the ordinary course of business which have not and could not
reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate;
(ii) any declaration or payment of any dividend, or any authorization or payment
of any distribution, on any of the capital stock of the Issuer, or any
redemption or repurchase of any securities of the Issuer;
(iii) any material damage, destruction or loss, whether or not covered by
insurance to any assets or properties of the Issuer or its Subsidiaries;
(iv) any waiver, not in the ordinary course of business, by the Issuer or any
Subsidiary of a material right or of a material debt owed to it;
(v) any satisfaction or discharge of any lien, claim or encumbrance or payment
of any obligation by the Issuer or a Subsidiary, except in the ordinary course
of business and which is not material to the assets, properties, financial
condition, operating results or business of the Issuer and its Subsidiaries
taken as a whole (as such business is presently conducted and as it is proposed
to be conducted);
(vi) any change or amendment to the Issuer's Certificate of Incorporation or
by-laws, or material change to any material contract or arrangement by which the
Issuer or any Subsidiary is bound or to which any of their respective assets or
properties is subject;
(vii) any material labor difficulties or labor union organizing activities with
respect to employees of the Issuer or any Subsidiary;
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(viii) any transaction entered into by the Issuer or a Subsidiary other than in
the ordinary course of business;
(ix) the loss of the services of any key employee, or material change in the
composition or duties of the senior management of the Issuer or any Subsidiary;
(x) the loss or threatened loss of any customer which has had or could
reasonably be expected to have a Material Adverse Effect; or
(xi) any other event or condition of any character that has had or could
reasonably be expected to have a Material Adverse Effect.
3.11 LITIGATION. Except as disclosed on Schedule 3.11 or the SEC Reports, there
is no action, suit, proceeding or investigation pending or, to the Issuer's
knowledge, currently threatened against the Issuer or any of its subsidiaries
that questions the validity of this Agreement or the right of the Issuer to
enter into it, or to consummate the transactions contemplated hereby, or that
might result, either individually or in the aggregate, in a Material Adverse
Effect on the Issuer or any material change in the current equity ownership of
the Issuer. The foregoing includes, without limitation, actions pending or, to
the Issuer's knowledge, threatened involving the prior employment of any of the
Issuer's employees or their use in connection with the Issuer's business of any
information or techniques allegedly proprietary to any of their former
employers. Neither the Issuer nor any of its subsidiaries is a party to or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Issuer or any of its subsidiaries currently
pending or which the Issuer or any of its subsidiaries currently intends to
initiate.
3.12 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated in this
Agreement and as disclosed on Schedule 3.12, the Issuer has not granted or
agreed to grant any registration rights, including piggyback rights, to any
person or entity, which have not been waived, and no stockholder of the Issuer
has entered into any agreements with respect to the voting of capital shares of
the Issuer.
3.13 OFFERINGS. Subject in part to the truth and accuracy of Investor's
representations and warranties set forth in this Agreement, the offer, sale and
issuance of the Shares and the Warrants as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act and any
applicable state securities laws, and neither the Issuer nor any authorized
agent acting on its behalf will take any action hereafter that would cause the
loss of such exemption.
3.14 DISCLOSURE. The Issuer is aware of no facts which lead it to believe that
the Disclosure Documents, as of their respective dates, contain any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
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3.15 TAX MATTERS. Except as disclosed in the SEC Reports or as described on
Schedule 3.15, the Issuer and each Subsidiary has timely prepared and filed all
tax returns required to have been filed by the Issuer or such Subsidiary with
all appropriate governmental agencies and timely paid all taxes shown thereon or
otherwise owed by it, except for those taxes being contested in good faith and
for which the Issuer or such Subsidiary has established adequate reserves in
accordance with generally accepted accounting principles. The charges, accruals
and reserves on the books of the Issuer in respect of taxes for all fiscal
periods are adequate in all material respects, and there are no material unpaid
assessments against the Issuer or any Subsidiary nor, to the Issuer's Knowledge,
any basis for the assessment of any additional taxes, penalties or interest for
any fiscal period or audits by any federal, state or local taxing authority
except for any assessment which is not material to the Issuer and its
Subsidiaries, taken as a whole. All taxes and other assessments and levies that
the Issuer or any Subsidiary is required to withhold or to collect for payment
have been duly withheld and collected and paid to the proper governmental entity
or third party when due. There are no tax liens or claims pending or, to the
Issuer's Knowledge, threatened against the Issuer or any Subsidiary or any of
their respective assets or property. Except as disclosed in the SEC Reports or
as described on Schedule 3.15, there are no outstanding tax sharing agreements
or other such arrangements between the Issuer and any Subsidiary or other
corporation or entity.
3.16 TITLE TO PROPERTIES. Except as disclosed in the SEC Reports, the Issuer and
each Subsidiary has good and marketable title to all real properties and all
other properties and assets owned by it, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or currently planned to be made thereof
by them; and except as disclosed in the SEC Reports, the Issuer and each
Subsidiary holds any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere with the
use made or currently planned to be made thereof by them.
3.17 CERTIFICATES, AUTHORITIES AND PERMITS. The Issuer and each Subsidiary
possess adequate certificates, authorities or permits issued by appropriate
governmental agencies or bodies necessary to conduct the business now operated
by it, and neither the Issuer nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authority or permit that, if determined adversely to the Issuer or such
Subsidiary, could reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate.
3.18 NO LABOR DISPUTES. No material labor dispute with the employees of the
Issuer or any Subsidiary exists or, to the Issuer's Knowledge, is imminent.
3.19 INTELLECTUAL PROPERTY. Except as disclosed in the SEC Reports or on
Schedule 3.19,
(a) All Intellectual Property developed by the Issuer and its Subsidiaries (the
"Intellectual Property") is currently in compliance with all legal requirements
(including timely filings, proofs and payments of fees) and is valid and
enforceable. No Intellectual Property of the Issuer or its Subsidiaries which is
necessary for the conduct of Issuer's and each of its Subsidiaries' respective
businesses as currently conducted or as currently proposed to be conducted has
been or is now involved in any cancellation, dispute or litigation, and, to the
Issuer's Knowledge, no such action
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is threatened. No patent of the Issuer or its Subsidiaries has been or is now
involved in any interference, reissue, reexamination or opposition proceeding.
(b) All of the licenses and sublicenses and consent, royalty or other agreements
concerning Intellectual Property which are necessary for the conduct of Issuer's
and each of its Subsidiaries' respective businesses as currently conducted or as
currently proposed to be conducted to which the Issuer or any Subsidiary is a
party or by which any of their assets are bound (other than generally
commercially available, non-custom, off-the-shelf software application programs
having a retail acquisition price of less than $10,000 per license)
(collectively, "License Agreements") are valid and binding obligations of the
Issuer or its Subsidiaries that are parties thereto and, to the Issuer's
Knowledge, the other parties thereto, enforceable in accordance with their
terms, except to the extent that enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws affecting the enforcement of creditors' rights generally, and
there exists no event or condition which will result in a material violation or
breach of or constitute (with or without due notice or lapse of time or both) a
default by the Issuer or any of its Subsidiaries under any such License
Agreement.
(c) The Issuer and its Subsidiaries own or have the valid right to use all of
the Intellectual Property necessary for the conduct of the Issuer's and each of
its Subsidiaries' businesses substantially as currently conducted or as
currently proposed to be conducted and for the ownership, maintenance and
operation of the Issuer's and its Subsidiaries' properties and assets.
(d) The Issuer and its Subsidiaries own or have the valid right to use the
Intellectual Property that is necessary for the conduct of Issuer's and each of
its Subsidiaries' respective businesses as currently conducted or as currently
proposed to be conducted, free and clear of all liens, encumbrances, adverse
claims or obligations to license all such owned Intellectual Property, other
than licenses entered into in the ordinary course of the Issuer's and its
Subsidiaries' businesses. The Issuer and its Subsidiaries have a valid and
enforceable right to use all other Intellectual Property used or held for use in
the respective businesses of the Issuer and its Subsidiaries. The Issuer and its
Subsidiaries have the right to use all of the owned and licensed Intellectual
Property which is necessary for the conduct of Issuer's and each of its
Subsidiaries' respective businesses as currently conducted or as currently
proposed to be conducted in all jurisdictions in which they conduct their
businesses.
(e) The Issuer and each of its Subsidiaries have taken reasonable steps to
maintain, police and protect the Intellectual Property which it owns and which
is necessary for the conduct of Issuer's and each of its Subsidiaries'
respective businesses as currently conducted or as currently proposed to be
conducted, including the execution of appropriate confidentiality agreements and
intellectual property and work product assignments and releases. The conduct of
the Issuer's and its Subsidiaries' businesses as currently conducted does not
infringe or otherwise impair or conflict with (collectively, "Infringe") any
Intellectual Property rights of any third party, and, to the Issuer's Knowledge,
the Intellectual Property rights of the Issuer and its Subsidiaries which are
necessary for the conduct of Issuer's and each of its Subsidiaries' respective
businesses as currently conducted or as currently proposed to be conducted are
not being Infringed by any third party. There is no litigation or order pending
or outstanding or, to the Issuer's Knowledge,
8
threatened or imminent, that seeks to limit or challenge or that concerns the
ownership, use, validity or enforceability of any Intellectual Property of the
Issuer and its Subsidiaries and the Issuer's and its Subsidiaries' use of any
Intellectual Property owned by a third party, and, to the Issuer's Knowledge,
there is no valid basis for the same.
(f) The consummation of the transactions contemplated hereby will not result in
the alteration, loss, impairment of or restriction on the Issuer's or any of its
Subsidiaries' ownership or right to use any of the Intellectual Property which
is necessary for the conduct of Issuer's and each of its Subsidiaries'
respective businesses as currently conducted or as currently proposed to be
conducted.
(g) All software developed by the Issuer or any of its Subsidiaries,
(i) is free from any material defect, bug, virus, or programming, design or
documentation error;
(ii) operates and runs in a reasonable and efficient business manner; and
(iii) conforms in all material respects to the specifications and purposes
thereof, except for such cases where it could not reasonably be expected to have
a Material Adverse Effect, individually or in the aggregate.
(h) The Issuer and its Subsidiaries have taken reasonable steps to protect the
Issuer's and its Subsidiaries' rights in their confidential information and
trade secrets. Each employee, consultant and contractor who has had access to
proprietary Intellectual Property which is necessary for the conduct of Issuer's
and each of its Subsidiaries' respective businesses as currently conducted or as
currently proposed to be conducted has executed an agreement to maintain the
confidentiality of such Intellectual Property and has executed appropriate
agreements that are substantially consistent with the Issuer's standard forms
thereof. Except under confidentiality obligations, there has been no material
disclosure of any of the Issuer's or its Subsidiaries' confidential information
or trade secrets to any third party.
3.20 ENVIRONMENTAL MATTERS. Neither the Issuer nor any Subsidiary is in
violation of any statute, rule, regulation, decision or order of any
governmental agency or body or any court, domestic or foreign, relating to the
use, disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, "Environmental Laws"), owns or operates any real
property contaminated with any substance that is subject to any Environmental
Laws, is liable for any off-site disposal or contamination pursuant to any
Environmental Laws, and is subject to any claim relating to any Environmental
Laws, which violation, contamination, liability or claim has had or could
reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate; and there is no pending or, to the Issuer's Knowledge, threatened
investigation that might lead to such a claim.
3.21 FINANCIAL STATEMENTS. The financial statements included in each SEC Report
present fairly, in all material respects, the consolidated financial position of
the Issuer as of the dates shown and its consolidated results of operations and
cash flows for the periods shown, and such financial
9
statements have been prepared in conformity with United States generally
accepted accounting principles applied on a consistent basis (except as may be
disclosed therein or in the notes thereto, and, in the case of quarterly
financial statements, as permitted by Form 10-QSB under the 1934 Act).
Except as set forth in the financial statements of the Issuer included in the
SEC Reports filed prior to the date hereof, potential continuing losses from
operations since September 30, 2002, as described in the Issuer's Risk Factors,
or as described on Schedule 3.21, neither the Issuer nor any of its Subsidiaries
has incurred any liabilities, contingent or otherwise, except those incurred in
the ordinary course of business, consistent (as to amount and nature) with past
practices since the date of such financial statements, none of which,
individually or in the aggregate, have had or could reasonably be expected to
have a Material Adverse Effect.
3.22 NO DIRECTED SELLING EFFORTS OR GENERAL SOLICITATION. Neither the Issuer nor
any Person acting on its behalf has conducted any general solicitation or
general advertising (as those terms are used in Regulation D) in connection with
the offer or sale of any of the Securities.
3.23 NO INTEGRATED OFFERING. Neither the Issuer nor any of its Affiliates, nor
any Person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any Issuer security or solicited any offers to buy any
security, under circumstances that would adversely affect reliance by the Issuer
on Section 4(2) for the exemption from registration for the transactions
contemplated hereby or would require registration of the Securities under the
1933 Act.
3.24 QUESTIONABLE PAYMENTS. Neither the Issuer nor any of its Subsidiaries nor,
to the Issuer's Knowledge, any of their respective current or former
shareholders, directors, officers, employees, agents or other Persons acting on
behalf of the Issuer or any Subsidiary, has on behalf of the Issuer or any
Subsidiary or in connection with their respective businesses: (a) used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; (b) made any direct or
indirect unlawful payments to any governmental officials or employees from
corporate funds; (c) established or maintained any unlawful or unrecorded fund
of corporate monies or other assets; (d) made any false or fictitious entries on
the books and records of the Issuer or any Subsidiary; or (e) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment of
any nature.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
As a material inducement to the Issuer entering into this Agreement and issuing
the Shares and the Warrants, the Investor represents and warrants to the Issuer
as follows:
4.1 POWER AND AUTHORITY. The Investor, if other than a natural person, is an
entity duly organized, validly existing and in good standing under the laws of
the state of its incorporation or formation. The Investor has the corporate,
partnership or other power and authority under applicable law to execute and
deliver this Agreement and consummate the transactions contemplated hereby, and
has all necessary authority to execute, deliver and perform its
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obligations under this Agreement and consummate the transactions contemplated
hereby. The Investor has taken all necessary action to authorize the execution,
delivery and performance of this Agreement and the transactions contemplated
hereby.
4.2 NO VIOLATION. The execution and delivery by the Investor of this Agreement,
the consummation of the transactions contemplated hereby, and the compliance by
the Investor with the terms and provisions hereof, will not result in a default
under (or give any other party the right, with the giving of notice or the
passage of time (or both), to declare a default or accelerate any obligation
under) or violate any charter or similar documents of the Investor, if other
than a natural person, or any Contract to which the Investor is a party or by
which it or its properties or assets are bound, or violate any Requirement of
Law applicable to the Investor, other than such violations or defaults which,
individually and in the aggregate, do not and will not have a Material Adverse
Effect on the Investor. The Investor is familiar with Regulation M promulgated
under the Exchange Act, a copy of which is attached hereto as Exhibit C, and is
in full compliance with the provisions thereof with respect to the transactions
contemplated hereby.
4.3 CONSENTS/APPROVALS. No consents, filings, authorizations or actions of any
Governmental Authority are required for the Investor's execution, delivery and
performance of this Agreement. No consent, approval, waiver or other actions by
any Person under any Contract to which the Investor is a party or by which the
Investor or any of its properties or assets are bound is required or necessary
for the execution, delivery and performance by the Investor of this Agreement
and the consummation of the transactions contemplated hereby.
4.4 ENFORCEABILITY. This Agreement has been duly executed and delivered by the
Investor and constitutes a legal, valid and binding obligation of the Investor,
enforceable against the Investor in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditor's rights generally and general equitable principles, regardless of
whether enforceability is considered in a proceeding at law or in equity.
4.5 INVESTMENT INTENT. The Investor is acquiring the Shares and the Warrants
hereunder for its own account and with no present intention of distributing or
selling such Shares and further agrees not to transfer such Shares or Warrants
in violation of the Securities Act or any applicable state securities law, and
no one other than the Investor has any beneficial interest in the Shares and the
Warrants. The Investor agrees that it will not sell or otherwise dispose of any
of the Shares or the Warrants unless such sale or other disposition has been
registered under the Securities Act or, in the opinion of counsel acceptable to
the Issuer, is exempt from registration under the Securities Act and has been
registered or qualified or, in the opinion of such counsel acceptable to the
Issuer, is exempt from registration or qualification under applicable state
securities laws. The Investor understands that the offer and sale by the Issuer
of the Shares or the Warrants being acquired by the Investor hereunder has not
been registered under the Securities Act by reason of their contemplated
issuance in transactions exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) thereof, and that
the reliance of the Issuer on such exemption from registration is predicated in
part on these representations and warranties of the Investor. The Investor
acknowledges that pursuant to
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Section 1.2 of this Agreement a restrictive legend consistent with the foregoing
has been or will be placed on the certificates for the Shares and Warrants.
4.6 ACCREDITED INVESTOR. The Investor is an "accredited investor" as such term
is defined in Rule 501(a) of Regulation D under the Securities Act (a copy of
which is attached hereto as Exhibit D, upon which the Investor has indicated the
specific nature of the Investor's status as an accredited investor), and has
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the investment to be made by it
hereunder.
4.7 ADEQUATE INFORMATION. The Investor has received from the Issuer, and has
reviewed, such information which the Investor considers necessary or appropriate
to evaluate the risks and merits of an investment in the Shares and Warrants,
including without limitation, the documents listed on Exhibit E, which have been
received by Investor as part of an informational packet of materials from the
Issuer (the "Disclosure Documents"). The Investor acknowledges that each of the
SEC Reports are specifically incorporated herein by reference and form an
integral part of this Agreement. The Investor also acknowledges that the
additional risk factors set forth on Exhibit E and contained in the Disclosure
Documents are specifically incorporated herein by reference and forms an
integral part of this Agreement.
4.8 OPPORTUNITY TO QUESTION. The Investor has had the opportunity to question,
and has questioned, to the extent deemed necessary or appropriate,
representatives of the Issuer so as to receive answers and verify information
obtained in the Investor's examination of the Issuer, including the information
that the Investor has received and reviewed as referenced in Section 4.7 hereof
in relation to its investment in the Shares and the Warrants.
4.9 NO OTHER REPRESENTATIONS . No oral or written representations have been made
to the Investor in connection with the Investor's acquisition of the Shares or
Warrants which were in any way inconsistent with the information reviewed by the
Investor. The Investor acknowledges that no representations or warranties of any
type or description have been made to it by any Person with regard to the
Issuer, any of its Subsidiaries, any of their respective businesses, properties
or prospects or the investment contemplated herein, other than the
representations and warranties set forth in Article 3 hereof.
4.10 KNOWLEDGE AND EXPERIENCE. The Investor has such knowledge and experience in
financial, tax and business matters, including substantial experience in
evaluating and investing in common stock and other securities (including the
common stock and other securities of speculative companies), so as to enable the
Investor to utilize the information referred to in Section 4.7 hereof and any
other information made available by the Issuer to the Investor in order to
evaluate the merits and risks of an investment in the Shares and Warrants and to
make an informed investment decision with respect thereto. Investor is fully
aware of: (i) the highly speculative nature of the Shares and Warrants; (ii) the
financial hazards involved; (iii) the lack of liquidity of the Shares and
Warrants and the restrictions on transferability of the Shares and Warrants;
(iv) the qualifications and backgrounds of the management of the Issuer; (v) the
tax consequences of acquiring the Shares and Warrants; and (vi) Investor
understands that the Shares and Warrants are restricted and cannot be resold
unless a registration statement under the Securities Act (and current
prospectus) is in effect as to the Shares and Warrants, the Shares and Warrants
are sold
12
pursuant to SEC Rule 144 of the Securities Act or pursuant to another exemption
from the registration requirements of the Securities Act or applicable state
securities laws.
4.11 RULE 144. In addition, Investor has been advised that SEC Rule 144
promulgated under the Securities Act, which permits certain limited sales of
unregistered securities, may not be presently available with respect to the
Shares and Warrants and, in any event, requires that the Shares and any shares
of Common Stock issuable upon exercise of the Warrants be held for a minimum of
one (1) year, and in certain cases two (2) years, after they have been purchased
and paid for (within the meaning of SEC Rule 144), before they may be resold
under SEC Rule 144.
4.12 INDEPENDENT DECISION. The Investor is not relying on the Issuer or on any
legal or other opinion in the materials reviewed by the Investor with respect to
the financial or tax considerations of the Investor relating to its investment
in the Shares and Warrants. The Investor has relied solely on the
representations and warranties, covenants and agreements of the Issuer in this
Agreement (including the Exhibits hereto) and on its examination and independent
investigation in making its decision to acquire the Shares and Warrants.
4.13 COMMISSIONS. The Investor has not incurred any obligation for any finder's
or broker's or agent's fees or commissions in connection with the transactions
contemplated hereby.
4.14 NO GENERAL SOLICITATION. At no time was Investor presented with or
solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the Shares and Warrants.
ARTICLE 5
COVENANTS
5.1 PUBLIC ANNOUNCEMENTS. The Investor agrees not to make any public
announcement or issue any press release or otherwise publicly disseminate any
information about the subject matter of this Agreement. The Issuer shall have
the right to make such public announcements and shall control, in its sole and
absolute discretion, the timing, form and content of all press releases or other
public communications of any sort relating to the subject matter of this
Agreement, and the method of their release, or publication thereof.
5.2 FURTHER ASSURANCES. Each party shall execute and deliver such additional
instruments and other documents and shall take such further actions as may be
reasonably necessary or appropriate to effectuate, carry out and comply with all
of the terms of this Agreement and the transactions contemplated hereby. Each of
the Investor and the Issuer shall make on a prompt and timely basis all
governmental or regulatory notifications and filings required to be made by it
with or to any Governmental Authority in connection with the consummation of the
transactions contemplated hereby. The Issuer and the Investor each agree to
cooperate with the other in the preparation and filing of all forms,
notifications, reports and information, if any, required or reasonably deemed
advisable pursuant to any Requirement of Law or the rules of the
Over-The-Counter Bulletin Board Market in connection with the transactions
contemplated by this Agreement and to use their respective best efforts to agree
jointly on a method to overcome any
13
objections by any Governmental Authority to any such transactions. Except as may
be specifically required hereunder, neither of the parties hereto or their
respective Affiliates shall be required to agree to take any action that in the
reasonable opinion of such party would result in or produce a Material Adverse
Effect on such party.
5.3 NOTIFICATION OF CERTAIN MATTERS . Each party hereto shall give prompt notice
to the other party of the occurrence, or non-occurrence, of any event which
would be likely to cause any representation and warranty herein to be untrue or
inaccurate, or any covenant, condition or agreement herein not to be complied
with or satisfied.
5.4 CONFIDENTIAL INFORMATION; STANDSTILL.
(a) The Investor agrees that no portion of the Confidential Information (as
defined below) shall be disclosed to third parties, except as may be required by
law, without the prior express consent of the Issuer provided that the Investor
may share such information with such of its officers and professional advisors
as may need to know such information to assist the Investor in its evaluation
thereof on the condition that such parties agree to be bound by the terms
hereof. All Confidential Information received by the Investor shall be promptly
returned or destroyed, as directed by the Issuer. "Confidential Information"
means all oral or written data, reports, records or materials and any and all
other confidential or disclosure information or materials obtained from the
Issuer or its professional advisors, which are not yet publicly available.
Confidential Information excludes information that is publicly available or
already known to the Investor through a source not bound by any confidentiality
obligation.
(b) For a period of one year from the Closing Date, the Investor will not,
without the prior written consent of the Issuer (i) propose to enter into any
acquisition of all or substantially of the assets or stock of the Issuer or a
merger or other business combination involving the Issuer; (ii) seek to control
or influence the management, Board of Directors or policies of the Issuer; or
(iii) form, join or in any way participate in a "group" (within the meaning of
Section 13(d) (3) of the Exchange Act) with respect to any securities of the
Issuer in connection with any of the foregoing. Notwithstanding the foregoing,
this section shall not restrict the Investor's acquisition of shares of the
Issuer's Common Stock through open market purchases.
5.5 COVENANTS AND AGREEMENTS OF THE ISSUER. Commencing on the date of the
Closing and continuing for one year after the Closing, the Investors who have
purchased at least $500,000 of Shares at the Closing (the "Lead Investors")
shall have the right to participate in future capital raising transactions on
the terms and conditions set forth in this Section 5.5. During such period, the
Issuer shall give ten (10) Business Days advance written notice to such Lead
Investors prior to any non-public offer or sale of any of the Issuer's
securities by providing to the Lead Investors a term sheet containing all
material business terms of the proposed transaction. The Investors and their
respective assignees shall have the right (pro rata in accordance with such Lead
Investors' participation in this offering) to purchase such Lead Investor's Pro
Rata Share (as defined below) of such securities which are the subject of the
proposed transaction for the same consideration and on the same terms and
conditions as contemplated for such third-party sale. The Lead Investors' rights
hereunder must be exercised in writing by the Lead Investors within five (5)
Business Days following receipt of the notice from the Issuer. If, subsequent to
the Issuer giving
14
notice to a Lead Investor hereunder but prior to the Lead Investor exercising
its right to participate (or the expiration of the five-Business Day period
without response from the Lead Investor), the terms and conditions of the
proposed third-party sale are changed in any material respect from that
disclosed in the term sheet provided to such Lead Investor, the Issuer shall be
required to provide a new notice to the Lead Investor hereunder and the Lead
Investors shall have the right, which must be exercised within five (5) Business
Days of such new notice, to exercise their rights to purchase the securities on
such changed terms and conditions as provided hereunder. In the event the Lead
Investors do not exercise their rights hereunder, or affirmatively decline to
engage in the proposed transaction with the Issuer, then the Issuer may proceed
with such proposed transaction on substantially the same terms and conditions as
noticed to the Lead Investors. A Lead Investor's "Pro Rata Share" for purposes
of this Section 5.5 is the ratio of (a) the sum of (i) the number of Shares the
Lead Investor holds plus (ii) the number of Warrant Shares which the Lead
Investor has the right to acquire to (b) a number of shares of Common Stock
equal to the sum of (x) the total number of shares of Common Stock then
outstanding plus (y) the total number of shares of Common Stock into which all
then outstanding shares of preferred stock and other convertible securities of
the Issuer are then convertible plus (z) the total number of shares of Common
Stock underlying all then outstanding and presently exercisable options,
warrants and other rights to purchase shares of Common Stock.
5.6 LIMITATION ON CERTAIN ACTIONS.
(a) For a period of one year from the Closing, the Issuer shall not offer or
sell any Equity Securities (as defined below) at a price per share lower than
the per Share Purchase Price or otherwise on terms more favorable to the
purchaser thereof than those contained in the Agreements without first complying
with the right of first refusal provisions set forth in Section 5.5; provided,
however, that the right of first refusal provisions shall be applicable to all
Investors (rather than just the Lead Investors), and provided further that the
restrictions in this sentence shall not apply to the issuance of an Equity
Security to an officer, director, employee, suppliers, vendors, or consultant to
the Issuer or any Subsidiary pursuant to any incentive or stock option plan or
agreement of the Issuer approved by the Board of Directors or the shareholders
of the Issuer. The term "Equity Securities" means the Issuer's capital stock,
warrants, rights, and options giving the holder thereof the right to acquire
shares of capital stock, and any security directly or indirectly convertible
into or exercisable for or exchangeable into shares of the Issuer's capital
stock.
(b) Commencing on the date of the Closing and continuing for one year after the
Closing, the Issuer shall not offer or sell or enter into any agreement,
arrangement or understanding to offer or sell any Equity Security if the Equity
Security (or any agreement, arrangement or understanding entered into in
connection therewith) provides for the future adjustment of (i) the purchase
price therefor, (ii) the number of Equity Securities to be issued, or (iii) the
conversion, exercise or exchange rate applicable thereto (other than customary
anti-dilution provisions no more favorable to the holder than those contained in
the Warrants) without the prior written consent of the Lead Investors, which
consent shall not be unreasonably withheld or delayed.
5.7 RESERVATION OF COMMON STOCK. The Issuer shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of providing for
15
the exercise of the Warrants, such number of shares of Common Stock as shall
from time to time equal the number of shares sufficient to permit the exercise
of the Warrants issued pursuant to this Agreement in accordance with their
respective terms.
5.8 REPORTS. The Issuer will furnish to such Investors and/or their assignees
such information relating to the Issuer and its Subsidiaries as from time to
time may reasonably be requested by such Investors and/or their assignees;
provided, however, that such Investors and/or assignees shall hold in confidence
any confidential or proprietary information received from the Issuer and
identified as such at the time of disclosure such information and shall use any
such confidential or proprietary information solely for the purpose of
monitoring and evaluating their investment in the Issuer and; provided, further,
that the Issuer shall not be required to provide any information to the
Investors which, if disclosed to such Investors and/or their assignees pursuant
to the terms of this Section 5.8, would, in the good faith judgment of the
Issuer, cause the Issuer or any Subsidiary to violate the terms of a
confidentiality undertaking binding on the Issuer or such Subsidiary. Each
Investor and/or assignee acknowledges that it is aware, and that it will advise
its representatives who are given access to such information, that the United
States securities laws may prohibit a person who has material, non-public
information concerning matters that may be disclosed to it pursuant to this
Section 5.8 from purchasing or selling securities of the Issuer or a company
which may be, or may be affiliated with, a party to a business arrangement or
proposed business arrangement with the Issuer or from communicating such
information to any other person under circumstances in which it is reasonably
foreseeable that such person is likely to purchase or sell such securities. The
Issuer shall not disclose material nonpublic information to the Investors, or to
advisors to or representatives of the Investors, unless prior to disclosure of
such information the Issuer identifies such information as being material
nonpublic information and provides the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such material
nonpublic information for review.
5.9 NO CONFLICTING AGREEMENTS. The Issuer will not take any action, enter into
any agreement or make any commitment that would conflict or interfere in any
material respect with the obligations to the Investors under the Agreements.
5.10 COMPLIANCE WITH LAWS. The Issuer will comply in all material respects with
all applicable laws, rules, regulations, orders and decrees of all governmental
authorities.
5.11 NASDAQ LISTING AND RELATED MATTERS; COMPLIANCE WITH NASDAQ EXEMPTION
REQUIREMENTS.
(a) Promptly following the Closing, if the Issuer determines that it meets the
relevant listing requirements, the Issuer shall use its commercially reasonable
best efforts to cause the Shares and the Warrant Shares to be listed on the
Nasdaq, American or NYSE stock exchanges, and, if applicable, to comply with the
terms and conditions of the Exemption, including, but not limited to, (i)
issuing a press release in a form reasonably satisfactory to Nasdaq, and (ii)
mailing to all shareholders a notification (the "Notification") to the effect
that the Audit Committee of the Board of Directors of the Issuer has expressly
approved the determination not to seek shareholder approval in connection with
the offer and sale of the Securities in reliance on the
16
exception provided in Nasdaq Marketplace Rule 4350(i)(2), Nasdaq has approved
the Exemption, and describing the basis for the Exemption. The Notification
shall not at any time prior to the Closing Date contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
(b) Further, if the Issuer applies to have its Common Stock or other securities
traded on any other principal stock exchange or market, it shall include in such
application the Shares and the Warrant Shares and will take such other action as
is necessary to cause such Common Stock to be so listed. Until such time as the
Shares are listed on Nasdaq, the Issuer will use commercially reasonable efforts
to continue the listing and trading of its Common Stock on the OTC Bulletin
Board and, in accordance, therewith, will use commercially reasonable efforts to
comply in all respects with the Issuer's reporting, filing and other obligations
under the bylaws or rules of such exchange, as applicable.
5.13 TERMINATION OF COVENANTS. The provisions of Sections 5.5 through 5.12 shall
terminate and be of no further force and effect upon the earliest of (i) the
mutual consent of the Issuer and the Lead Investors, (ii) the date on which the
Issuer's obligations to maintain an effective registration statement under this
Agreement terminate, or (iii) the occurrence of a "Change of Control" of the
Issuer. As used herein, "Change of Control" means the consolidation or merger of
the Issuer with or into any other entity or entities which results in the
holders of Common Stock of the Issuer immediately prior to such transaction
owning less than 50% of the voting power of the successor entity and pursuant to
which such holders receive either (i) cash, (ii) freely tradable securities, or
(iii) a combination of cash and freely tradable securities, the sale, conveyance
or other disposition by the Issuer of all or substantially all of its assets, or
the consummation of a tender or exchange offer pursuant to which a Person
(including any group) becomes the beneficial owner of 80% or more of the
outstanding voting power of the Issuer.
ARTICLE 6
REGISTRATION RIGHTS
The Investor shall have the following registration rights with respect to the
Registrable Securities owned by it:
6.1 TRANSFER OF REGISTRATION RIGHTS. The Investor may assign the registration
rights with respect to the Shares or the shares of Common Stock issuable upon
exercise of the Warrants (the "Warrant Shares") to any party or parties to which
it may from time to time transfer the Shares or Warrant Shares, provided that
the transferee agrees in writing with the Issuer to be bound by the applicable
provisions of this Agreement regarding such registration rights and
indemnification relating thereto. Upon assignment of any registration rights
pursuant to this Section 6.1, the Investor shall deliver to the Issuer a notice
of such assignment which includes the identity and address of any assignee and
such other information reasonably requested by the Issuer in connection with
effecting any such registration (collectively, the Investor and each such
subsequent holder is referred to as a "Holder").
17
6.2 REQUIRED REGISTRATION.
(a) Filing of Registration Statement. As promptly as practicable after the
Closing, but in no event later than ninety (90) days after the date of the
Closing, the Issuer agrees to file a Registration Statement on Form SB-2 (the
"Registration Statement") to register the resale of all of the Shares. The
Issuer shall use reasonable efforts to cause the SEC to declare the Registration
Statement effective as soon as practicable after filing and to thereafter
maintain the effectiveness of the Registration Statement until such time as the
Issuer reasonably determines, based on an opinion of counsel, that the Holders
will be eligible to sell all of the Shares then owned by the Holders without the
need for continued registration of the Shares in the three month period
immediately following the termination of the effectiveness of the Registration
Statement. The Issuer's obligations contained in this Section 6.2 shall
terminate on the second anniversary of the date on which the Shares are issued
hereunder.
(b) Delay In Effectiveness.
(i) If the Registration Statement is not declared effective by the SEC on or
prior to the date one hundred fifty (150) days after the Closing (the "Deadline
Date"), then upon the first day following the Deadline Date (the "Initial
Liquidated Damages Date"), and upon the expiration of each fifteen (15)-day
period following the Initial Liquidated Damages Date in which the Registration
Statement has not been declared effective by the SEC (each, an "Additional
Liquidated Damages Date"), the Issuer shall pay the Investor, as liquidated
damages and not as a penalty, an amount equal to 1.5% (expressed as a percentage
of the Purchase Price) with respect to any failure to timely obtain the
effectiveness of the Registration Statement; and for any Initial Liquidated
Damages Date or Additional Liquidated Damages Date, such payment shall be made
no later than the first business day of the calendar month next succeeding the
month in which such Initial Liquidated Damages Date or Additional Liquidated
Damages Date occurs.
(ii) The parties agree that the sole damages payable for a violation of the
terms of this Agreement with respect to which liquidated damages are expressly
provided shall be such liquidated damages. Nothing shall preclude the Investor
from pursuing or obtaining specific performance or other equitable relief with
respect to this Agreement.
(iii) The parties hereto agree that the liquidated damages provided for in this
Section 6.2(b) constitute a reasonable estimate of the damages that may be
incurred by the Investor by reason of the failure of the Registration Statement
to be filed in accordance with the provisions hereof.
6.3 REGISTRATION PROCEDURES.
(a) In case of the Registration Statement effected by the Issuer subject to this
Article 6, the Issuer shall keep the Investor, on behalf of each Holder, advised
in writing as to the initiation of such registration, and as to the completion
thereof. In addition, subject to Section 6.2 above, the Issuer shall, to the
extent applicable to the Registration Statement:
(i) prepare and file with the SEC such amendments and supplements to the
Registration Statement as may be necessary to keep such registration, effective
and comply with provisions of
18
the Securities Act with respect to the disposition of all securities covered
thereby during the period referred to in Section 6.2;
(ii) update, correct, amend and supplement the Registration Statement as
necessary;
(iii) notify Holder when the Registration Statement is declared effective by the
SEC, and furnish such number of prospectuses, including preliminary
prospectuses, and other documents incident thereto as Holder may reasonably
request from time to time;
(iv) use its commercially reasonable efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions of the United States where an exemption is not available and as
Holder may reasonably request to enable it to consummate the disposition in such
jurisdiction of the Registrable Securities (provided that the Issuer will 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 provision, or (ii)
consent to general service of process in any such jurisdiction, or (iii) subject
itself to taxation in any jurisdiction where it is not already subject to
taxation);
(v) notify Holder at any time when a prospectus relating to the Registrable
Securities is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in the
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 Holder, the Issuer will prepare a supplement or amendment to such
prospectus, so that, as thereafter delivered to purchasers of such shares, such
prospectus will not contain any untrue statements of a material fact or omit to
state any fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(vi) cause all such Registrable Securities to be listed on each securities
exchange on which similar securities issued by the Issuer are then listed and
obtain all necessary approvals from the Over-The-Counter Bulletin Board Market,
if applicable, for trading thereon;
(vii) provide a transfer agent and registrar for all such Registrable Securities
not later than the effective date of the Registration Statement; and
(viii) upon the sale of any Registrable Securities pursuant to the Registration
Statement, direct the transfer agent to remove all restrictive legends from all
certificates or other instruments evidencing such Registrable Securities.
(b) Notwithstanding anything stated or implied to the contrary in Section 6.3(a)
above, the Issuer shall not be required to consent to any underwritten offering
of the Registrable Securities or to any specific underwriter participating in
any underwritten public offering of the Registrable Securities.
(c) Each Holder agrees that upon receipt of any notice from the Issuer of the
happening of any event of the kind described in Section 6.3(a)(v), such Holder
will forthwith discontinue such Holder's disposition of Registrable Securities
pursuant to the registration statement relating to
19
such Registrable Securities until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 6.3(a)(v) and, if so
directed by the Issuer, will deliver to the Issuer at the Issuer's expense all
copies, other than permanent file copies, then in such Holder's possession, of
the prospectus relating to such Registrable Securities current at the time of
receipt of such notice.
(d) Except as required by law, all expenses incurred by the Issuer in complying
with this Article 6, including but not limited to, all registration,
qualification and filing fees, printing expenses, fees and disbursements of
counsel and accountants for the Issuer, blue sky fees and expenses (including
fees and disbursements of counsel related to all blue sky matters)
("Registration Expenses") incurred in connection with any registration,
qualification or compliance pursuant to this Article 6 shall be borne by the
Issuer. All underwriting discounts and selling commissions applicable to a sale
incurred in connection with any registration of Registrable Securities and the
legal fees and other expenses of a Holder shall be borne by such Holder.
6.4 FURTHER INFORMATION. If Registrable Securities owned by a Holder are
included in any registration, such Holder shall furnish the Issuer such
information regarding itself as the Issuer may reasonably request and as shall
be required in connection with any registration (or amendment thereto), referred
to in this Agreement, and Holder shall indemnify the Issuer with respect thereto
in accordance with Article 7 hereof. The Investor hereby agrees to promptly
complete and return all forms and questionnaires relating to Investor that the
Issuer shall reasonably request in connection with its preparation of the
Registration Statement. The Investor agrees and acknowledges that the Issuer may
rely on such information as being true and correct for purposes of preparing and
filing the Registration Statement at the time of filing thereof and at the time
it is declared effective, unless the Investor has notified the Issuer in writing
to the contrary prior to such time.
ARTICLE 7
INDEMNIFICATION
7.1 INDEMNIFICATION GENERALLY. The Issuer, on the one hand, and the Investor, on
the other hand (each an "Indemnifying Party"), shall indemnify the other from
and against any and all losses, damages, liabilities, claims, charges, actions,
proceedings, demands, judgments, settlement costs and expenses of any nature
whatsoever (including, without limitation, reasonable attorneys' fees and
expenses) or deficiencies resulting from any breach of a representation and
warranty, covenant or agreement by the Indemnifying Party and all claims,
charges, actions or proceedings incident to or arising out of the foregoing.
7.2 INDEMNIFICATION RELATING TO REGISTRATION RIGHTS.
(a) With respect to any registration, effected or to be effected pursuant to
Article 6 of this Agreement, the Issuer shall indemnify each Holder of
Registrable Securities whose securities are included or are to be included
therein, each of such Holder's directors, officers, employees and agents, each
underwriter (as defined in the Securities Act) of the securities sold by such
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Holder (if any), and each Person who controls (within the meaning of the
Securities Act) any such Holder or underwriter (a "Controlling Person") from and
against all losses, damages, liabilities, claims, charges, actions, proceedings,
demands, judgments, settlement costs and expenses of any nature whatsoever
(including, without limitation, reasonable attorneys' fees and expenses) or
deficiencies of any such Holder or any such underwriter or Controlling Person
concerning:
(i) any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular or other document (including any
related registration statement, notification or the like) incident to any such
registration;
(ii) any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein, in the
light of the circumstances under which it was made, not misleading; or
(iii) any violation by the Issuer of the Securities Act or any rule or
regulation promulgated thereunder applicable to the Issuer, or of any blue sky
or other state securities laws or any rule or regulation promulgated thereunder
applicable to the Issuer, in each case, relating to any action or inaction
required of the Issuer in connection with any such registration, and subject to
Section 7.3 below will reimburse each such Person entitled to indemnity under
this Section 7.2 for all legal and other expenses reasonably incurred in
connection with investigating or defending any such loss, damage, liability,
claim, charge, action, proceeding, demand, judgment, settlement or deficiency;
provided, however, that, the foregoing indemnity and reimbursement obligation
shall not be applicable to the extent that any such matter arises out of or is
based on any untrue statement (or alleged untrue statement) or omission (or
alleged omission) made in reliance upon and in conformity with written
information furnished to the Issuer by or on behalf of such Holder or by or on
behalf of such an underwriter specifically for use in such prospectus, offering
circular or other document.
(b) With respect to any registration, qualification or compliance effected or to
be effected pursuant to this Agreement, each Holder of Registrable Securities
whose securities are included or are to be included therein, shall indemnify the
Issuer from and against all losses, damages, liabilities, claims, charges,
actions, proceedings, demands, judgments, settlement costs and expenses of any
nature whatsoever (including, without limitation, reasonable attorneys' fees and
expenses) or deficiencies of the Issuer concerning:
(i) any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular or other document (including any
related registration statement, notification or the like) incident to any such
registration, qualification or compliance;
(ii) any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein, in the
light of the circumstances under which it was made, not misleading; or
(iii) any violation by such Holder of the Securities Act or any rule or
regulation promulgated thereunder applicable to the Issuer or such Holder or of
any blue sky or other state securities laws or any rule or regulation
promulgated thereunder applicable to the Issuer or such Holder,
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in each case, relating to any action or inaction required of such Holder in
connection with any such registration, qualification or compliance, and subject
to Section 7.3 below will reimburse the Issuer for all legal and other expenses
reasonably incurred in connection with investigating or defending any such loss,
damage, liability, claim, charge, action, proceeding, demand, judgment,
settlement or deficiency; provided, however, that, the foregoing indemnity and
reimbursement obligation shall only be applicable to the extent that any such
matter arises out of or is based on any untrue statement (or alleged untrue
statement) or omission (or alleged omission) made in reliance upon and in
conformity with written information furnished to the Issuer by or on behalf of
the Holder specifically for use in such prospectus, offering circular or other
document; provided, however, that, the obligation of the Holder hereunder shall
be limited to an amount equal to the proceeds to the Holder of Registrable
Securities sold as contemplated hereunder.
7.3 INDEMNIFICATION PROCEDURES. Each Person entitled to indemnification under
this Section (an "Indemnified Party") shall give notice as promptly as
reasonably practicable to each party required to provide indemnification under
this Section (an "Indemnifying Party") of any action commenced against or by it
in respect of which indemnity may be sought hereunder, but failure to so notify
an Indemnifying Party shall not relieve such Indemnifying Party from any
liability that it may have otherwise than on account of this indemnity agreement
so long as such failure shall not have materially prejudiced the position of the
Indemnifying Party. Upon such notification, the Indemnifying Party shall assume
the defense of such action if it is a claim brought by a third party, if and
after such assumption the Indemnifying Party shall not be entitled to
reimbursement of any expenses incurred by it in connection with such action
except as described below. In any such action, any Indemnified Party shall have
the right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party unless (i) the Indemnifying
Party and the Indemnified Party shall have mutually agreed to the contrary or
(ii) the named parties in any such action (including any impleaded parties)
include both the Indemnifying Party and the Indemnified Party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing or conflicting interests between them. The Indemnifying
Party shall not be liable for any settlement of any proceeding effected without
its written consent (which shall not be unreasonably withheld or delayed by such
Indemnifying Party), but if settled with such consent or if there be final
judgment for the plaintiff, the Indemnifying Party shall indemnify the
Indemnified Party from and against any loss, damage or liability by reason of
such settlement or judgment.
ARTICLE 8
CONDITIONS TO CLOSING
8.1 CONDITIONS TO THE OBLIGATIONS OF THE INVESTOR. The obligations of the
Investor to proceed with respect to its purchase of the Shares and Warrants at
the Closing is subject to the following conditions any and all of which may be
waived, in whole or in part, to the extent permitted by applicable law:
(a) Representations and Warranties. Each of the representations and warranties
of the Issuer contained in this Agreement shall be true and correct in all
material respects as of the Closing as though made on and as of the Closing,
except (i) for changes specifically permitted by this
22
Agreement, and (ii) that those representations and warranties which address
matters only as of a particular date shall remain true and correct as of such
date, except in any case for such failures to be true and correct which would
not, individually or in the aggregate, have a Material Adverse Effect on the
Issuer. Unless the Investor receives written notice to the contrary at the
Closing, Investor shall be entitled to assume that the preceding is accurate in
all respects at the Closing.
(b) Agreement and Covenants. The Issuer shall have performed or complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with by it on or prior to the Closing. Unless the
Investor receives written notice to the contrary at the Closing, Investor shall
be entitled to assume that the preceding is accurate in all respects at the
Closing.
(c) No Order. No governmental authority or other agency or commission or federal
or state court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive order,
decree, injunction, or other order (whether temporary, preliminary or permanent)
which is in effect and which materially restricts, prevents or prohibits
consummation of the Closing or any transaction contemplated by this Agreement.
No stop order or suspension of trading shall have been imposed by Nasdaq, the
SEC or any other governmental regulatory body with respect to public trading in
the Common Stock.
(d) Minimum Investment. Together with the gross proceeds of the sale of the
Shares and Warrants, the sales of Shares and Warrants to other Investors in this
offering shall have been consummated and shall result in gross proceeds to the
Issuer of at least Two Million Five Hundred Thousand Dollars ($2,500,000).
8.2 CONDITIONS TO THE OBLIGATIONS OF THE ISSUER. The obligations of the Issuer
to proceed with the Closing is subject to the following conditions any and all
of which may be waived, in whole or in part, to the extent permitted by
applicable law:
(a) Representations and Warranties. Each of the representations and warranties
of the Investor contained in this Agreement shall be true and correct as of the
Closing as though made on and as of the Closing, except (i) for changes
specifically permitted by this Agreement, and (ii) that those representations
and warranties which address matters only as of a particular date shall remain
true and correct as of such date. Unless the Issuer receives written
notification to the contrary at the Closing, the Issuer shall be entitled to
assume that the preceding is accurate in all respects at the Closing.
(b) Agreement and Covenants. The Investor shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Closing.
Unless the Issuer receives written notification to the contrary at the Closing,
the Issuer shall be entitled to assume that the preceding is accurate in all
respects at the Closing.
(c) No Order. No governmental authority or other agency or commission or federal
or state court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive order,
decree, injunction, or other order (whether temporary,
23
preliminary or permanent) which is in effect and which materially restricts,
prevents or prohibits consummation of the Closing or any transaction
contemplated by this Agreement.
ARTICLE 9
MISCELLANEOUS
9.1 DEFINED TERMS. As used herein the following terms shall have the following
meanings:
"Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of the General
Rules and Regulations under the Exchange Act, as in effect on the date hereof.
"Certificate of Incorporation" means the Issuer's Certificate of Incorporation,
as the same may be supplemented, amended or restated from time to time.
"Closing" has the meaning in Article 2 of this Agreement.
"Common Stock" has the meaning specified in the Recitals to this Agreement.
"Contract" means any material indenture, lease, sublease, loan agreement,
mortgage, note, restriction, commitment, obligation or other contract, agreement
or instrument.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in effect in the United
States of America from time to time.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, and any entity or official exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Investor" has the meaning specified in the Recitals to this Agreement.
"Issuer" means Citadel Security Software Inc., a Delaware corporation.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement, any lease in the nature thereof, and the filing of or agreement to
give any financing statement under the Uniform Commercial Code or comparable law
or any jurisdiction in connection with such mortgage, pledge, security interest,
encumbrance, lien or charge).
"Material Adverse Change (or Effect)" means a material and adverse change in (or
effect on) the financial condition, properties, assets, liabilities, rights,
obligations, operations or business, of a Person and its Subsidiaries taken as a
whole.
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"Person" means an individual, partnership, corporation, business trust, joint
stock company, estate, trust, unincorporated association, joint venture,
Governmental Authority or other entity, of whatever nature.
"Purchase Price" has the meaning specified in Section 1.1 of this Agreement.
"Register", "registered" and "registration" refer to a registration of the
offering and sale or resale of Common Stock effected by preparing and filing a
registration statement in compliance with the Securities Act and the declaration
or ordering of the effectiveness of such registration statement.
"Registrable Securities" means all shares of Common Stock acquired by the
Investor pursuant to this Agreement, the Warrant Shares and any other shares of
Common Stock or other securities issued in respect of such Shares or Warrant
Shares by way of a stock dividend or stock split or in connection with a
combination or subdivision of the Issuer's Common Stock or by way of a
recapitalization, merger or consolidation or reorganization of the Issuer;
provided, however, that, as to any particular securities, such securities will
cease to be Registrable Securities when they have been sold pursuant to
registration or in a transaction exempt from the registration and prospectus
delivery requirements of the Securities Act under Section 4(1) thereof so that
all transfer restrictions and restrictive legends with respect thereto are
removed upon the consummation of such sale and the purchaser and seller receive
an opinion of counsel for the Issuer, which shall be in form and substance
reasonably satisfactory to the purchaser and seller and their respective
counsel, to the effect that such stock in the hands of the purchaser is freely
transferable without restriction or registration under the Securities Act in any
public or private transaction.
"Requirements of Law" means as to any Person, the certificate of incorporation,
bylaws or other organizational or governing documents of such person, and any
domestic or foreign and federal, state or local law, rule, regulation, statute
or ordinance or determination of any arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of its
properties or to which such Person or any of its property is subject.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" has the meaning specified in Section 3.7 of this Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" has the meaning specified in Section 1.1 of this Agreement.
"Subsidiary" means as to any Person, a corporation or limited partnership of
which more than 50% of the outstanding capital stock or partnership interests
having full voting power is at the time directly or indirectly owned or
controlled by such Person.
9.2 OTHER DEFINITIONAL PROVISIONS.
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(a) All terms defined in this Agreement shall have the defined meanings when
used in any certificates, reports or other documents made or delivered pursuant
hereto or thereto, unless the context otherwise requires.
(b) Terms defined in the singular shall have a comparable meaning when used in
the plural, and vice versa.
(c) All accounting terms shall have a meaning determined in accordance with
GAAP.
(d) As used herein, the neuter gender shall also denote the masculine and
feminine, and the masculine gender shall also denote the neuter and feminine,
where the context so permits.
(e) The words "hereof," "herein" and "hereunder," and words of similar import,
when used in this Agreement shall refer to this Agreement as a whole (including
any Exhibits hereto) and not to any particular provision of this Agreement.
9.3 NOTICES. All notices, requests, demands, claims, and other communications
hereunder shall be in writing and shall be delivered by certified or registered
mail (first class postage pre-paid), guaranteed overnight delivery, or facsimile
transmission if such transmission is confirmed by delivery by certified or
registered mail (first class postage pre-paid) or guaranteed overnight delivery,
to the following addresses and telecopy numbers (or to such other addresses or
telecopy numbers which such party shall subsequently designate in writing to the
other party):
(a) if to the Issuer to:
Citadel Security Software Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
(b) if to the Investor to the address set forth next to its name on the
signature page hereto.
Each such notice or other communication shall for all purposes of this Agreement
be treated as effective or having been given when delivered if delivered by
hand, by messenger or by courier, or if sent by facsimile, upon confirmation of
receipt.
9.4 ENTIRE AGREEMENT. This Agreement (including the Exhibits attached hereto)
and other documents delivered at the Closing pursuant hereto, contain the entire
understanding of the parties in respect of its subject matter and supersedes all
prior agreements and understandings between or among the parties with respect to
such subject matter. The Exhibits constitute a part hereof as though set forth
in full above.
9.5 EXPENSES; TAXES. Except as otherwise provided in this Agreement, the parties
shall pay their own fees and expenses, including their own counsel fees,
incurred in connection with this Agreement or any transaction contemplated
hereby. Any sales tax, stamp duty, deed transfer or other tax (except taxes
based on the income of the Investor) arising out of the issuance of the
26
Shares by the Issuer to the Investor and consummation of the transactions
contemplated by this Agreement shall be paid by the Issuer.
9.6 AMENDMENT; WAIVER. This Agreement may not be modified, amended,
supplemented, canceled or discharged, except by written instrument executed by
both parties. No failure to exercise, and no delay in exercising, any right,
power or privilege under this Agreement shall operate as a waiver, nor shall any
single or partial exercise of any right, power or privilege hereunder preclude
the exercise of any other right, power or privilege. No waiver of any breach of
any provision shall be deemed to be a waiver of any preceding or succeeding
breach of the same or any other provision, nor shall any waiver be implied from
any course of dealing between the parties. No extension of time for performance
of any obligations or other acts hereunder or under any other agreement shall be
deemed to be an extension of the time for performance of any other obligations
or any other acts. The rights and remedies of the parties under this Agreement
are in addition to all other rights and remedies, at law or equity, that they
may have against each other.
9.7 BINDING EFFECT; ASSIGNMENT. The rights and obligations of this Agreement
shall bind and inure to the benefit of the parties and their respective
successors and legal assigns. The rights and obligations of this Agreement may
not be assigned by any party without the prior written consent of the other
party.
9.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall be an original but all of which together shall constitute
one and the same instrument.
9.9 HEADINGS. The headings contained in this Agreement are for convenience of
reference only and are not to be given any legal effect and shall not affect the
meaning or interpretation of this Agreement.
9.10 GOVERNING LAW; INTERPRETATION. This Agreement shall be construed in
accordance with and governed for all purposes by the laws of the State of Texas
applicable to contracts executed and to be wholly performed within such State.
9.11 SEVERABILITY. The parties stipulate that the terms and provisions of this
Agreement are fair and reasonable as of the date of this Agreement. However, any
provision of this Agreement shall be determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated. If,
moreover, any of those provisions shall for any reason be determined by a court
of competent jurisdiction to be unenforceable because excessively broad or vague
as to duration, activity or subject, it shall be construed by limiting, reducing
or defining it, so as to be enforceable.
[SIGNATURES AND OTHER INFORMATION FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement
to be duly executed and delivered as of the date set forth below.
NAME OF INVESTOR: ADDRESS FOR NOTICES (Please Print):
______________________________ _______________________________________
_______________________________________
SIGNATURE: _______________________________________
Attention:_______________________________
By:___________________________ Telecopy:_______________________________
Name:
Title: Tax Identification #:_______________________
Exact Name to appear on Stock Certificate:
_______________________________________
Number of Shares Subscribed For: _______________________________________
Aggregate Purchase Price (see Section 1.1):
_______________________________________
Warrants to Purchase _______________ shares of Common Stock.
ACCEPTED: CITADEL SECURITY SOFTWARE INC.
By: Dated: __________________, 2003
Name:
Title:
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