UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) July 2, 1998 ------------ Aastrom Biosciences, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 24 Frank Lloyd Wright Drive, P.O. Box 376, Ann Arbor Michigan 48106 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (734) 930-5555 -------------- Not Applicable -------------- (Former name or former address, if changed since last report) 1
Michigan 0-22025 94-3096597 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) ITEM 5. OTHER EVENTS. On July 2, 1998 the Registrant sold 5,000 shares of its newly created 1998 Series I Convertible Preferred Stock (the "Series I Preferred") to one investor for an aggregate purchase price of $5 million. The shares of Series I Preferred are convertible, at the option of the holder, into shares of the Registrant's Common Stock at the lower of (i) $4.81, or (ii) a price based on the market price of the Registrant's Common Stock prior to conversion. With limited exceptions, the shares of Series I Preferred are not convertible into Common Stock until March 30, 1999 and, subject to extension under certain circumstances, will automatically convert into Common Stock on July 2, 2001, unless sooner converted. In general, the Registrant may require the holders to convert the Series I Preferred if the average closing bid price of the Registrant's Common Stock exceeds $9.62 for specified periods after July 2, 1999. In connection with the sales of Series I Preferred, the investor agreed to purchase an additional $3 million of a new series of Preferred Stock (to be designated 1998 Series II Convertible Preferred Stock) if the Common Stock of the Registrant trades at a price greater than $6.00 for a specified duration during the period from October 2, 1998 through July 2, 1999. The foregoing description of the Series I Preferred financing is qualified in its entirety by the Securities Purchase Agreement, dated July 2, 1998, and the other agreements and instruments executed in connection therewith, copies of which are attached as exhibits to this Current Report on Form 8-K.
ITEM 7. EXHIBITS. (a) Financial statements of business acquired. Not applicable. (b) Pro forma financial information. Not applicable. (c) Exhibits. 2
Exhibit No. Description --- ----------- 3.1 Certificate of Designation for 1998 Series I Preferred Stock 4.1 Securities Purchase Agreement, dated July 2, 1998, by and between the Registrant and RGC International Investors, LDC ("RGC") 4.2 Registration Rights Agreement dated July 2, 1998, by and between the Registrant and RGC.SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AASTROM BIOSCIENCES, INC. By: /s/ Todd E. Simpson ----------------------------------- Date: July 15, 1998 Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 3 EXHIBIT INDEX ------------- 4
Exhibit No. Description --- ----------- 3.1 Certificate of Designation for 1998 Series I Preferred Stock 4.1 Securities Purchase Agreement, dated July 2, 1998, by and between the Registrant and RGC International Investors, LDC ("RGC") 4.2 Registration Rights Agreement dated July 2, 1998, by and between the Registrant and RGC.
EXHIBIT 3.1 CERTIFICATE OF DESIGNATIONS, PREFERENCES, AND RIGHTS OF 1998 SERIES I CONVERTIBLE PREFERRED STOCK OF AASTROM BIOSCIENCES, INC. (Pursuant to Section 450.1302 of the Michigan Business Corporation Act) Aastrom Biosciences, Inc., a corporation organized and existing under the Michigan Business Corporation Act (the "CORPORATION"), hereby certifies that the following resolutions were adopted by the Board of Directors of the Corporation on May 20, 1998 pursuant to authority of the Board of Directors as required by Section 450.1302 of the Michigan Business Corporation Act: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD") in accordance with the provisions of its Articles of Incorporation, the Board of Directors hereby authorizes a Series of the Corporation's previously authorized Preferred Stock, no par value, (the "PREFERRED STOCK"), and hereby states the designation and number of shares, and fixes the relative rights, preferences, privileges, powers and restrictions thereof as follows: 1998 Series I Convertible Preferred Stock: I. Designation and Amount ---------------------- The designation of this series, which consists of 5,000 shares of Preferred Stock, is 1998 Series Convertible Preferred Stock (the "1998 SERIES I PREFERRED STOCK") and the stated value shall be One Thousand Dollars ($1,000) per share (the "STATED VALUE"). II. Certain Definitions ------------------- For purposes of this Certificate of Designation, the following terms shall have the following meanings: A. "Applicable Percentage" means 94%; provided, however that for conversions taking place prior to two hundred seventy (270) days from the Issue Date, the Applicable Percentage shall mean (i) 100%, if the Market Price is $4.00 or greater and (ii) 105%, if the Market Price is less than $4.00. B. "Applicable Premium" shall mean, with respect to a share or shares of 1998 Series I Preferred Stock, an amount equal to five and one half percent (5.5%) per annum of the Stated Value of such share or shares; provided, -------- however that if the Corporation has elected to increase the Applicable Premium - ------- pursuant to Section 2(c)(2) of the Registration Rights Agreement, the Applicable Premium shall mean fifteen percent (15%) per annum of the Stated Value of such share or shares for the periods specified in the Registration Rights Agreement. C. "Bloomberg" means Bloomberg Financial Markets or an equivalent reliable reporting service mutually acceptable to and hereafter designated by the holders of a majority in interest of the shares of 1998 Series I Preferred Stock and the Corporation. D. "Closing Bid Price" means, for any security as of any date, the closing bid price on Nasdaq as reported by Bloomberg or, if Nasdaq is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security or in any of the foregoing manners, the average of the bid prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date in the manner provided above, the Closing Bid Price shall be the fair market value as mutually determined by the Corporation and the holders of a majority in interest of shares of 1998 Series I Preferred Stock being converted for which the calculation of the Closing Bid Price is required in order to determine the Conversion Price of such 1998 Series I Preferred Stock. E. "Closing Price" as of any date, means the last sale price of the Common Stock on Nasdaq as reported or, if Nasdaq is not the principal trading market for such security, the last sale price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last sale price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last sale price of such security or in the over-the-counter market on the electronic bulletin board for such security in any of the foregoing manners the average of the bid prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Price cannot be calculated for such security on such date in the manner provided above, the Closing Price shall be the fair market value as mutually determined by the Corporation and the holders of a majority in interest of shares of 1998 Series I Preferred Stock being converted for which the calculation of the Closing Price is required in order to determine the Conversion Price of such 1998 Series I Preferred Stock. F. "Common Stock" means the Corporation's common stock, no par value. -2- G. "Fixed Conversion Price" means 130% times the average Closing Bid Prices during the five consecutive (5) Trading Day period ending one (1) Trading Day prior to the Issue Date. H. "Issue Date" means the date of issuance of the 1998 Series I Preferred Stock. I. "Market Price" means the average of the Closing Bid Prices during the Market Price Days. J. "Market Price Days" means any five (5) consecutive Trading Days designated by the converting holder at the time of conversion, from among the days comprising the Pricing Period, as such designation is set forth in the Notice of Conversion (as defined in Article VIII.E). K. "Nasdaq" means the Nasdaq National Market. L. "Person" shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization. M. "Pricing Period" means the twenty (20) consecutive Trading Day period ending one (1) Trading Day prior to the Conversion Date (as defined in Article VIII.E). N. "Purchase Agreement" shall mean that certain Securities Purchase Agreement dated as of the Issue Date, by and between the Corporation and the signatories thereto. O. "Redemption Market Price" means the Closing Price of the Common Stock on the Conversion Date (as defined in Article VIII.F(d)). P. "Redemption Threshold" means $3.25. Q. "Registration Rights Agreement" shall mean that certain Registration Rights Agreements dated as of the Issue Date, by and among the Corporation and the signatories thereto. R. "Trading Day" shall mean any day on which the Common Stock is traded for any period on Nasdaq, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. III. Rank ---- The 1998 Series I Preferred Stock shall rank (i) prior to the Common Stock; (ii) prior to any class or Series of capital stock of the Corporation hereafter created (unless, with the consent of the holders of 1998 Series I Preferred Stock obtained in accordance with Article XI hereof, such class or Series of capital stock specifically, by its terms, ranks senior to or pari passu with ---- ----- -3- the 1998 Series I Preferred Stock) (collectively, with the Common Stock, "JUNIOR SECURITIES"); (iii) pari passu with (A) any class or Series of the Corporation's ---- ----- preferred stock existing as of the date hereof and (B) any class or Series of capital stock of the Corporation hereafter created specifically ranking, by its terms, on parity with the 1998 Series I Preferred Stock (collectively, "PARI ---- PASSU SECURITIES"); and (iv) junior to any class or Series of capital stock of - ----- the Corporation hereafter created (with the consent of the holders of 1998 Series I Preferred Stock obtained in accordance with Article XI hereof) specifically ranking, by its terms, senior to the 1998 Series I Preferred Stock ("SENIOR SECURITIES"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. IV. Dividends --------- The 1998 Series I Preferred Stock shall not bear any dividends. In no event, so long as any 1998 Series I Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon (excluding any distribution received in connection with a Change in Control Transaction (as defined below)), any Junior Securities, nor shall any shares of Junior Securities be purchased or redeemed by the Corporation nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any Junior Securities (other than a distribution of Junior Securities), without, in each such case, the written consent of the holders of a majority of the outstanding shares of 1998 Series I Preferred Stock, voting together as a class. V. Liquidation Preference ---------------------- A. If the Corporation shall commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or State bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of thirty (30) consecutive days and, on account of any such event, the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up (each such event being considered a "LIQUIDATION EVENT"), no distribution shall be made to the holders of any shares of capital stock of the Corporation (other than Senior Securities and, subject to the following sentence, Pari Passu Securities) upon liquidation, dissolution ---- ----- or winding up unless prior thereto, the holders of shares of 1998 Series I Preferred Stock, subject to Article VIII, shall have received the Liquidation Preference (as defined in Article V.C) with respect to each share. If upon the occurrence of a Liquidation Event, the assets -4- and funds available for distribution among the holders of the 1998 Series I Preferred Stock and holders of Pari Passu Securities shall be insufficient to ---- ----- permit the payment to such holders of the preferential amounts payable thereon, then the entire assets and funds of the Corporation legally available for distribution to the 1998 Series I Preferred Stock and the Pari Passu Securities ---- ----- shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate liquidation preference payable on all such shares. B. Subject to Article VII.B below, at the option of the Corporation, the sale, conveyance or disposition of all or substantially all of the assets of the Corporation, the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, or the consolidation, merger or other business combination of the Corporation with or into any other Person or Persons when the Corporation is not the survivor (other than a merger or other business combination solely for the purposes of reincorporating to a new jurisdiction) (each, a "CHANGE IN CONTROL TRANSACTION") shall either: (i) be deemed to be a liquidation, dissolution or winding up of the Corporation pursuant to which the Corporation shall be required to distribute upon consummation of such transaction an amount equal to 115% of the Liquidation Preference with respect to each outstanding share of 1998 Series I Preferred Stock in accordance with and subject to the terms of this Article V or (ii) be treated pursuant to Article VIII.C(b) hereof. For purposes of the Michigan Business Corporation Act (the "MCBA") and Article XI(A) of this Certificate, any such Change in Control Transaction shall be deemed to alter or change the powers, preferences, or special rights of the holders of shares of 1998 Series I Preferred Stock so as to affect such holders adversely. C. For purposes hereof, the "LIQUIDATION PREFERENCE" with respect to a share of the 1998 Series I Preferred Stock shall mean an amount equal to the sum of (i) the Stated Value thereof plus (ii) the Applicable Premium for the period beginning on the Issue Date and ending on the date of final distribution to the holder thereof (prorated for any portion of such period). The liquidation preference with respect to any Pari Passu Securities shall be as set forth in ---- ----- the Certificate of Designation filed in respect thereof. VI. Redemption ---------- A. If any of the following events (each, a "REDEMPTION EVENT") shall occur: (i) The Corporation fails to issue shares of Common Stock to the holders of 1998 Series I Preferred Stock upon exercise by the holders of their conversion rights in accordance with the terms of this Certificate of Designation (for a period of at least sixty (60) days if such failure is solely as a result of the circumstances governed by the second paragraph of Article VIII.F below and the Corporation is using all commercially reasonable efforts to authorize a sufficient number of shares of Common Stock as soon as practicable), fails to transfer or to cause its transfer agent to transfer (electronically or in certificated form) any certificate for shares of Common Stock issued to the holders upon conversion of the 1998 Series I Preferred Stock as and when required by this Certificate of Designation or the Registration Rights -5- Agreement, fails to remove any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate or any shares of Common Stock issued to the holders of 1998 Series I Preferred Stock upon conversion of the 1998 Series I Preferred Stock as and when required by this Certificate of Designation, the Purchase Agreement or the Registration Rights Agreement, or fails to fulfill its obligations pursuant to Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase Agreement (or makes any announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for ten (10) business days; (ii) The Corporation fails to obtain effectiveness with the Securities and Exchange Commission (the "SEC") of the Registration Statement (as defined in the Registration Rights Agreement) prior to one hundred eighty (180) days from the Issue Date or such Registration Statement lapses in effect (or sales otherwise cannot be made thereunder, whether by reason of the Company's failure to amend or supplement the prospectus included therein in accordance with the Registration Rights Agreement or otherwise) for more than thirty (30) consecutive days or more than sixty (60) days in any twelve (12) month period after such Registration Statement becomes effective; (iii) the Corporation shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for all or substantially all of its property or business; or such a receiver or trustee shall otherwise be appointed; (iv) Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Corporation or any subsidiary of the Corporation; provided, however, that in the case of any -------- ------- involuntary bankruptcy, such involuntary bankruptcy shall continue undischarged or undismissed for a period of thirty (30) days; or (v) The Corporation shall fail to maintain the listing of the Common Stock on Nasdaq, the Nasdaq SmallCap Market, the New York Stock Exchange or the American Stock Exchange, then, upon the occurrence and during the continuation of any Redemption Event specified in subparagraphs (i), (ii) or (v) at the option of the holders of at least 50% of the then outstanding shares of 1998 Series I Preferred Stock by written notice (the "REDEMPTION NOTICE") to the Corporation of such Redemption Event, or upon the occurrence of any Redemption Event specified in subparagraphs (iii) or (iv) the Corporation shall purchase each holder's shares of 1998 Series I Preferred Stock for an amount equal to the greater of (1) 115% multiplied by the sum of (A) the aggregate Stated Value of the shares to be redeemed plus (b) the Applicable Premium for the period beginning on the Issue Date and ending on the date of payment of the Redemption Amount (the "REDEMPTION DATE"), or (2) the parity value of the shares to be redeemed, where "parity value" means the product of (A) the highest number of shares of Common Stock issuable upon conversion of such shares in accordance with Article VIII below -6- (without giving any effect to any limitations on conversions of shares set forth in Article VIII.A(b) below, and treating the Trading Day immediately preceding the Redemption Date as the "Conversion Date" (as defined in Article VII.B(a)) for purposes of determining the lowest applicable Conversion Price), unless the Redemption Event arises as a result of a breach in respect of a specific Conversion Date, in which case such Conversion Date shall be the Conversion Date), multiplied by (b) the Closing Price for the Common Stock on such "Conversion Date" (the greater of such amounts being referred to as the "REDEMPTION AMOUNT"). In the case of a Redemption Event, if the Corporation fails to pay the Redemption Amount for each share within five (5) business days of written notice that such amount is due and payable, then (assuming there are sufficient authorized shares) in addition to all other available remedies, each holder of 1998 Series I Preferred Stock shall have the right at any time, so long as the Redemption Event continues, to require the Corporation, upon written notice, to immediately issue (in accordance with and subject to the terms of Article VIII below), in lieu of the Redemption Amount, with respect to each outstanding share of 1998 Series I Preferred Stock held by such holder, the number of shares of Common Stock of the Corporation equal to the Redemption Amount divided by the Conversion Price then in effect. B. If the 1998 Series I Preferred Stock held by any holder ceases to be convertible as a result of the limitations described in Article VIII.A(c) below (a "19.99% REDEMPTION EVENT"), and the Corporation has not prior to, or within thirty (30) days of, the date that such 19.99% Redemption Event arises, (i) obtained approval of the issuance of the additional shares of Common Stock by the requisite vote of the holders of the then-outstanding Common Stock (not including any shares of Common Stock held by present or former holders of 1998 Series I Preferred Stock that were issued upon conversion of 1998 Series I Preferred Stock) or (ii) received other permission pursuant to Nasdaq Rule 4460(i) allowing the Corporation to resume issuances of shares of Common Stock upon conversion of 1998 Series I Preferred Stock, then the Corporation shall be obligated to redeem immediately all of the then outstanding 1998 Series I Preferred Stock, in accordance with this Article VI.B. An irrevocable redemption notice (the "19.99% REDEMPTION NOTICE") shall be delivered promptly to the holders of 1998 Series I Preferred Stock at their registered address appearing on the records of the Corporation and shall state (1) that 19.99% of the Outstanding Common Amount (as defined in Article VIII.A) has been issued upon exercise of the 1998 Series I Preferred Stock, (2) that the Corporation is obligated to redeem all of the outstanding 1998 Series I Preferred Stock and (3) the Redemption Date, which shall be a date within five (5) business days of the earlier of (i) the date of the 19.99% Redemption Notice or (ii) the date on which the holders of the 1998 Series I Preferred Stock notify the Corporation of the occurrence of a 19.99% Redemption Event. On Redemption Date, the Corporation shall make payment of the Redemption Amount (as defined in Article VI.A above) in cash. C. Notwithstanding anything to the contrary contained in this Article VI, so long as (i) no Redemption Event shall have occurred and be continuing and (ii) the Registration Statement is then in effect and has been in effect and sales can be made thereunder for at least twenty (20) days prior to the Optional Redemption Date (as defined below), then at any time -7- after the Issue Date if the average Closing Bid Prices of the Common Stock for any five (5) consecutive Trading Days is below the Redemption Threshold , the Corporation shall have the right, exercisable on not less than fifteen (15) Trading Days prior written notice to the holders of 1998 Series I Preferred Stock (which notice may not be sent to the holders of the 1998 Series I Preferred Stock until the Corporation is permitted to redeem the 1998 Series I Preferred Stock pursuant to this Article VI.C), to redeem all of the outstanding shares of 1998 Series I Preferred Stock in accordance with this Article VI. A notice (the "OPTIONAL REDEMPTION NOTICE") of any redemption hereunder (an "OPTIONAL REDEMPTION") shall be delivered to the holders of 1998 Series I Preferred Stock at their registered addresses appearing on the books and records of the Corporation and shall state (1) that the Corporation is exercising its right to redeem all of the outstanding shares of 1998 Series I Preferred Stock issued on the Issue Date and (2) the date of redemption (the "OPTIONAL REDEMPTION DATE"). On the Optional Redemption Date, the Corporation shall make payment of the Optional Redemption Amount (as defined below) to or upon the order of the holders as specified by the holders in writing to the Corporation at least one (1) business day prior to the Optional Redemption Date. If the Corporation exercises its right to redeem the 1998 Series I Preferred Stock, the Corporation shall make payment to the holders of an amount in cash per share (the "OPTIONAL REDEMPTION AMOUNT") equal to the sum of (i) 115% multiplied by the Stated Value thereof plus (ii) the Applicable Premium for the period beginning on the Issue Date and ending on the Optional Redemption Date, for each share of 1998 Series I Preferred Stock then held. Notwithstanding notice of an Optional Redemption, the holders shall at all times prior to the Optional Redemption Date maintain the right to convert all or any shares of 1998 Series I Preferred Stock in accordance with Article VIII and any shares of 1998 Series I Preferred Stock so converted after receipt of an Optional Redemption Notice and prior to the Optional Redemption Date set forth in such notice and payment of the aggregate Optional Redemption Amount shall be deducted from the shares of 1998 Series I Preferred Stock which are otherwise subject to redemption pursuant to such notice. D. Notwithstanding anything to the contrary contained in this Article VI, if the Closing Price of the Common Stock is below the Redemption Threshold on any Conversion Date, the Corporation shall have the option, in lieu of issuing shares of Common Stock to the holders of 1998 Series I Preferred Stock upon conversion in accordance with the terms of Article VIII below, to redeem all of the shares of 1998 Series I Preferred Stock submitted for conversion for an amount in cash equal to the number of shares of Common Stock that would have otherwise been issued upon conversion of the 1998 Series I Preferred Stock at the applicable Conversion Price (as defined in Article VIII) multiplied by the Redemption Market Price. If the Closing Price of the Common Stock is below the Redemption Threshold, the Corporation shall promptly notify the holders of 1998 Series I Preferred Stock as to whether the Corporation will issue shares of Common Stock or deliver cash in redemption in respect of 1998 Series I Preferred Stock submitted for conversion pursuant to Article VIII. The Corporation will be bound by such notice for a period of twenty (20) Trading Days (the "TERM") from the date of such notice, after which the Corporation may elect to renew such notice. A failure to issue or renew within two (2) business days after the expiration of any Term shall be deemed to be an election not to redeem the 1998 Series I Preferred Stock during the subsequent Term. Any redemption amounts payable hereunder shall be paid to the converting holders within two (2) Trading Days of the Conversion Date. -8- VII. Conversion by the Corporation ----------------------------- A. So long as (i) no Redemption Event shall have occurred and be continuing and (ii) the Registration Statement is then in effect and has been in effect and sales can be made thereunder for at least twenty (20) days prior to the Corporation Conversion Date (as defined below), then, at any time after the one (1) year anniversary of the date the Registration Statement is declared effective by the SEC (subject to extension for each Trading Day following effectiveness that sales cannot be made pursuant to the Registration Statement (whether by reason of the Company's failure to properly supplement or amend the prospectus included therein in accordance with the terms of the Registration Rights Agreement , during an Allowed Delay or otherwise), if the average Closing Bid Price of the Common Stock over any five (5) consecutive Trading Days is greater than 200% of the Fixed Conversion Price, the Corporation shall have the right, exercisable on not less than fifteen (15) Trading Days prior written notice (the "CORPORATION CONVERSION NOTICE") to the holders of 1998 Series I Preferred Stock (which notice may not be sent to the holders of the 1998 Series I Preferred Stock until the Corporation is permitted to convert the 1998 Series I Preferred Stock pursuant to this Article VII.A), to convert all of the outstanding shares of 1998 Series I Preferred Stock into shares of Common Stock in accordance with this Article VII.A and Article VIII. Any conversion hereunder (a "CORPORATION CONVERSION") shall be as of the date (the "CORPORATION CONVERSION DATE") the Corporation Conversion Notice is delivered to the holders of 1998 Series I Preferred Stock at their registered addresses appearing on the books and records of the Corporation, which notice shall contain substantially the same information as the Notice of Conversion described in Article VIII.E. The Corporation Conversion Date shall be the "Conversion Date" for purposes of determining the Conversion Price and the time within which certificates representing the Common Stock must be delivered to the holder upon a Corporation Conversion. B. If, in the event of a Change in Control Transaction (as defined in Article V.B above), the consideration per share to be received by the holders of the Common Stock of the Corporation in such Change in Control Transaction is equal to at least 115% of the Fixed Conversion Price, then, at the option of the Corporation, simultaneously with the consummation of the Change in Control Transaction, each share of 1998 Series I Preferred Stock issued and outstanding at that time automatically shall be converted into shares of Common Stock on such date at the then effective Conversion Price in accordance with, and subject to, the provisions of this Article VII.B and Article VIII hereof (the "CHANGE IN CONTROL CONVERSION"). The date on which the Change in Control Transaction is consummated shall be the "Conversion Date" for purposes of determining the Conversion Price and the time within which certificates representing the Common Stock must be delivered to the holder upon a Change in Control Conversion VIII. Conversion at the Option of the Holder -------------------------------------- A. (a) Subject to the conversion schedule set forth in Article VIII.A(b) below, each holder of shares of 1998 Series I Preferred Stock may, at its option at any time and from time to time, upon surrender of the certificates therefor, convert any or all of its shares of -9- 1998 Series I Preferred Stock into Common Stock as follows (an "OPTIONAL CONVERSION"). Each share of 1998 Series I Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (1) the sum of (A) the Stated Value thereof plus (b) the Applicable Premium for the period beginning on the Issue Date and ending on and including the Conversion Date (as defined in Article VIII.B, below), by (2) the then effective Conversion Price (as defined below); provided, however, that, -------- ------- unless the holder delivers a waiver in accordance with the immediately following sentence, in no event (other than pursuant to the Automatic Conversion (as defined in Article IX)) shall a holder of shares of 1998 Series I Preferred Stock be entitled to convert any such shares in excess of that number of shares upon conversion of which the sum of (x) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the shares of 1998 Series I Preferred Stock) and (y) the number of shares of Common Stock issuable upon the conversion of the shares of 1998 Series I Preferred Stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by a holder and such holder's affiliates of more than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, (i) beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (x) of such proviso, and (ii) a holder may waive the limitations set forth therein by written notice to the Corporation upon not less than sixty-one (61) days prior written notice (with such waiver taking effect only upon the expiration of such sixty-one (61) day notice period). (b) Each holder of shares of 1998 Series I Preferred Stock may convert only up to that percentage of the aggregate Stated Value of all shares of 1998 Series I Preferred Stock received by such holder on the Issue Date specified below during the time period set forth opposite such percentage. ; provided, however, that the restrictions on conversion set forth above shall -------- ------- not apply to conversions taking place on any Conversion Date (i) that the Common Stock trades on Nasdaq or the principal trading market on which the Common Stock is then listed as reported by Bloomberg at a price greater than or equal to (A) 117% of the Market Price or (b) the Fixed Conversion Price or (ii) occurring on or after the date the Corporation makes a public announcement that it intends to merge or consolidate with any other corporation or sell or transfer substantially all of the assets of the Corporation or (iii) occurring on or after the date any person, group or entity (including the Corporation) publicly announces a tender offer to purchase 50% or more of the Corporation's Common Stock or otherwise publicly announces an intention to replace a majority of the Corporation's Board of Directors by waging a proxy battle or otherwise or (iv) occurring -10-
Percentage Time Period - ------------------------------------------------------------------------------- 0.0% 0-270 days following the Issue Date 33.3% 271-300 days following the Issue Date 66.6% 301-330 days following the Issue Date 100.0% 331 days following the Issue Date on or after there is a material adverse change in the business, operation, assets, financial condition or prospects of the Corporation or its subsidiaries, taken as a whole or (v) upon the occurrence of a Redemption Grant or the delivery by the Company of an Optional Redemption Notice. If, pursuant to clause (i)(A) of the preceding proviso, the 1998 Series I Preferred Stock is permitted to be converted prior to the date which is two hundred seventy (270) days from the Issue Date, and the then applicable Conversion Price is less than $3.25, each holder of 1998 Series I Preferred Stock during such 270-day period may not convert more than both (i) 10% of the number of shares of 1998 Series I Preferred Stock received on the Issue Date during any thirty (30) day period (within such 270-day period) and (ii) 50% of the number of shares of 1998 Series I Preferred Stock received on the Issue Date. (c) So long as the Common Stock is listed for trading on Nasdaq or an exchange or quotation system with a rule substantially similar to Nasdaq Rule 4460(i) then, notwithstanding anything to the contrary contained herein if, at any time, the aggregate number of shares of Common Stock then issued upon conversion of the 1998 Series I Preferred Stock (including any shares of capital stock or rights to acquire shares of capital stock issued by the Corporation which are aggregated or integrated with the Common Stock issued or issuable upon conversion of the 1998 Series I Preferred Stock for purposes of such rule) equals 19.99% of the "OUTSTANDING COMMON AMOUNT" (as hereinafter defined), the 1998 Series I Preferred Stock shall, from that time forward, cease to be convertible into Common Stock in accordance with the terms of this Article VIII and Article IX below, unless the Corporation (i) has obtained approval of the issuance of the Common Stock upon conversion of the 1998 Series I Preferred Stock by a majority of the total votes cast on such proposal, in person or by proxy, by the holders of the then-outstanding Common Stock (not including any shares of Common Stock held by present or former holders of 1998 Series I Preferred Stock that were issued upon conversion of 1998 Series I Preferred Stock) (the "STOCKHOLDER APPROVAL"), or (ii) shall have otherwise obtained permission to allow such issuances from Nasdaq in accordance with Nasdaq Rule 4460(i). If the Corporation's Common Stock is not then listed on Nasdaq or an exchange or quotation system that has a rule substantially similar to Nasdaq Rule 4460(i) then the limitations set forth herein shall be inapplicable and of no force and effect. For purposes of this paragraph, "OUTSTANDING COMMON AMOUNT" means (i) the number of shares of the Common Stock outstanding on the date of issuance of the 1998 Series I Preferred Stock pursuant to the Purchase Agreement plus (ii) any additional shares of Common Stock issued thereafter in respect of such shares pursuant to a stock dividend, stock split or similar event. The maximum number of shares of Common Stock issuable as a result of the 19.99% limitation set forth herein is hereinafter referred to as the "MAXIMUM SHARE AMOUNT." With respect to each holder of 1998 Series I Preferred Stock, the Maximum Share Amount shall refer to such holder's pro rata share thereof --- ---- determined in accordance with Article XI below. In the event that Corporation obtains Stockholder Approval or the approval of Nasdaq, by reason of the inapplicability of the rules of Nasdaq or otherwise and concludes that it is able to increase the number of shares to be issued above the Maximum Share Amount (such increased number being the "NEW MAXIMUM SHARE AMOUNT"), the references to Maximum Share Amount, above, shall be deemed to be, instead, references to the greater New Maximum Share Amount. In the event that Stockholder Approval is obtained but there are insufficient reserved or authorized shares or a registration statement covering the additional shares of Common Stock which constitute the New Maximum Share Amount is not -11- effective prior to the Maximum Share Amount being issued (if such registration statement is necessary to allow for the public resale of such securities), the Maximum Share Amount shall remain unchanged; provided, however, that the holders -------- ------- of the 1998 Series I Preferred Stock may grant an extension to obtain a sufficient reserved or authorized amount of shares or of the effective date of such registration statement. In the event that (A) the aggregate number of shares of Common Stock actually issued upon conversion of the 1998 Series I Preferred Stock represents at least twenty percent (20%) of the Maximum Share Amount and (b) the sum of (x) the aggregate number of shares of Common Stock actually issued upon conversion of the outstanding 1998 Series I Preferred Stock plus (y) the aggregate number of shares of Common Stock that remain issuable - ---- upon conversion of 1998 Series I Preferred Stock, represents at least one hundred percent (100%) of the Maximum Share Amount (the "TRIGGERING EVENT"), the Corporation will use its best efforts to seek and obtain Stockholder Approval (or obtain such other relief as will allow conversions hereunder in excess of the Maximum Share Amount) as soon as practicable following the Triggering Event and before the Redemption Date. B. The "CONVERSION PRICE" shall be the lesser of (i) the Applicable Percentage multiplied by the Market Price and (ii) the Fixed Conversion Price, subject to adjustments pursuant to the provisions of Article VIII.C below. C. The Conversion Price shall be subject to adjustment from time to time as follows: (a) Adjustment to Conversion Price Due to Stock Split, Stock -------------------------------------------------------- Dividend, Etc. If at any time when 1998 Series I Preferred Stock is issued and - ------------- outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend, combination, reclassification, rights offering below the Trading Price (as defined in Article VIII.D) to all holders of Common Stock or other similar event, which event shall have taken place during the reference period for determination of the Conversion Price for any Optional Conversion or Automatic Conversion of the 1998 Series I Preferred Stock, then the Conversion Price shall be calculated giving appropriate effect to the stock split, stock dividend, combination, reclassification or other similar event. In such event, the Corporation shall notify the Transfer Agent of such change on or before the effective date thereof. (b) Adjustment Due to Merger, Consolidation, Etc. If, at any -------------------------------------------- time when 1998 Series I Preferred Stock is issued and outstanding and prior to the conversion of all 1998 Series I Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Corporation shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Corporation or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Corporation other than in connection with a plan of complete liquidation of the Corporation, then the holders of 1998 Series I Preferred Stock shall thereafter have the right to receive upon conversion of the 1998 Series I Preferred Stock, upon the bases and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the holders of 1998 Series I Preferred Stock would have been -12- entitled to receive in such transaction had the 1998 Series I Preferred Stock been converted in full (without regard to any limitations on conversion contained herein) immediately prior to such transaction, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of 1998 Series I Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares of Common Stock issuable upon conversion of the 1998 Series I Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion of 1998 Series I Preferred Stock. The Corporation shall not effect any transaction described in this subsection (b) unless (A) it first gives, to the extent practical, thirty (30) days' prior written notice (but in any event at least fifteen (15) business days prior written notice) of such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the holders of 1998 Series I Preferred Stock shall be entitled to convert the 1998 Series I Preferred Stock) and (b) the resulting successor or acquiring entity (if not the Corporation) assumes by written instrument the obligations of this subsection (b). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges. (c) [Reserved.] -------- (d) Adjustment Due to Distribution. Subject to Article IV, if ------------------------------ the Corporation shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Corporation's shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then the holders of 1998 Series I Preferred Stock shall be entitled, upon any conversion of shares of 1998 Series I Preferred Stock after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the holder with respect to the shares of Common Stock issuable upon such conversion had such holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution. (e) Purchase Rights. Subject to Article IV, if at any time when --------------- any 1998 Series I Preferred Stock is issued and outstanding, the Corporation issues any convertible securities or rights to purchase stock, warrants, securities or other property (the "PURCHASE RIGHTS") pro rata to the record holders of any class of Common Stock, then the holders of 1998 Series I Preferred Stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of the 1998 Series I Preferred Stock (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. (f) Adjustment for Restricted Periods. In the event that (1) --------------------------------- the Corporation fails to obtain effectiveness with the Securities and Exchange Commission of the -13- Registration Statement (as defined in the Registration Rights Agreement) on or prior to one hundred twenty (120) days following the Issue Date, or (2) such Registration Statement lapses in effect, or sales otherwise cannot be made thereunder, whether by reason of the Corporation's failure or inability to amend or supplement the prospectus (the "PROSPECTUS") included therein in accordance with the Registration Rights Agreement or otherwise, after such Registration Statement becomes effective (including, without limitation, during an Allowed Delay (as defined in Section 3(f) of the Registration Rights Agreement), then the Pricing Period shall be comprised of, (i) in the case of an event described in clause (1), the twenty (20) Trading Days preceding the 120th day following the Issue Date plus all Trading Days through and including the third Trading Day following the date of effectiveness of the Registration Statement; and (ii) in the case of an event described in clause (2), the twenty (20) Trading Days preceding the date on which the holder of the 1998 Series I Preferred Stock is first notified that sales may not be made under the Prospectus, plus all Trading Days through and including the third Trading Day following the date on which the Holder is first notified that such sales may again be made under the Prospectus. If a holder of 1998 Series I Preferred Stock determines that sales may not be made pursuant to the Prospectus (whether by reason of the Corporation's failure or inability to amend or supplement the Prospectus or otherwise) it shall so notify the Corporation in writing and, unless the Corporation provides such holder with a written opinion of the Corporation's counsel to the contrary, such determination shall be binding for purposes of this paragraph. (g) Notice of Adjustments. Upon the occurrence of each --------------------- adjustment or readjustment of the Conversion Price pursuant to this Article VIII.C, the Corporation, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to each holder of 1998 Series I Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of 1998 Series I Preferred Stock, furnish to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of 1998 Series I Preferred Stock. D. For purposes of Article VIII.C(A) above, "TRADING PRICE," which shall be measured as of the record date in respect of the rights offering means (i) the average of the last reported sale prices for the shares of Common Stock on Nasdaq as reported by Bloomberg, as applicable, for the five (5) Trading Days immediately preceding such date, or (ii) if Nasdaq is not the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Trading Price shall be the fair market value as reasonably determined in good faith by (A) the Board of Directors of the Corporation or, (b) at the option of a majority-in-interest of the holders of the outstanding 1998 Series I Preferred Stock by an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the Corporation. -14- E. In order to convert 1998 Series I Preferred Stock into full shares of Common Stock, a holder of 1998 Series I Preferred Stock shall: (i) submit a copy of the fully executed notice of conversion in the form attached as Exhibit D to the Purchase Agreement ("NOTICE OF CONVERSION") to the Corporation - --------- by facsimile dispatched on the Conversion Date (or by other means resulting in, or reasonably expected to result in, notice to the Corporation on the Conversion Date) at the office of the Corporation or its designated Transfer Agent for the 1998 Series I Preferred Stock that the holder elects to convert the same, which notice shall specify the number of shares of 1998 Series I Preferred Stock to be converted, the applicable Conversion Price, the Market Price Days and a calculation of the number of shares of Common Stock issuable upon such conversion (together with a copy of the first page of each certificate to be converted) prior to Midnight, New York City time (the "CONVERSION NOTICE DEADLINE") on the date of conversion specified on the Notice of Conversion; and (ii) surrender the original certificates representing the 1998 Series I Preferred Stock being converted (the "PREFERRED STOCK CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion to the office of the Corporation or the Transfer Agent for the 1998 Series I Preferred Stock as soon as practicable thereafter. The Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion, unless either the Preferred Stock Certificates are delivered to the Corporation or its Transfer Agent as provided above, or the holder notifies the Corporation or its Transfer Agent that such certificates have been lost, stolen or destroyed (subject to the requirements of subparagraph (A) below). In the case of a dispute as to the calculation of the Conversion Price, the Corporation shall promptly issue such number of shares of Common Stock that are not disputed in accordance with subparagraph (b) below. The Corporation shall submit the disputed calculations to its outside accountant via facsimile within two (2) business days of receipt of the Notice of Conversion. The accountant shall audit the calculations and notify the Corporation and the holder of the results no later than 48 hours from the time it receives the disputed calculations. The accountant's calculation shall be deemed conclusive absent manifest error. (a) Lost or Stolen Certificates. Upon receipt by the --------------------------- Corporation of evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing shares of 1998 Series I Preferred Stock, and (in the case of loss, theft or destruction) of indemnity reasonably satisfactory to the Corporation, and upon surrender and cancellation of the Preferred Stock Certificate(s), if mutilated, the Corporation shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. (b) Delivery of Common Stock Upon Conversion. Upon the ---------------------------------------- surrender of certificates as described above together with a Notice of Conversion, the Corporation shall issue and, within two (2) business days after such surrender (or, in the case of lost, stolen or destroyed certificates, after provision of agreement and indemnification pursuant to subparagraph (A) above) (the "DELIVERY PERIOD"), deliver (or cause its Transfer Agent to so issue and deliver) to or upon the order of the holder (i) that number of shares of Common Stock for the portion of the shares of 1998 Series I Preferred Stock converted as shall be determined in accordance herewith and (ii) a certificate representing the balance of the shares of 1998 Series I Preferred Stock not converted, if any. In addition to any other remedies available to the holder, including actual damages and/or equitable relief, the Corporation shall pay to a holder $2,000 per day in -15- cash for each day beyond a two (2) business day grace period following the Delivery Period that the Corporation fails to deliver Common Stock (a "DELIVERY DEFAULT") issuable upon surrender of shares of 1998 Series I Preferred Stock with a Notice of Conversion until such time as the Corporation has delivered all such Common Stock (the "DELIVERY DEFAULT PAYMENTS"). Such cash amount shall be paid to such holder by the fifth day of the month following the month in which it has accrued or, at the option of the holder (by written notice to the Corporation by the first day of the month following the month in which it has accrued), shall be convertible into Common Stock in accordance with the terms of this Article VIII. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Corporation's Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, in compliance with the provisions contained in Article VIII.A and in this Article VIII.E, the Corporation shall use its best efforts to cause its Transfer Agent to electronically transmit the Common Stock issuable upon conversion to the holder by crediting the account of holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and penalties described in the immediately preceding paragraph shall apply to the electronic transmittals described herein. (c) No Fractional Shares. If any conversion of 1998 Series I -------------------- Preferred Stock would result in a fractional share of Common Stock or the right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon Conversion of the 1998 Series I Preferred Stock shall be the next higher number of shares. (d) Conversion Date. The "CONVERSION DATE" shall be the date --------------- specified in the Notice of Conversion, provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, notice) to the Corporation or its Transfer Agent before Midnight, New York City time, on the Conversion Date. The person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such securities as of the Conversion Date and all rights with respect to the shares of 1998 Series I Preferred Stock surrendered shall forthwith terminate except the right to receive the shares of Common Stock or other securities or property issuable on such conversion and except that the holders preferential rights as a holder of 1998 Series I Preferred Stock shall survive to the extent the Corporation fails to deliver such securities. F. A number of shares of the authorized but unissued Common Stock sufficient to provide for the conversion of the 1998 Series I Preferred Stock outstanding at the then current Conversion Price shall at all times be reserved by the Corporation, free from preemptive rights, for such conversion or exercise. As of the date of issuance of the 1998 Series I Preferred Stock, 2,712,000 authorized and unissued shares of Common Stock have been duly reserved for issuance upon conversion of the 1998 Series I Preferred Stock (the "RESERVED AMOUNT"). The Reserved Amount shall be increased from time to time in accordance with the Company's obligations pursuant to Section 4(h) of the Purchase Agreement. In addition, if the -16- Corporation shall issue any securities or make any change in its capital structure which would change the number of shares of Common Stock into which each share of the 1998 Series I Preferred Stock shall be convertible at the then current Conversion Price, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding 1998 Series I Preferred Stock. If at any time a holder of shares of 1998 Series I Preferred Stock submits a Notice of Conversion, and the Corporation does not have sufficient authorized but unissued shares of Common Stock available to effect such conversion in accordance with the provisions of this Article VIII (a "CONVERSION DEFAULT"), the Corporation shall issue to the holder (or holders, if more than one holder submits a Notice of Conversion in respect of the same Conversion Date, pro rata based on the ratio that the number of shares of 1998 Series I Preferred Stock then held by each such holder bears to the aggregate number of such shares held by such holders) all of the shares of Common Stock which are available to effect such conversion. The number of shares of 1998 Series I Preferred Stock included in the Notice of Conversion which exceeds the amount which is then convertible into available shares of Common Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to the contrary contained herein, not be convertible into Common Stock in accordance with the terms hereof until (and at the holder's option at any time after) the date additional shares of Common Stock are authorized by the Corporation to permit such conversion, at which time the Conversion Price in respect thereof shall be the lesser of (i) the Conversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price on the Conversion Date elected by the holder in respect thereof. The Corporation shall use its best efforts to effect an increase in the authorized number of shares of Common Stock as soon as possible following a Conversion Default. In addition, the Corporation shall either (i) pay to the holder payments ("CONVERSION DEFAULT PAYMENTS") for a Conversion Default in the amount of (A) (N/365), multiplied by (b) the sum of the Stated Value plus the Applicable Premium per share of 1998 Series I Preferred Stock through the Authorization Date (as defined below), multiplied by (c) the Excess Amount on the day the holder submits a Notice of Conversion giving rise to a Conversion Default (the "CONVERSION DEFAULT DATE"), multiplied by (d) .24, where N = the number of days from the Conversion Default Date to the date (the "AUTHORIZATION DATE") that the Corporation authorizes a sufficient number of shares of Common Stock to effect conversion of the full number of shares of 1998 Series I Preferred Stock or (ii) provided no similar adjustment has been made pursuant to Section 2(c)(1) of the Registration Rights Agreement, increase the Applicable Premium to an amount equal to fifteen percent (15%) of the Stated Value through the Authorization Date; provided, however, that if the Conversion Default -------- ------- continues for more than sixty (60) days, each holder of the 1998 Series I Preferred Stock shall have the option to cause the Corporation to either pay the Conversion Default Payments pursuant to clause (i) of this sentence or increase the Applicable Premium pursuant to clause (ii) of this sentence. The Corporation shall send notice to the holder of the authorization of additional shares of Common Stock, the Authorization Date and the amount of holder's accrued Conversion Default Payments. The accrued Conversion Default Payment for each calendar month shall be paid in cash or shall be convertible into Common Stock at the Conversion Price, at the holder's option, as follows: -17- (a) In the event the holder elects to take such payment in cash, cash payment shall be made to holder by the fifth day of the month following the month in which it has accrued; and (b) In the event the holder elects to take such payment in Common Stock, the holder may convert such payment amount into Common Stock at the Conversion Price (as in effect at the time of Conversion) at any time after the fifth day of the month following the month in which it has accrued in accordance with the terms of this Article VIII (so long as there is then a sufficient number of authorized shares). Nothing herein shall limit the holder's right to pursue actual damages for the Corporation's failure to maintain a sufficient number of authorized shares of Common Stock, and each holder shall have the right to pursue all remedies available at law or in equity (including a decree of specific performance and/or injunctive relief). G. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article VIII, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of 1998 Series I Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of 1998 Series I Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of 1998 Series I Preferred Stock. H. Upon submission of a Notice of Conversion by a holder of 1998 Series I Preferred Stock, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such holder's allocated portion of the Reserved Amount) shall be deemed converted into shares of Common Stock and (ii) the holder's rights as a holder of such converted shares of 1998 Series I Preferred Stock shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such holder because of a failure by the Corporation to comply with the terms of this Certificate of Designation. Notwithstanding the foregoing, if a holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Delivery Period with respect to a conversion of shares of 1998 Series I Preferred Stock for any reason, then (unless the holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Corporation) the holder shall regain the rights of a holder of such shares of 1998 Series I Preferred Stock with respect to such unconverted shares of 1998 Series I Preferred Stock and the Corporation shall, as soon as practicable, return such unconverted shares of 1998 Series I Preferred Stock to the holder or, if such shares of 1998 Series I Preferred Stock have not been surrendered, adjust its records to reflect that such shares of 1998 Series I Preferred Stock have not been converted. In all cases, the holder shall retain all of its rights and remedies (including, -18- without limitation, the right to receive Delivery Default Payments pursuant to Article V.E to the extent required thereby for such Delivery Default and any subsequent Delivery Default). IX. Automatic Conversion -------------------- So long as the Registration Statement is effective and there is not then a continuing Redemption Event, each share of 1998 Series I Preferred Stock issued and outstanding on the date which is three (3) years from the Issue Date (the "AUTOMATIC CONVERSION DATE"), subject to any adjustment pursuant to this Article, automatically shall be converted into shares of Common Stock on such date at the then effective Conversion Price in accordance with, and subject to, the provisions of Article VIII hereof (the "AUTOMATIC CONVERSION"). The Automatic Conversion Date shall be delayed by one (1) Trading Day each for each Trading Day occurring prior thereto and prior to the full conversion of the 1998 Series I Preferred Stock that (i) sales cannot be made pursuant to the Registration Statement (whether by reason of the Company's failure to properly supplement or amend the prospectus included therein in accordance with the terms of the Registration Rights Agreement or otherwise including any Allowed Delays (as defined in Section 3(f) of the Registration Rights Agreement) after the earlier of (A) the date the Registration Statement is declared effective, and (b) the date the Registration Statement is required to be declared effective pursuant to Section 2(c) of the Registration Rights Agreement or (ii) any Redemption Event (as defined in Article VI.A) exists, without regard to whether any cure periods shall have run. The Automatic Conversion Date shall be the "Conversion Date" for purposes of determining the Conversion Price and the time within which certificates representing the Common Stock must be delivered to the holder upon an Automatic Conversion. X. Voting Rights ------------- The holders of the 1998 Series I Preferred Stock have no voting power whatsoever, except as otherwise provided by the MBCA, in this Article X, and in Article XI below. Notwithstanding the above, the Corporation shall provide each holder of 1998 Series I Preferred Stock with prior notification of any meeting of the shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Corporation of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Corporation, or any proposed liquidation, dissolution or winding up of the Corporation, the Corporation shall mail a notice to each holder, at least ten (10) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. -19- To the extent that under the MBCA the vote of the holders of the 1998 Series I Preferred Stock, voting separately as a class or Series as applicable, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the shares of the 1998 Series I Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the shares of 1998 Series I Preferred Stock (except as otherwise may be required under the MCBA) shall constitute the approval of such action by the class. To the extent that under the MCBA holders of the 1998 Series I Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of 1998 Series I Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of shareholders as the date as of which the Conversion Price is calculated. Holders of the 1998 Series I Preferred Stock shall be entitled to notice of all shareholder meetings or written consents (and copies of proxy materials and other information sent to shareholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws and the MBCA. XI. Protective Provisions --------------------- So long as shares of 1998 Series I Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided by the MBCA) of the holders of at least a majority of the then outstanding shares of 1998 Series I Preferred Stock: (a) alter or change the rights, preferences or privileges of the 1998 Series I Preferred Stock or any Senior Securities so as to affect adversely the 1998 Series I Preferred Stock; (b) create any new class or Series of capital stock having a preference over the 1998 Series I Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation (as previously defined in Article III hereof, "SENIOR SECURITIES"); (c) increase the authorized number of shares of 1998 Series I Preferred Stock; or (d) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the holders of shares of the 1998 Series I Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). In the event holders of at least a majority of the then outstanding shares of 1998 Series I Preferred Stock agree to allow the Corporation to alter or change the rights, preferences or privileges of the shares of 1998 Series I Preferred Stock, pursuant to subsection (A) above, so as to affect the 1998 Series I Preferred Stock, then the Corporation will deliver notice of such approved change to the holders of the 1998 Series I Preferred Stock that did not agree to such alteration or change (the "DISSENTING HOLDERS") and Dissenting Holders shall have the right for a -20- period of thirty (30) days to convert pursuant to the terms of this Certificate of Designation as they exist prior to such alteration or change or continue to hold their shares of 1998 Series I Preferred Stock. XII. Pro Rata Allocations -------------------- The Maximum Share Amount and the Reserved Amount (including any increases thereto) shall be allocated by the Corporation pro rata among the holders of 1998 Series I Preferred Stock based on the number of shares of 1998 Series I Preferred Stock then held by each holder relative to the total aggregate number of shares of 1998 Series I Preferred Stock then outstanding. IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the Corporation this ___ day of June, 1998. AASTROM BIOSCIENCES, INC. By:____________________________________ R. Douglas Armstrong President & Chief Executive Officer -21-
EXHIBIT 4.1 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of July 2, 1998, by and among Aastrom Biosciences, Inc., a Michigan corporation, with headquarters located at 24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106 ("COMPANY"), and each of the purchasers set forth on the signature pages hereto (the "BUYERS"). WHEREAS: A. The Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D ("REGULATION D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 ACT"); B. The Company has authorized two new series of preferred stock, one designated as the 1998 Series I Convertible Preferred Stock (the "SERIES I PREFERRED STOCK"), having the rights, preferences and privileges set forth in the Certificate of Designations, Rights and Preferences attached hereto as EXHIBIT "A-1" (the "SERIES I CERTIFICATE OF DESIGNATION") and the second as the 1998 Series II Convertible Preferred Stock (the "SERIES II PREFERRED STOCK" and, collectively with the Series I Preferred Stock, the "PREFERRED STOCK"), having the rights, preferences and privileges set forth in the Certificate of Designations, Rights and Preferences attached hereto as EXHIBIT "A-2" (the "SERIES II CERTIFICATE OF DESIGNATION" and, collectively with the Series I Certificate of Designation, the "CERTIFICATE OF DESIGNATIONS"); C. The Preferred Stock is convertible into shares of common stock, no par value, of the Company (the "COMMON STOCK"), upon the terms and subject to the limitations and conditions set forth in the Certificate of Designation and pursuant to the notice of conversion attached hereto as EXHIBIT "D"; D. The Buyers desire to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement, an aggregate of Five Thousand (5,000) shares of Series I Preferred Stock and Three Thousand (3,000) shares of Series II Preferred Stock, for an aggregate purchase price of Eight Million Dollars ($8,000,000). E. Each Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, the number of shares of Preferred Stock is set forth immediately below its name on the signature pages hereto; F. Contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached hereto as EXHIBIT "B" (the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws; and 1 NOW THEREFORE, the Company and each of the Buyers severally (and not jointly) hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED SHARES. ------------------------------------- (a) Purchase of Preferred Shares. The Company shall issue and sell to each Buyer and each Buyer severally agrees to purchase from the Company such number of shares of Series I Preferred Stock (collectively, together with any Series I Preferred Stock issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "SERIES I PREFERRED SHARES") and Series II Preferred Stock (collectively, together with any Series II Preferred Stock issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "SERIES II PREFERRED SHARES" and, collectively with the Series I Preferred Shares, the "PREFERRED SHARES") for the aggregate purchase price with respect to the First Closing (as defined below) and the Second Closing (as defined below) (each, a "PURCHASE PRICE" and collectively, the "PURCHASE PRICES") as is set forth immediately below such Buyer's name on the signature pages hereto. The issuance sale and purchase of the Preferred Shares shall take place at two (2) closings, the first of which is hereinafter referred to as the "FIRST CLOSING" and the second of which is hereinafter referred to as the "SECOND CLOSING." The aggregate number of Series I Preferred Shares to be issued at the First Closing is Five Thousand (5,000), for an aggregate purchase price of Five Million Dollars ($5,000,000) and the aggregate number of Series II Preferred Shares to be issued at the Second Closing is three thousand (3,000), for an aggregate purchase price of Three Million Dollars ($3,000,000). Subject to the satisfaction (or waiver) of the conditions thereto set forth in Section 6 and Section 7 below, (i) at the First Closing, the Company shall issue and sell to each Buyer and each Buyer shall purchase from the Company the number of Series I Preferred Shares which such Buyer is purchasing hereunder and as set forth below such Buyer's name on the signature pages hereto for the Purchase Price to be paid by such Buyer in respect of the First Closing and (ii) at the Second Closing, the Company shall issue and sell to each Buyer and each Buyer shall purchase from the Company the number of Series II Preferred Shares which such Buyer is purchasing hereunder and as set forth below such Buyer's name on the signature pages hereto for the Purchase Price to be paid by such Buyer in respect of the Second Closing. (b) Form of Payment. On each Closing Date (as defined below), (i) --------------- each Buyer shall pay the Purchase Price for the Preferred Shares to be issued and sold to it at each Closing by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions, against delivery of duly executed certificates representing such number of Preferred Shares which such Buyer is purchasing and (ii) the Company shall deliver such certificates duly executed on behalf of the Company, to the Buyer, against delivery of such Purchase Price. (c) Closing Date. Subject to the satisfaction (or waiver) of the ------------ conditions thereto set forth in Section 6 and Section 7 below, the date and time of the issuance and sale of the Preferred Shares pursuant to this Agreement (the "CLOSING DATE") shall be (i) in the case of the First Closing, 12:00 noon Eastern Standard Time on July 2, 1998 and (ii) in the case of the Second Closing, 12:00 noon Eastern Standard Time as soon as practicable (but no less than three 2 (3) business days) following the satisfaction (or waiver) of the conditions to the Second Closing set forth in Sections 6(b) and 7(b) or, in each case, such other mutually agreed upon time. Each Closing shall occur on each Closing Date at the offices of Morgan, Lewis & Bockius LLP, 2000 One Logan Square, Philadelphia, Pennsylvania 19103, or at such other location as may be agreed to be the parties. 2. BUYERS' REPRESENTATIONS AND WARRANTIES. Each Buyer severally (and not -------------------------------------- jointly) represents and warrants to the Company solely as to such Buyer that: (a) Investment Purpose. As of the date hereof, the Buyer is ------------------ purchasing the Preferred Shares and the shares of Common Stock issuable upon conversion thereof (the "CONVERSION SHARES" and, collectively with the Preferred Shares, the "SECURITIES") for its own account for investment only and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933 Act. (b) Accredited Investor Status. The Buyer is an "accredited -------------------------- investor" as that term is defined in Rule 501(a) of Regulation D. (c) Reliance on Exemptions. The Buyer understands that the ---------------------- Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities. (d) Information. The Buyer and its advisors, if any, have been ----------- furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigation conducted by Buyer or any of its advisors or representatives shall modify, amend or affect Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. The Buyer has reviewed the risk factors discussed in the Company's SEC Documents (as defined below) and understands that its investment in the Securities involves a significant degree of risk. (e) Governmental Review. The Buyer understands that no United ------------------- States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. (f) Transfer or Resale. The Buyer understands that (i) except as ------------------ provided in the Registration Rights Agreement, the Securities have not been and are not being registered under the 1933 Act or any applicable state securities laws, and may not be transferred unless (a) subsequently included in an effective registration statement thereunder, (b) the Buyer shall have delivered to the Company an opinion of counsel (which opinion shall be reasonably acceptable to the Company) to the effect that the Securities to be sold or transferred may be sold 3 or transferred pursuant to an exemption from such registration, (c) so long as the Buyer otherwise complies with applicable securities laws, sold or transferred to an "affiliate"(as defined in Rule 144 promulgated under the 1933 Act (or a successor rule) ("RULE 144")) or (d) sold pursuant to Rule 144; (ii) any sale of such Securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to the Registration Rights Agreement). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement. Except for transfers - ---- ---- by a Buyer (i) to its "affiliates" (as defined in Rule 144) or (ii) to the holders of interests in a Buyer upon a liquidation of a Buyer's assets in accordance with its governing documents, the Preferred Shares may be transferred by a Buyer only with the prior written consent of the Company, which consent will not be unreasonably withheld. (g) Legends. The Buyer understands that the Preferred Shares and, ------- until such time as the Conversion Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement, the Conversion Shares, may bear a restrictive legend in substantially the following form (and a stop- transfer order may be placed against transfer of the certificates for such Securities): "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities have been acquired for investment and may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under said Act, or an opinion of counsel, in form, substance and scope reasonably acceptable to the Company, that registration is not required under said Act or unless sold pursuant to Rule 144 under said Act." The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) the resale of such Security is covered by an effective registration statement filed under the 1933 Act, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope reasonably acceptable to the Company, to the effect that a public sale or transfer of such Security may be made without registration under the 1933 Act and such sale or transfer is effected or (c) such holder provides the Company with reasonable assurances that such Security can be sold pursuant to Rule 144 under the 1933 Act (or a successor rule thereto) without any restriction as to the number of Securities acquired as of a particular date that can then be immediately sold. The Buyer agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been 4 removed, in compliance with applicable requirements for delivery of a prospectus contained in an effective registration statement, if any. (h) Authorization; Enforcement. This Agreement and the Registration -------------------------- Agreement have been duly and validly authorized, executed and delivered on behalf of the Buyer and are valid and binding agreements of the Buyer enforceable in accordance with their terms. (i) Residency. The Buyer is a resident of the jurisdiction set forth --------- immediately below such Buyer's name on the signature pages hereto. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company --------------------------------------------- represents and warrants to each Buyer that: (a) Organization and Qualification. The Company is a corporation ------------------------------ duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. The Company has no Subsidiaries (as defined below). The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any material adverse effect on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. "SUBSIDIARIES" means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly, any equity or other ownership interest. (b) Authorization; Enforcement. (i) The Company has all requisite -------------------------- power and authority to file and perform its obligations under the Certificate of Designations and to enter into and perform this Agreement and the Registration Rights Agreement and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Preferred Shares and the issuance and reservation for issuance of the Conversion Shares issuable upon conversion thereof) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, (iii) this Agreement has been duly executed and delivered and the Series I Certificate of Designation has been duly filed by the Company and, as of the Second Closing, the Series II Certificate of Designation will be duly filed by the Company, and (iv) each of this Agreement and the Series I Certificate of Designation constitutes, and upon execution and delivery by the Company of the Registration Rights Agreement and the filing of the Series II Certificate of Designation by the Company such instrument will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 5 (c) Capitalization. As of the date hereof, the authorized capital -------------- stock of the Company consists of (i) 40,000,000 shares of Common Stock of which 13,639,817 shares are issued and outstanding, 1,479,186 shares are reserved for issuance pursuant to the Company's stock option plans, 2,705,544 shares are reserved for issuance pursuant to securities (other than the Preferred Shares) exercisable for, or convertible into or exchangeable for shares of Common Stock and 2,712,000 shares are reserved for issuance upon conversion of the Series I Preferred Shares and, prior to the Second Closing, if applicable, a number of shares will be reserved equal to two (2) times the number of shares of Common Stock then issuable upon conversion of the Series II Preferred Shares (in each case subject to adjustment pursuant to the Company's covenant set forth in Section 4(h) below); and (ii) 5,000,000 shares of preferred stock, 2,200,000 of which shares are issued and outstanding. All of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable. Except as disclosed on SCHEDULE 3(C), no shares of capital stock of the Company are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Except as disclosed in SCHEDULE 3(C), as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any shares of capital stock of the Company, or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company, (ii) there are no agreements or arrangements under which the Company is obligated to register the sale of any of its or their securities under the 1933 Act (except the Registration Rights Agreement) and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Preferred Shares or the Conversion Shares. The Company has furnished to the Buyer true and correct copies of the Company's Certificate of Incorporation as in effect on the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's By-laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all securities convertible into or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto. The Company shall provide the Buyer with a written update of this representation signed by the Company's Chief Executive or Chief Financial Officer on behalf of the Company as of the Closing Date. (d) Issuance of Shares. The Preferred Shares and Conversion Shares ------------------ are duly authorized and, upon issuance in accordance with the terms of this Agreement (including the issuance of the Conversion Shares upon conversion of the Preferred Shares in accordance with the Certificate of Designations) will be validly issued, fully paid and non-assessable, and free from all taxes, liens and charges with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of stockholders of the Company. The term Conversion Shares includes, without limitation, such additional shares, if any, as are issuable as a result of the events described in Article V, Article VII.E(b) or Article VII.F of the Certificate of Designations and Section 2(c) of the Registration Rights Agreement. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares. The Company further acknowledges that its obligation to issue Conversion Shares in accordance with this Agreement and the Certificate of Designations is absolute and 6 unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. (e) Series of Preferred Stock. The terms, designations, powers, ------------------------- preferences and relative, participating and optional or special rights, and the qualifications, limitations and restrictions of each series of preferred stock of the Company (other than the Preferred Stock) are as stated in the Certificate of Incorporation and the previous certificate of designation, filed on or prior to the date hereof, and the Bylaws. The terms, designations, powers, preferences and relative, participating and optional or special rights, and the qualifications, limitations and restrictions of the Preferred Stock are as stated in the Certificate of Designations. (f) No Conflicts. The execution, delivery and performance of this ------------ Agreement and the Registration Rights Agreement by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the filing of the Certificate of Designations and the issuance and reservation for issuance of the Conversion Shares) will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). The Company is not in violation of its Certificate of Incorporation, By-laws or other organizational documents and the Company is not in default (and no event has occurred which with notice or lapse of time or both could put the Company in default) under, and the Company has not taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party or by which any property or assets of the Company is bound or affected, except for possible defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company is not being conducted, and shall not be conducted so long as a Buyer owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity, which violations individually or in the aggregate would have a Material Adverse Effect. Except (i) as specifically contemplated by this Agreement, (ii) as required under the 1933 Act and any applicable state securities laws, (iii) for filings with Nasdaq, and (iv) for filings with the Secretary of State of the State of Michigan, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self regulatory agency in order for it to execute, deliver or perform any of its obligations under this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. Except as disclosed in SCHEDULE 3(f), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is not in violation of the listing requirements of the Nasdaq National Market ("NASDAQ") and does not reasonably 7 anticipate that the Common Stock will be delisted by Nasdaq in the foreseeable future. Except for anticipated losses as described in the SEC Documents (as defined below), the Company is unaware of any facts or circumstances which might give rise to any of the foregoing. (g) SEC Documents; Financial Statements. Since February 6, 1997, ----------------------------------- the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act of 1934, as amended (the "1934 ACT") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits) incorporated by reference therein, being hereinafter referred to herein as the "SEC DOCUMENTS"). The Company has delivered or made available to each Buyer true and complete copies of the SEC Documents, except for such exhibits and incorporated documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, 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, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to June 30, 1997 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. (h) Absence of Certain Changes. Except for operating losses -------------------------- incurred in the normal course of business, since June 30, 1997, there has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations or prospects of the Company. (i) Absence of Litigation. There is no action, suit, claim, --------------------- proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company, or its officers or directors in their capacity as such, that could have a Material Adverse Effect. SCHEDULE 3(i) contains a complete list and summary description of any 8 pending or, to the Company's knowledge, threatened proceeding against or affecting the Company, without regard to whether it would have a Material Adverse Effect. Except as set forth on SCHEDULE 3(i), the Company is unaware of any facts or circumstances which might give rise to any of the foregoing. (j) Patents, Copyrights, etc. The Company and each of its ------------------------ Subsidiaries owns or possesses the requisite licenses or rights to use all patents, patent rights, inventions, know-how, trade secrets, trademarks, service marks, service names, trade names and copyrights ("INTELLECTUAL PROPERTY") necessary to enable it to conduct its business as now operated (and, except as set forth in SCHEDULE 3(j) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future); there is no claim or action by any person pertaining to, or proceeding pending, or to the Company's knowledge threatened which challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct its business as now operated (and, except as set forth in SCHEDULE 3(j) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future); to the best of the Company's knowledge, the Company's or its Subsidiaries, current and intended products, services and processes do not infringe on any Intellectual Property or other rights held by any person; and the Company is unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their Intellectual Property. (k) No Materially Adverse Contracts, Etc. The Company is not ------------------------------------ subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect. Except as set forth on SCHEDULE 3(k), the Company is not a party to any contract or agreement which in the judgment of the Company's officers has or is expected to have a Material Adverse Effect. (l) Tax Status. Except as set forth on SCHEDULE 3(l), the Company ---------- has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. (m) Certain Transactions. Except as set forth on SCHEDULE 3(m) and -------------------- except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed on SCHEDULE 3(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other 9 than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. (n) Disclosure. All information relating to or concerning the ---------- Company set forth in this Agreement and provided to the Buyers pursuant to Section 2(d) hereof and otherwise in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. Other than the transactions contemplated by this Agreement, no event or circumstance has occurred or exists with respect to the Company or its business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed (assuming for this purposes that the Company's reports filed under the 1934 Act are being incorporated into an effective registration statement filed by the Company under the 1933 Act). (o) Acknowledgment Regarding Buyers' Purchase of Securities. The ------------------------------------------------------- Company acknowledges and agrees that the Buyers are acting solely in the capacity of arm's length purchasers with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by any Buyer or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is merely incidental to the Buyers' purchase of the Securities. The Company further represents to each Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives. (p) No Integrated Offering. Neither the Company, nor any of its ---------------------- affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance of the Securities to the Buyers. The issuance of the Securities to the Buyers will not be integrated with any other issuance of the Company's securities (past, current or future) which requires stockholder approval under the rules of the Nasdaq. (q) No Brokers. The Company has taken no action which would give ---------- rise to any claim by any person for brokerage commissions, finder's fees or similar payments relating to this Agreement or the transactions contemplated hereby, except for dealings with The Shemano Group, Inc., whose commissions and fees will be paid for by the Company. 10 (r) Permits; Compliance. The Company is in possession of all ------------------- franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "COMPANY PERMITS"), except where the failure to possess such Company Permit would not have a Material Adverse Effect, and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits. The Company is not in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Since June 30, 1997, the Company has not received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect. (s) Environmental Matters. --------------------- (i) Except as set forth in SCHEDULE 3(s), there are, to the Company's knowledge, with respect to the Company or any predecessor of the Company, no past or present violations of Environmental Laws (as defined below), releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and the Company has not received any notice with respect to any of the foregoing, nor is any action pending or, to the Company's knowledge, threatened in connection with any of the foregoing. The term "ENVIRONMENTAL LAWS" means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes (collectively, "HAZARDOUS MATERIALS") into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder. (ii) Other than those that are or were stored, used or disposed of in compliance with applicable law, no Hazardous Materials are contained on or about any real property currently owned, leased or used by the Company, and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company during the period the property was owned, leased or used by the Company, except in the normal course of the Company's business. (iii) To the Company's knowledge, there are no underground storage tanks on or under any real property owned, leased or used by the Company that are not in compliance with applicable law. 11 (t) Title to Property. The Company has good and marketable title ----------------- in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described in SCHEDULE 3(t) or such as would not have a Material Adverse Effect. Any real property and facilities held under lease by the Company is held by it under valid, subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect. (u) Insurance. The Company is insured by insurers of recognized --------- financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company is engaged. The Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (v) Internal Accounting Controls. The Company maintains a system ---------------------------- of internal accounting controls sufficient, in the judgment of the Company's board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (w) Foreign Corrupt Practices. Neither the Company, nor any ------------------------- director, officer, agent, employee or other person acting on behalf of the Company has, in the course of his actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. 4. COVENANTS. --------- (a) Best Efforts. The parties shall use their best efforts to ------------ satisfy timely each of the conditions described in Section 6 and 7 of this Agreement. (b) Form D; Blue Sky Laws. The Company agrees to file a Form D --------------------- with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date with respect to the First Closing, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to the Buyers at the applicable closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an 12 exemption from such qualification), and shall provide evidence of any such action so taken to each Buyer on or prior to the Closing Date with respect to the First Closing. (c) Reporting Status; Eligibility to Use Form S-3. The Company's --------------------------------------------- Common Stock is registered under Section 12(g) of the 1934 Act. So long as any Buyer beneficially owns any of the Securities, the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. The Company currently meets, and will take all necessary action to continue to meet, the "registrant eligibility" requirements set forth in the general instructions to Form S-3. (d) Use of Proceeds. The Company shall use the proceeds from the --------------- sale of the Preferred Shares in the manner set forth in SCHEDULE 4(d) attached hereto and made a part hereof and shall not, directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership, enterprise or other person (except in connection with its currently existing direct or indirect Subsidiaries). (e) Additional Equity Capital; Right To Purchase. Subject to the -------------------------------------------- exceptions described below, the Company will not, without the prior written consent of RGC International Investors, LDC ("RGCI"), register any equity financing (including debt financing with an equity component) or otherwise allow any public resales of equity interests in the Company's securities, issued after April 24, 1998, pursuant to Rule 144 or otherwise during the period (the "LOCK- UP PERIOD") (i) beginning on the Closing Date with respect to the First Closing and ending one hundred eighty (180) days from the date the Registration Statement (as defined in the Registration Rights Agreement) is declared effective (plus any trading days after the Registration Statement is declared effective and prior to such 180th day during which sales cannot be made thereunder) and (ii) beginning on the Closing Date with respect to the Second Closing and ending sixty (60) days from the Closing Date with respect to the Second Closing. In addition, subject to the exceptions described below, the Company will not conduct any equity financing (including debt financing with an equity component) ("FUTURE OFFERINGS") during the Lock-up Period, unless it shall have first delivered to RGCI, at least fifteen (15) business days prior to the closing of such Future Offering, written notice describing the proposed Future Offering, including the terms and conditions thereof and proposed definitive documentation to be entered into in connection therewith, and providing each Buyer an option during the ten (10) day period following delivery of such notice to purchase at least the percentage equal to (a) the number of outstanding shares of Preferred Stock at the time of the notice multiplied by 1,000, divided by (b) the Company's then current market capitalization, of the securities being offered in the Future Offering on the same terms as contemplated by such Future Offering (the limitations referred to in this sentence and the preceding sentence are collectively referred to as the "CAPITAL RAISING LIMITATIONS"). In the event the terms and conditions of a proposed Future Offering are amended in any material respect after delivery of the notice to RGCI concerning the proposed Future Offering, the Company shall deliver a new notice to RGCI describing the amended terms and conditions of the proposed Future Offering and RGCI thereafter shall have an option during the ten (10) day period following delivery of such new notice to purchase at least the percentage 13 equal to (a) the number of outstanding shares of Preferred Stock at the time of the notice multiplied by 1,000, divided by (b) the Company's then current market capitalization, of the securities being offered on the same terms as contemplated by such proposed Future Offering, as amended. The foregoing sentence shall apply to successive amendments to the terms and conditions of any proposed Future Offering during the Lock-Up Period. The Capital Raising Limitations shall not apply to any transaction involving (i) issuances of securities in a firm commitment underwritten public offering (excluding a continuous offering pursuant to Rule 415 under the 1933 Act) or (ii) issuances of securities as consideration for a merger, consolidation or purchase of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or in connection with the disposition or acquisition of a business, product or license by the Company. The Capital Raising Limitations also shall not apply to the issuance of securities upon exercise or conversion of the Company's options, warrants or other convertible securities outstanding as of the date hereof or to the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or stock purchase plan previously in effect or approved by a majority of the Company's disinterested directors. (f) Expenses. The Company shall reimburse Rose Glen Capital -------- Management, L.P. ("RGC") for all expenses incurred by it in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the other agreements to be executed in connection herewith, including, without limitation, attorneys' and consultants' fees and expenses. The Company's obligation to reimburse RGC's expenses under this Section 4(f) and the Registration Rights Agreement shall be limited to an aggregate of Twenty-Five Thousand Dollars ($25,000) of which Five Thousand Dollars ($5,000) was advanced previously. (g) Financial Information. The Company agrees to send the following --------------------- reports to each Buyer until such Buyer transfers, assigns, or sells all of the Securities: (i) within one (1) day after release, copies of all press releases issued by the Company or any of its Subsidiaries; and (ii) contemporaneously with the making available or giving to the stockholders of the Company, copies of any notices or other information the Company makes available or gives to such stockholders. (h) Reservation of Shares. The Company shall at all times have --------------------- authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion of the outstanding Preferred Shares and issuance of the Conversion Shares in connection therewith (based on the Conversion Price of the Preferred Shares in effect from time to time). The Company shall not reduce the number of shares of Common Stock reserved for issuance upon conversion of Preferred Shares without the consent of each Buyer. The Company shall use its best efforts at all times to maintain the number of shares of Common Stock so reserved for issuance at no less than two (2) times the number that is then actually issuable upon full conversion of the Preferred Shares (based on the Conversion Price of the Preferred Shares in effect from time to time). If at any time the number of shares of Common Stock authorized and reserved for issuance is below the number of Conversion Shares issued and issuable upon conversion of the Preferred Shares (based on the Conversion Price of the Preferred Shares then in effect), the Company will promptly take all corporate action necessary to 14 authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of shareholders to authorize additional shares to meet the Company's obligations under this Section 4(h), in the case of an insufficient number of authorized shares, and using its best efforts to obtain shareholder approval of an increase in such authorized number of shares. (i) Listing. The Company shall promptly, but no later than ten (10) ------- days from each Closing Date, secure the listing of the Conversion Shares issuable with respect to the Preferred Shares issued at each respective Closing upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable upon conversion of the Preferred Shares. The Company will obtain and maintain the listing and trading of its Common Stock on Nasdaq, the Nasdaq SmallCap Market ("NASDAQ SMALLCAP"), the New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. The Company shall promptly provide to each Buyer copies of any notices it receives from Nasdaq and any other exchanges or quotation systems on which the Common Stock is then listed regarding the continued eligibility of the Common Stock for listing on such exchanges and quotation systems. (j) Corporate Existence. Subject to the Company's right to ------------------- exercise the right described in Article IV.B(i) of the Certificate of Designations, so long as a Buyer beneficially owns any Preferred Shares, the Company shall maintain its corporate existence and shall not sell all or substantially all of the Company's assets, except in the event of a merger or consolidation or sale of all or substantially all of the Company's assets, where the surviving or successor entity in such transaction (i) assumes the Company's obligations hereunder and under the agreements and instruments entered into in connection herewith and (ii) if the consideration to be received for such transaction is equity securities, is a publicly traded corporation whose Common Stock is listed for trading on Nasdaq, Nasdaq SmallCap, NYSE or AMEX. (k) No Integration. The Company will not conduct any future -------------- offering that will be integrated with the issuance of the Securities solely for purposes of Rule 4460(i) of the Nasdaq Stock Market. (l) Solvency. The Company (both before and after giving effect to -------- the transactions contemplated by this Agreement) is solvent (i.e., its assets ---- have a fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute and matured) and currently subject to SCHEDULE 4(l), the Company has no information that would lead it to reasonably conclude that the Company would not have, nor does it intend to take any action that would impair, its ability to pay its debts from time to time incurred in connection therewith as such debts mature. The Company did not receive a qualified opinion from its auditors with respect to its most recent fiscal year end and does not anticipate or know of any basis upon which its auditors might issue a qualified opinion in respect of its current fiscal year. 15 (m) Trading Restrictions. Each Buyer covenants and agrees that, -------------------- during any Pricing Period (as defined in the Certificate of Designations) during which a Conversion Price (as defined in the Certificate of Designations) is computed, if a Buyer (or others acting on its behalf) engages in short sale transactions or other hedging activities which involve, among other things, sales of shares of Common Stock, such Buyer will place its sale orders for Common Stock in the course of such activities so as not to complete or effect any such sale on any trading day during such period at a price which is lower than the lowest sale effected on such day by persons other than the Buyers (or others acting on their behalf). 5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable --------------------------- instructions to its transfer agent to issue certificates, registered in the name of each Buyer or its nominee, for the Conversion Shares in such amounts as specified from time to time by each Buyer to the Company upon conversion of the Preferred Shares in accordance with the terms thereof (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the Conversion Shares under the 1933 Act, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Conversion Shares, prior to registration of the Conversion Shares under the 1933 Act), will be given by the Company to its transfer agent and that the Conversion Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section shall affect in any way the Buyer's obligations and agreement set forth in Section 2(g) hereof to comply with all applicable prospectus delivery requirements, if any, upon resale of the Conversion Shares. If a Buyer provides the Company with an opinion of counsel, reasonably satisfactory to the Company in form, substance and scope, that registration of a resale by such Buyer of any of the Securities is not required under the 1933 Act, the Company shall permit the transfer, and, in the case of the Conversion Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by such Buyer. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyers, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section, that the Buyers shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate transfer, without the necessity of showing economic loss and without any bond or other security being required. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the ---------------------------------------------- Company hereunder to issue and sell the Preferred Shares to a Buyer at each of the First Closing and Second Closing, as applicable, is subject to the satisfaction, at or before the Closing Date in respect of such closing, of each of the following conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: 16 (a) With respect to the First Closing and the Second Closing: (i) the applicable Buyer shall have executed this Agreement and the Registration Rights Agreement, and delivered the same to the Company. (ii) The applicable Buyer shall have delivered the Purchase Price in accordance with Section 1(b) above. (iii) The Series I Certificate of Designation shall have been accepted for filing with the Secretary of State of the State of Michigan. (iv) The representations and warranties of the applicable Buyer shall be true and correct in all material respects as of the date when made and as of each Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the applicable Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the applicable Buyer at or prior to each Closing Date. (v) No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. (b) With respect to the Second Closing: (i) The Series II Certificate of Designation shall have been accepted for filing with the Secretary of State of the State of Michigan, and a copy thereof certified by such Secretary of State shall have been delivered to such Buyer. (ii) At any time on or after the 90th day following the Closing Date in respect of the First Closing, the Closing Bid Price of the Common Stock is greater than $6.00 for any twenty (20) consecutive Trading Days and the Company provides notice to the Buyers to that effect. (iii) The Closing Bid Price (as defined in the Certificate of Designation) of the Common Stock on the Trading Day (as defined in the Certificate of Designation) immediately preceding the Closing Date with respect to the Second Closing is greater than $6.00. (iv) Ninety (90) days shall have elapsed since the Closing Date with respect to the First Closing and no more than one (1) year shall have elapsed since the Closing Date with respect to the First Closing. 7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The obligation ------------------------------------------------- of each Buyer hereunder to purchase the Preferred Shares at each of the First Closing 17 and Second Closing, as applicable, is subject to the satisfaction, at or before the Closing Date in respect of such closing of each of the following conditions, provided that these conditions are for such Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion: (a) With respect to the First Closing and the Second Closing: (i) The Company shall have executed this Agreement and the Registration Rights Agreement, and delivered the same to the Buyer. (ii) The Company shall have delivered to such Buyer duly executed certificates (in such denominations as the Buyer shall request) representing the Preferred Shares in accordance with Section 1(b) above. (iii) The Series I Certificate of Designation shall have been accepted for filing with the Secretary of State of the State of Michigan, and a copy thereof certified by such Secretary of State shall have been delivered to such Buyer. (iv) The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to a majority-in-interest of the Buyers, shall have been delivered to and acknowledged in writing by the Company's Transfer Agent. (v) The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of each Closing Date as though made at such time (except for representations and warranties that speak as of a specific date and in each case subject to the schedules referred to in such representations and warranties provided by the Company as of each Closing Date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to each Closing Date. The Buyer shall have received a certificate or certificates, executed on behalf of the Company by the chief executive officer of the Company, dated as of each Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, but not limited to, those matters described in Section 3(c) above, and certificates with respect to the Company's Certificate of Incorporation, By-laws and Board of Directors' resolutions relating to the transactions contemplated hereby. (vi) No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. (vii) Trading in the Common Stock on Nasdaq shall not have been suspended by the SEC or Nasdaq. 18 (viii) The Buyer shall have received opinions of the Company's counsel, dated as of each Closing Date, in form, scope and substance reasonably satisfactory to the Buyer and in substantially the same form as EXHIBIT "C-1" and EXHIBIT "C-2" attached hereto. (ix) The Company shall have obtained waivers of any preemptive rights and pari passu limitations in respect of the sale of the Preferred Shares to be issued at each Closing from the holders of shares of any other existing series of the Company's preferred stock. (b) With respect to the Second Closing: (i) The Series II Certificate of Designation shall have been accepted for filing with the Secretary of State of the State of Michigan, and a copy thereof certified by such Secretary of State shall have been delivered to such Buyer. (ii) At any time on or after the 90th day following the Closing Date in respect of the First Closing, the Closing Bid Price of the Common Stock is greater than $6.00 for any twenty (20) consecutive Trading Days and the Company provides notice to the Buyers to that effect. (iii) The Closing Bid Price (as defined in the Certificate of Designation) of the Common Stock on the Trading Day (as defined in the Certificate of Designation) immediately preceding the Closing Date with respect to the Second Closing is greater than $6.00. (iv) Ninety (90) days shall have elapsed since the Closing Date with respect to the First Closing and no more than one (1) year shall have elapsed since the Closing Date with respect to the First Closing. (v) The registration statement(s) filed by the Company pursuant to Section 2(a) of the Registration Rights Agreement covering the resale of the Registrable Securities (as defined in the Registration Rights Agreement) underlying the Preferred Shares issued or issuable at the First Closing and the Second Closing and shall be effective and no stop order shall have been issued in respect thereof. (vi) If Section 4(e) is not then in effect, the Company shall not, prior to the Closing Date with respect to the Second Closing, have obtained any equity financing (including debt financing with an equity component) that would otherwise be covered by Section 4(e) had such section been in effect. 8. GOVERNING LAW; MISCELLANEOUS. ---------------------------- (a) Governing Law. This Agreement shall be governed by and ------------- interpreted in accordance with the laws of the State of Michigan without regard to the principles of conflict of laws. The parties hereto hereby submit to the exclusive jurisdiction of the United States Federal Courts located in Delaware with respect to any dispute arising under this Agreement, the 19 agreements entered into in connection herewith or the transactions contemplated hereby or thereby. (b) Counterparts; Signatures by Facsimile. This Agreement may be ------------------------------------- executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (c) Headings. The headings of this Agreement are for convenience of -------- reference and shall not form part of, or affect the interpretation of, this Agreement. (d) Severability. If any provision of this Agreement shall be invalid or ------------ unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (e) Entire Agreement; Amendments. This Agreement and the instruments ---------------------------- referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. (f) Notices. Any notices required or permitted to be given under the ------- terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular U.S. mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Aastrom Biosciences, Inc. 24 Frank Lloyd Wright Drive P.O. Box 376 Ann Arbor, Michigan 48106 Attention: R. Douglas Armstrong President & Chief Executive Officer Facsimile: (734) 930-5546 20 With copy to: Gray Cary Ware & Freidenrich LLP 4365 Executive Drive, Suite 1600 San Diego, CA 92121-2189 Attention: Douglas J. Rein, Esq. Facsimile: (619) 677-1477 If to a Buyer: To the address set forth immediately below such Buyer's name on the signature pages hereto. Each party shall provide notice to the other party of any change in address. (g) Successors and Assigns. This Agreement shall be binding ---------------------- upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor any Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its rights hereunder to any person that purchases Securities in a private transaction from a Buyer or to any of its "affiliates," as that term is defined under the 1934 Act, without the consent of the Company. (h) Third Party Beneficiaries. This Agreement is intended for ------------------------- the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. (i) Survival. The representations and warranties of the -------- Company and the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive each Closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of the Buyers. (j) Publicity. The Company and each of the Buyers shall have --------- the right to review a reasonable period of time before issuance of any press releases, SEC, Nasdaq or NASD filings, or any other public statements with respect to the transactions contemplated hereby; provided, however, that the -------- ------- Company shall be entitled, without the prior approval of each of the Buyers, to make any press release or SEC, Nasdaq or NASD filings with respect to such transactions as is required by applicable law and regulations (although each of the Buyers shall be consulted by the Company in connection with any such press release prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon). (k) Further Assurances. Each party shall do and perform, or ------------------ cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 21 (l) No Strict Construction. The language used in this Agreement ---------------------- will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 22 IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this Agreement to be duly executed as of the date first above written. AASTROM BIOSCIENCES, INC. By: _____________________________________________ R. Douglas Armstrong, Ph.D. President & Chief Executive Officer RGC INTERNATIONAL INVESTORS, LDC By: _____________________________________________ Rose Glen Capital Management, L.P., Investment Manager By: _____________________________________________ RGC General Partner Corp., as General Partner By: _____________________________________________ Wayne D. Bloch Managing Director RESIDENCE: Cayman Islands ADDRESS: c/o Rose Glen Capital Management, L.P. 3 Bala Plaza East, Suite 200 251 St. Asaphs Road Bala Cynwyd, PA 19004 Facsimile: (610) 617-0570 Telephone: (610) 617-5900 23 AGGREGATE SUBSCRIPTION AMOUNT: First Closing - ------------- Number of Shares of Series I Preferred Stock:5,000 Aggregate Purchase Price:$5,000,000 Second Closing - -------------- Number of Shares of Series II Preferred Stock:3,000 Aggregate Purchase Price:$3,000,000 24 EXHIBIT D NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the 1998 Series I Preferred Stock) The undersigned hereby irrevocably elects to convert ______ shares of 1998 Series I Preferred Stock, represented by stock certificate No(s). __________ (the "PREFERRED STOCK CERTIFICATES") into shares of common stock ("COMMON STOCK") of Aastrom Biosciences, Inc. (the "CORPORATION") according to the conditions of the Certificate of Designation of 1998 Series I Preferred Stock, as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof). The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the 1998 Series I Preferred Stock shall be made pursuant to registration of the securities under the Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from registration under the Act and that it is in compliance with covenants set forth in Section 4(m) of the Securities Purchase Agreement. Date of Conversion:____________________________ Applicable Conversion Price:___________________ Market Price Days:_____________________________ Number of Shares of Common Stock to be Issued:_____________________ Signature:____________________________________ Name:_________________________________________ Address:______________________________________ * The Corporation is not required to issue shares of Common Stock until the original 1998 Series I Preferred Stock Certificate(s) (or evidence of loss, theft or destruction thereof) to be converted are received by the Corporation or its Transfer Agent. The Corporation shall issue and deliver shares of Common Stock to an overnight courier not later than two (2) business days following receipt of the original Preferred Stock Certificate(s) to be converted, and shall make payments pursuant to the Certificate of Designation for the number of business days such issuance and delivery is late. 25
EXHIBIT 4.2 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of July 2, 1998, by and among Aastrom Biosciences, Inc., a Michigan corporation, with its headquarters located at 24 Frank Lloyd Wright Drive, Ann Arbor, Michigan 48106 (the "COMPANY"), and each of the undersigned (together with their respective affiliates and any assignee or transferee of all of their respective rights hereunder, the "INITIAL INVESTORS"). WHEREAS: A. In connection with the Securities Purchase Agreement by and among the parties hereto of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the Company has agreed, upon the terms and subject to the conditions contained therein, to issue and sell to the Initial Investors shares of its 1998 Series I Convertible Preferred Stock (the "SERIES I PREFERRED STOCK") and 1998 Series II Preferred Stock (the "SERIES II PREFERRED STOCK" and, collectively with the Series I Preferred Stock, the "PREFERRED STOCK") that are convertible into shares (the "CONVERSION SHARES") of the Company's common stock, no par value (the "COMMON STOCK"), upon the terms and subject to the limitations and conditions set forth in the Certificate of Designations, Rights, Preferences, Privileges and Restrictions with respect to the Series I Preferred Stock (the "SERIES I CERTIFICATE OF DESIGNATION") and the Certificate of Designations, Rights, Preferences, Privileges and Restrictions with respect to the Series II Preferred Stock (the "SERIES II CERTIFICATE OF DESIGNATION" and, collectively with the Series I Certificate of Designation, the "CERTIFICATE OF DESIGNATIONS"); and B. To induce the Initial Investors to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 ACT"), and applicable state securities laws; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Initial Investors hereby agree as follows: 1. DEFINITIONS. ----------- (a) As used in this Agreement, the following terms shall have the following meanings: (i) "INVESTORS" means the Initial Investors and any transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof. (ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("RULE 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC"). (iii) "REGISTRABLE SECURITIES" means the Conversion Shares (including any shares issued pursuant to Articles V, VII.E(b) and VII.F of the Certificate of Designations) issued or issuable and any shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to any of the foregoing. (iv) "REGISTRATION STATEMENT" means a registration statement of the Company under the 1933 Act. (b) Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement. 2. REGISTRATION. ------------ (a) Mandatory Registration. The Company shall prepare, and, on or prior ---------------------- to the date which is twenty (20) business days after the Date of the First Closing under the Securities Purchase Agreement (the "CLOSING DATE"), file with the SEC a Registration Statement on Form S-3 (or, if Form S-3 is not then available, on such form of Registration Statement as is then available to effect a registration of the Registrable Securities, subject to the consent of the Initial Investors, which consent will not be unreasonably withheld) covering the resale of the Registrable Securities underlying the Preferred Stock issued or issuable at the First Closing and the Second Closing pursuant to the Securities Purchase Agreement, which Registration Statement, to the extent allowable under the 1933 Act and the rules promulgated thereunder (including Rule 416), shall state that such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Stock (i) to prevent dilution resulting from stock splits, stock dividends or similar transactions or (ii) by reason of changes in the Conversion Price of the Preferred Stock in accordance with the terms thereof. The number of shares of Common Stock initially included in such Registration Statement shall be no less than one and one-half (1 1/2) times the sum of the number of Conversion Shares that are then issuable upon conversion of the Preferred Stock, without regard to any limitation on the Investor's ability to convert the Preferred Stock. The Company acknowledges that the number of shares initially included in the Registration Statement represents a good faith estimate of the maximum number of shares issuable upon conversion of the Preferred Stock. (b) Underwritten Offering. If any offering pursuant to a Registration --------------------- Statement pursuant to Section 2(a) hereof involves an underwritten offering, the Investors who hold a majority in interest of the Registrable Securities subject to such underwritten offering, with the consent of a majority-in-interest of the Initial Investors, shall have the right to select one legal counsel and an investment banker or bankers and manager or managers to administer the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Company. -2- (c) Payments by the Company. The Company shall use its best efforts to ----------------------- obtain effectiveness of the Registration Statement as soon as practicable. If (i) the Registration Statement(s) covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not declared effective by the SEC within one hundred twenty (120) days after the Closing Date with respect to the First Closing or if, after the Registration Statement has been declared effective by the SEC, sales cannot be made pursuant to the Registration Statement, or (ii) the Common Stock is not listed or included for quotation on the Nasdaq National Market ("NASDAQ"), the Nasdaq SmallCap Market ("NASDAQ SMALLCAP"), the New York Stock Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") after being so listed or included for quotation, then the Company will make payments to the Investors in such amounts and at such times as shall be determined pursuant to this Section 2(c) as partial relief for the damages to the Investors by reason of any such delay in or reduction of their ability to sell the Registrable Securities (which remedy shall not be exclusive of any other remedies available at law or in equity). Without limiting the generality of the preceding sentence, the Company shall, at its election, by providing the Investors with written notice of such election within two (2) business days following the first day of any such delay in or reduction of their ability to sell the Registrable Securities, either: (1) pay to each holder of the Preferred Stock or Registerable Securities an amount equal to the then outstanding principal amount of the Preferred Stock (and, in the case of holders of Registerable Securities, the principal amount of Preferred Stock from which such Registerable Securities were converted) ("AGGREGATE SHARE PRICE") multiplied by two hundredths (.02) times the sum of: (i) the number of months (prorated for partial months) after the end of such 120-day period and prior to the date the Registration Statement is declared effective by the SEC, provided, however, that there shall be excluded from such period any delays which are solely attributable to changes required by the Investors in the Registration Statement with respect to information relating to the Investors, including, without limitation, changes to the plan of distribution, or to the failure of the Investors to conduct their review of the Registration Statement pursuant to Section 3(h) below in a reasonably prompt manner; (ii) the number of months (prorated for partial months) that sales cannot be made pursuant to the Registration Statement after the Registration Statement has been declared effective (including, without limitation, when sales cannot be made by reason of the Company's failure to properly supplement or amend the prospectus included therein in accordance with the terms of this Agreement , but excluding any days during an Allowed Delay (as defined in Section 3(f)); and (iii) the number of months (prorated for partial months) that the Common Stock is not listed or included for quotation on the Nasdaq, Nasdaq SmallCap, NYSE or AMEX or that trading thereon is halted after the Registration Statement has been declared effective. (For example, if the Registration Statement becomes effective one (1) month after the end of such 120-day period, the Company would pay $20,000 for each $1,000,000 of Aggregate -3- Share Price. If thereafter, sales could not be made pursuant to the Registration Statement for an additional period of one (1) month, the Company would pay an additional $20,000 for each $1,000,000 of Aggregate Share Price.) Such amounts shall be paid in cash within five (5) days after the end of each period that gives rise to such obligation, provided that, if any such period extends for more than thirty (30) days, interim payments shall be made for each such thirty (30) day period; or (2) increase the AApplicable Premium@ (as defined in Article IV.C of the Certificate of Designations) to an amount equal to fifteen percent (15%) per annum of the Stated Value (as defined in the Certificate of Designations) for: (i) the period beginning on the end of such 120-day period and ending on the date the Registration Statement is declared effective by the SEC, provided, however, that there shall be excluded from such period any delays which are solely attributable to changes required by the Investors in the Registration Statement with respect to information relating to the Investors, including, without limitation, changes to the plan of distribution, or to the failure of the Investors to conduct their review of the Registration Statement pursuant to Section 3(h) below in a reasonably prompt manner; (ii) each period during which sales cannot be made pursuant to the Registration Statement after the Registration Statement has been declared effective (including, without limitation, when sales cannot be made by reason of the Company's failure to properly supplement or amend the prospectus included therein in accordance with the terms of this Agreement, but excluding any days during an Allowed Delay (as defined in Section 3(f)); and (iii) each period during which the Common Stock is not listed or included for quotation on the Nasdaq, Nasdaq SmallCap, NYSE or AMEX or that trading thereon is halted after the Registration Statement has been declared effective. (d) Piggy-Back Registrations. Subject to the last sentence of this ------------------------ Section 2(d), if at any time prior to the expiration of the Registration Period (as hereinafter defined) the Company shall file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the 1933 Act of any of its equity securities (other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans), the Company shall send to each Investor who is entitled to registration rights under this Section 2(d) written notice of such determination and, if within fifteen (15) days after the effective date of such notice, such Investor shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registrable Securities such Investor requests to be registered, except that if, in connection with any underwritten public offering for the account of the Company the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement because, in such underwriter(s)' judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which such Investor has requested inclusion hereunder as the underwriter shall permit. Any exclusion of Registrable Securities shall be made pro rata among the Investors seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Investors; provided, however, -------- ------- -4- that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities; and provided, further, however, that, after giving effect to -------- ------- ------- the immediately preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in the Registration Statement other than holders of securities entitled to inclusion of their securities in such Registration Statement by reason of demand registration rights. No right to registration of Registrable Securities under this Section 2(d) shall be construed to limit any registration required under Section 2(a) hereof. If an offering in connection with which an Investor is entitled to registration under this Section 2(d) is an underwritten offering, then each Investor whose Registrable Securities are included in such Registration Statement shall, unless otherwise agreed by the Company, offer and sell such Registrable Securities in an underwritten offering using the same underwriter or underwriters and, subject to the provisions of this Agreement, on the same terms and conditions as other shares of Common Stock included in such underwritten offering. Notwithstanding anything to the contrary set forth herein, the registration rights of the Investors pursuant to this Section 2(d) shall only be available in the event the Company fails to timely file, obtain effectiveness or maintain effectiveness of the Registration Statement to be filed pursuant to Section 2(a) in accordance with the terms of this Agreement. (e) Eligibility for Form S-3. The Company represents and warrants that ------------------------ it meets the registrant eligibility and transaction requirements for the use of Form S-3 for registration of the sale by the Initial Investors and any other Investors of the Registrable Securities and the Company shall file all reports required to be filed by the Company with the SEC in a timely manner so as to maintain such eligibility for the use of Form S-3. 3. OBLIGATIONS OF THE COMPANY. -------------------------- In connection with the registration of the Registrable Securities, the Company shall have the following obligations: (a) The Company shall prepare promptly, and file with the SEC not later than twenty (20) business days after the Closing Date, a Registration Statement with respect to the number of Registrable Securities provided in Section 2(a), and thereafter use its best efforts to cause such Registration Statement relating to Registrable Securities to become effective as soon as possible after such filing, and keep the Registration Statement effective pursuant to Rule 415 at all times until such date as is the earlier of (i) the date on which all of the Registrable Securities have been sold and (ii) the date on which the Registrable Securities (in the opinion of counsel to the Company, reasonably satisfactory in form and substance to the Initial Investors) may be immediately sold without restriction (including without limitation as to volume by each holder thereof) without registration under the 1933 Act (the "REGISTRATION PERIOD"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein not misleading. -5- (b) The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement. In the event the number of shares available under a Registration Statement filed pursuant to this Agreement is insufficient to cover all of the Registrable Securities issued or issuable upon conversion of the Preferred Stock, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefore, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within twenty (20) business days after the necessity therefor arises (based on the market price of the Common Stock and other relevant factors on which the Company reasonably elects to rely). The Company shall use its best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. The provisions of Section 2(c) above shall be applicable with respect to such obligation, with the one hundred twenty (120) days running from the day after the date on which the Company reasonably first determines (or reasonably should have determined) the need therefor. (c) The Company shall furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one copy of the Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto, and, in the case of the Registration Statement referred to in Section 2(a), each letter written by or on behalf of the Company to the SEC or the staff of the SEC, and each item of correspondence from the SEC or the staff of the SEC, in each case relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment), and (ii) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor. The Company will immediately notify each Investor by facsimile of the effectiveness of the Registration Statement or any post- effective amendment. The Company will promptly respond to any and all comments received from the SEC, with a view towards causing any Registration Statement or any amendment thereto to be declared effective by the SEC as soon as practicable and shall promptly file an acceleration request as soon as practicable following the resolution or clearance of all SEC comments or, if applicable, following notification by the SEC that the Registration Statement or any amendment thereto will not be subject to review. (d) The Company shall use reasonable efforts, to the extent required, to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investors who hold a majority in interest of the Registrable Securities being offered reasonably request, -6- (ii) prepare and file in those jurisdictions such amendments (including post- effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection - -------- ------- therewith or as a condition thereto to (a) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (b) subject itself to general taxation in any such jurisdiction, (c) file a general consent to service of process in any such jurisdiction, (d) provide any undertakings that cause the Company undue expense or burden, or (e) make any change in its charter or bylaws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders. (e) In the event Investors who hold a majority-in-interest of the Registrable Securities being offered in the offering (with the approval of a majority-in-interest of the Initial Investors) select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering. (f) As promptly as practicable after becoming aware of such event, the Company shall notify each Investor of the happening of any event, of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and deliver such number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; provided that, for not more than twenty (20) consecutive trading days (or a total of not more than forty (40) trading days in any twelve (12) month period), the Company may delay the disclosure of material non-public information concerning the Company (as well as prospectus or Registration Statement updating) the disclosure of which at the time is not, in the good faith opinion of the Company, the best interests of the Company (an "ALLOWED DELAY"); provided, further, that the Company shall promptly (i) notify the Investors in writing of the existence of (but in no event, without the prior written consent of an Investor, shall the Company disclose to such investor any of the facts or circumstances regarding) material non-public information giving rise to an Allowed Delay and (ii) advise the Investors in writing to cease all sales under the Registration Statement until the end of the Allowed Delay. Upon expiration of the Allowed Delay, the Company shall again be bound by the first sentence of this Section 3(f) with respect to the information giving rise thereto. (g) The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, and, if such an order is issued, to obtain the withdrawal of such order at the earliest possible moment and to notify each -7- Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof. (h) The Company shall permit a single firm of counsel designated by the Initial Investors to review the Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration of effectiveness thereof) a reasonable period of time prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects and will not request acceleration of the Registration Statement without prior notice to such counsel. The sections of the Registration Statement covering information with respect to the Investors, the Investor's beneficial ownership of securities of the Company or the Investors intended method of disposition of Registrable Securities shall conform to the information provided to the Company by each of the Investors. (i) The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. (j) At the request of any Investor, the Company shall furnish, on the date that Registrable Securities are delivered to an underwriter, if any, for sale in connection with the Registration Statement (i) an opinion, dated as of such date, from counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the underwriters, if any, and the Investors and (ii) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and the Investors. (k) The Company shall make available for inspection by (i) any Investor, (ii) any underwriter participating in any disposition pursuant to the Registration Statement, (iii) one firm of attorneys and one firm of accountants or other agents retained by the Initial Investors, (iv) one firm of attorneys and one firm of accountants or other agents retained by all other Investors, and (v) one firm of attorneys retained by all such underwriters (collectively, the "INSPECTORS") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "RECORDS"), as shall be reasonably deemed necessary by each Inspector to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that -------- ------- each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (b) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction, or (c) the information in such Records has -8- been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Company) with the Company with respect thereto, substantially in the form of this Section 3(k). Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investor's ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations. (l) The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor prior to making such disclosure, and allow the Investor, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. (m) The Company shall (i) cause all the Registrable Securities covered by the Registration Statement to be listed on each national securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure the designation and quotation, of all the Registrable Securities covered by the Registration Statement on the Nasdaq or, if not eligible for the Nasdaq on the Nasdaq SmallCap and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities. (n) The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement. (o) The Company shall cooperate with the Investors who hold Registrable Securities being offered and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or the Investors may reasonably request and registered in such names as the managing -9- underwriter or underwriters, if any, or the Investors may reasonably request, and, within three (3) business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an instruction in the form attached hereto as EXHIBIT 1 and an opinion of such counsel in the form attached hereto as EXHIBIT 2. (p) At the request of the holders of a majority-in-interest of the Registrable Securities, the Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary in order to change the plan of distribution set forth in such Registration Statement. (q) From and after the date of this Agreement, the Company shall not, and shall not agree to, allow the holders of any securities of the Company to include any of their securities in any Registration Statement under Section 2(a) hereof or any amendment or supplement thereto under Section 3(b) hereof without the consent of the holders of a majority-in-interest of the Registrable Securities. (r) The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities following their transfer pursuant to the Registration Statement. 4. OBLIGATIONS OF THE INVESTORS. ---------------------------- In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least three (3) business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor. (b) Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder. (c) In the event Investors holding a majority-in-interest of the Registrable Securities being registered (with the approval of the Initial Investors) determine to engage the -10- services of an underwriter, each Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement. (d) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. (e) No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by the Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and any expenses in excess of those payable by the Company pursuant to Section 5 below. (f) The underwriters in connection with any firm commitment public offering of the Company's common stock resulting in gross proceeds of at least $20,000,000 led by at least one of the underwriters listed on SCHEDULE 4(F) attached hereto and made a part hereof, shall have the right to require that the Investors enter into an agreement restricting the Investors from selling Common Shares pursuant to the Registration Statement held by such Investors in any public sale for a period not to exceed ninety (90) days following the closing of such underwriting, if they deem this to be reasonably necessary to effect such underwritten public offering; provided that all executive officers and directors shall have also agreed to identical (or more restrictive) restrictions. The Investors shall be subject to no more than one such restriction during the Registration Period. 5. EXPENSES OF REGISTRATION. ------------------------ All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and subject to Section 4(f) of the Purchase Agreement, the reasonable fees and disbursements of one counsel -11- selected by the Initial Investors pursuant to Sections 2(b) and 3(h) hereof shall be borne by the Company. 6. INDEMNIFICATION. --------------- In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify, hold harmless and defend (i) each Investor who holds such Registrable Securities, (ii) the directors, officers, partners, employees, agents and each person who controls any Investor within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 ACT"), if any, (iii) any underwriter (as defined in the 1933 Act) for the Investors, and (iv) the directors, officers, partners, employees and each person who controls any such underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each, an "INDEMNIFIED PERSON"), against any joint or several losses, claims, damages, liabilities or expenses (collectively, together with actions, proceedings or inquiries by any regulatory or self-regulatory organization, whether commenced or threatened, in respect thereof, "CLAIMS") to which any of them may become subject insofar as such Claims arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or the omission or alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities (the matters in the foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Indemnified Person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld; and (iii) with respect to any preliminary prospectus, shall not inure to the benefit of any Indemnified Person if the untrue statement or omission of material fact contained in the preliminary prospectus was -12- corrected on a timely basis in the prospectus, as then amended or supplemented, such corrected prospectus was timely made available by the Company pursuant to Section 3(c) hereof, and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a Violation and such Indemnified Person, notwithstanding such advice, used it. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. (b) In connection with any Registration Statement in which an Investor is participating, each such Investor agrees severally and not jointly to indemnify, hold harmless and defend, to the same extent and in the same manner set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out of or is based upon any Violation by such Investor, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and subject to Section 6(c) such Investor will reimburse any legal or other expenses (promptly as such expenses are incurred and are due and payable) reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the -------- ------- indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under -------- ------- ------- this Agreement (including this Section 6(b) and Section 7) for only that amount as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. (c) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified -13- Party, as the case may be; provided, however, that an Indemnified Person or -------- ------- Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such legal counsel shall be selected by Investors holding a majority-in-interest of the Registrable Securities included in the Registration Statement to which the Claim relates (with the approval of a majority-in-interest of the Initial Investors), if the Investors are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is actually prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. CONTRIBUTION. ------------ To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (i) no -------- ------- contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution (together with any indemnification or other obligations under this Agreement) by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. -------------------------- With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the investors to sell securities of the Company to the public without registration ("RULE 144"), the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains -14- subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 4(c) of the Securities Purchase Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and (c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. --------------------------------- The rights under this Agreement shall be automatically assignable by the Investors to any transferee of all or any portion of Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein, (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement, and (vi) such transferee shall be an "ACCREDITED INVESTOR" as that term defined in Rule 501 of Regulation D promulgated under the 1933 Act. 10. AMENDMENT OF REGISTRATION RIGHTS. -------------------------------- Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with written consent of the Company, each of the Initial Investors (to the extent such Initial Investor still owns Registrable Securities) and Investors who hold a majority interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. MISCELLANEOUS. ------------- (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. -15- (b) Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular U.S. mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Aastrom Biosciences, Inc. 24 Frank Lloyd Wright Drive P.O. Box 376 Ann Arbor, Michigan 48106 Attention: R. Douglas Armstrong President & Chief Executive Officer Facsimile: 734-930-5546 With copy to: Gray Cary Ware & Freidenrich LLP 4365 Executive Drive, Suite 1600 San Diego, CA 92121-2189 Attention: Douglas J. Rein Facsimile: 619-677-1477 If to an Investor: to the address set forth immediately below such Investor's name on the signature pages to the Securities Purchase Agreement. (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of Michigan applicable to agreements made and to be performed entirely within such State. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. The parties hereto hereby submit to the exclusive jurisdiction of the United States Federal Courts located in Delaware with respect to any dispute arising under this Agreement or the transactions contemplated hereby. -16- (e) This Agreement and the Securities Purchase Agreement (including all schedules and exhibits thereto) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Securities Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. (f) Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (g) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (h) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (i) Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (j) Except as otherwise provided herein, all consents and other determinations to be made by the Investors pursuant to this Agreement shall be made by Investors holding a majority of the Registrable Securities, determined as if the all of the shares of Preferred Stock then outstanding have been converted into for Registrable Securities. (k) The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -17- IN WITNESS WHEREOF, the Company and the undersigned Initial Investors have caused this Agreement to be duly executed as of the date first above written. AASTROM BIOSCIENCES, INC. By: ______________________________________ R. Douglas Armstrong, Ph.D. President & Chief Executive Officer RGC INTERNATIONAL INVESTORS, LDC By: ______________________________________ Rose Glen Capital Management, L.P., Investment Manager By: ______________________________________ RGC General Partner Corp., as General Partner By: ______________________________________ Wayne D. Bloch Managing Director -18-