Document:

Exhibit
10.14

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”)
is made and entered into as of September 9, 2003, between Aerogen, Inc., a
Delaware corporation (the “Borrower”), and the lender identified on
the signature page hereto (the “Lender”).

 

This Agreement is made pursuant to the Loan and
Securities Purchase Agreement, dated as of the date hereof among the Borrower
and the Lender (the “Loan Agreement”).

 

The Borrower and the Lender hereby agree as follows:

 

1.                   Definitions.  Capitalized terms used and not otherwise
defined herein that are defined in the Loan Agreement shall have the meanings
given such terms in the Loan Agreement. 
As used in this Agreement, the following terms shall have the respective
meanings set forth in this Section 1:

 

“Additional Closing”
shall have the meaning set forth in the Loan Agreement.

 

“Additional Closing
Date” shall have the meaning set forth in the Loan Agreement.

 

“Additional
Registrable Securities” means the Underlying Shares issuable upon
conversion or exercise (as applicable) of the Securities issued on the
Additional Closing Date, together with any securities issued or issuable upon
any stock split, dividend or other distribution, recapitalization or similar
event, or any conversion price or exercise price adjustment with respect
thereto.

 

“Effectiveness Date”
means: (a) with respect to the initial Registration Statement required to be
filed to cover the resale by the Holders of the Initial Registrable Securities
(and if the Additional Closing Date occurs prior to the 40th day following the
Closing Date, the Additional Registrable Securities), the earlier of: (i) the
120th day following the Closing Date and (ii) the fifth Trading Day following
the date on which the Borrower is notified by the Commission that the initial
Registration Statement will not be reviewed or is no longer subject to further
review and comments, and (b) unless previously filed pursuant to the
immediately preceding subsection, with respect to a Registration Statement
required to be filed to cover the resale by the Holders of the Additional
Registrable Securities, the earlier of: (i) the 120th day following the
Additional Closing Date, (ii) the fifth Trading Day following the date on which
the Borrower is notified by the Commission that such Registration Statement
will not be reviewed or is no longer subject to further review and comments and
(c) with respect to any additional Registration Statements that may be required
pursuant to Section 2(c) hereof, the earlier of: (i) the 120th day following
the date on which the Borrower first knows, or reasonably should have known,
that such additional Registration Statement is required under such Section and
(ii) the fifth Trading Day following the date on which the Borrower is notified
by the Commission that 

 

 

such additional Registration Statement will not be reviewed or is no
longer subject to further review and comments.

 

“Effectiveness Period”
shall have the meaning set forth in Section 2(a).

 

“Filing Date”
means: (a) with respect to the initial Registration Statement required to be
filed to cover the resale by the Holders of the Initial Registrable Securities
(and if the Additional Closing Date occurs prior to the 40th day following the
Closing Date, the Additional Registrable Securities), the 45th day following
the Closing Date, (b) unless previously filed pursuant to the immediately
preceding subsection, with respect to a Registration Statement required to be
filed to cover the resale by the Holders of the Additional Registrable
Securities, the 45th day following the Additional Closing Date, and (c) with
respect to any additional Registration Statements that may be required pursuant
to Section 2(c) hereof, the 45th day following the date on which the Borrower
first knows, or reasonably should have known, that such additional Registration
Statement is required under such Section.

 

“Holder” or “Holders”
means the holder or holders, as the case may be, from time to time of
Registrable Securities.

 

“Indemnified Party”
shall have the meaning set forth in Section 5(c).

 

“Indemnifying Party”
shall have the meaning set forth in Section 5(c).

 

“Initial Registrable
Securities” means the Underlying Shares issuable upon conversion or
exercise (as applicable) of the Securities issued on the Closing Date, together
with any securities issued or issuable upon any stock split, dividend or other
distribution, recapitalization or similar event, or any conversion price or
exercise price adjustment with respect thereto.

 

“Losses” shall have
the meaning set forth in Section 5(a).

 

“Proceeding” means
an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.

 

“Prospectus” means
the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by a Registration
Statement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.

 

2

 

“Registrable
Securities” means, collectively, the Initial Registrable Securities and the
Additional Registrable Securities.

 

“Registration
Statement” means each of the following: 
(i) an initial registration statement which is required to register the
resale of the Initial Registrable Securities, (ii) if an Additional Closing
shall have occurred, an initial registration statement, which is required to
register the resale of the Additional Registrable Securities, (iii) each
additional registration statement, if any, contemplated by Section 2(c), and
(iv) including, in each case, the Prospectus, amendments and supplements to
each such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference in such registration
statement.

 

“Rule 144” means
Rule 144 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as
such Rule.

 

“Rule 415” means
Rule 415 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as
such Rule.

 

“Rule 424” means
Rule 424 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as
such Rule.

 

“Securities” shall
have the meaning set forth in the Loan Agreement.

 

“Special Counsel”
means Bryan Cave LLP.

 

“Underlying Shares”
shall have the meaning set forth in the Loan Agreement.

 

2.                   Registration.

 

(a)                       On or prior
to each Filing Date, the Borrower shall prepare and file with the Commission a
Registration Statement covering the resale of all Registrable Securities
required to be included in such Registration Statement for an offering to be made
on a continuous basis pursuant to Rule 415. 
Each Registration Statement shall be on Form S-3 (except if the Borrower
is not then eligible to register for resale the Registrable Securities on Form
S-3, in which case such registration shall be on another appropriate form in
accordance herewith) and shall contain (except if otherwise required by the
Commission or directed by the Holders of at least a majority of the Registrable
Securities) the “Plan of Distribution” attached hereto as Annex A.  The Borrower shall use its best efforts to
cause each Registration Statement to be declared effective under the Securities
Act as promptly as possible, but in any event prior to the applicable
Effectiveness Date, and shall use its best efforts to keep such Registration
Statement continuously effective under the Securities Act until the date which
is two years after

 

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the date that such Registration Statement is declared effective by the
Commission or such earlier date when all Registrable Securities covered by a
Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) as determined by the counsel to the
Borrower pursuant to a written opinion letter to such effect, addressed and
acceptable to the Borrower’s transfer agent and the affected Holders (the “Effectiveness
Period”).  Notwithstanding anything
herein to the contrary, if the Additional Closing Date shall occur on or prior
to the 45th day following the Closing Date, then the Borrower shall
include all of the Registrable Securities on the initial Registration
Statement.

 

(b)                      If: (a) a
Registration Statement is not filed on or prior to its Filing Date (if the
Borrower files a Registration Statement without affording the Holder the
opportunity to review and comment on the same as required by Section 3(a), the
Borrower shall not be deemed to have satisfied clause (a)), or (b)
notwithstanding anything herein to the contrary, after a Registration Statement
is first declared effective by the Commission, it ceases for any reason to
remain continuously effective as to all Registrable Securities for which it is
required to be effective, or the Holders are not permitted to utilize the
Prospectus therein to resell such Registrable Securities, for in any such cases
an aggregate of twenty Trading Days (which need not be consecutive Trading
Days) (any such failure or breach being referred to as an “Event,” and
for purposes of clause (a) the day after the Filing Date, or for purposes of
clause (b) the date on which such twenty Trading Day period is exceeded being
referred to as “Event Date”), then, in addition to any other rights the
Holders may have hereunder or applicable law: (x) the Borrower shall pay to
each Holder an amount in cash, as liquidated damages and not as a penalty,
equal to 1% of the aggregate purchase price paid by such Holder pursuant to the
Loan Agreement for the first 30 day period beginning on the Event Date during
which the applicable Event is not cured (or a pro rata portion of any such
partial period); and (y) if the applicable Event shall not have been cured by
the last day of such 30 day period, until the applicable Event is cured, the
Borrower shall pay to each Holder an amount in cash, as liquidated damages and
not as a penalty, equal to 2% of the aggregate purchase price paid by such
Holder pursuant to the Loan Agreement for each month anniversary thereafter (or
a pro rata portion of any such partial month). 
The period of time in which the Borrower is required to file the
Registration Statement hereunder shall be tolled to the extent of any delays
caused solely by any Holder.

 

(c)                       File one or
more additional Registration Statements if the number of Registrable Securities
issuable upon conversion or exercise (as applicable) of the Securities relating
to such Registration Statement would require the issuance of in excess of 85%
of the number of shares of Common Stock then registered in such Registration
Statement.  Such additional Registration
Statement shall cover the resale by the Holders of not less than 110% of the
number of shares required in order that all Registrable Securities issuable
upon conversion or exercise (as applicable) of the Securities relating to such
Registration Statement would then be registered.

 

3.                   Registration
Procedures

 

In connection with the Borrower’s registration
obligations hereunder:

 

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(a)                       Not less
than two Trading Days prior to the filing of a Registration Statement or any
related Prospectus or any amendment or supplement thereto, the Borrower shall
furnish to the Holders and the Special Counsel copies of all such documents
proposed to be filed which documents will be subject to the review of such
Holders and the Special Counsel. The Borrower shall not file a Registration
Statement or any such Prospectus or any amendments or supplements thereto to
which the Holders of a majority of the Registrable Securities or the Special
Counsel shall reasonably object in good faith.

 

(b)                      The Borrower
shall (i)  prepare and file with the
Commission such amendments, including post-effective amendments, to each
Registration Statement and the Prospectus used in connection therewith as may
be necessary to keep such Registration Statement continuously effective as to
the applicable Registrable Securities for its Effectiveness Period and prepare
and file with the Commission such additional Registration Statements in order
to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented by
any required Prospectus supplement, and as so supplemented or amended to be
filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible,
to any comments received from the Commission with respect to each Registration
Statement or any amendment thereto and, as promptly as reasonably possible
provide the Holders true and complete copies of all correspondence from and to
the Commission relating to such Registration Statement that would not result in
the disclosure to the Holders of material and non-public information concerning
the Borrower; and (iv) comply in all material respects with the provisions of
the Securities Act and the Exchange Act with respect to the Registration Statements
and the disposition of all Registrable Securities covered by each Registration
Statement.

 

(c)                       The
Borrower shall notify the Holders and the Special Counsel as promptly as
reasonably possible (and, in the case of (i)(A) below, not less than three Trading
Days prior to such filing) and (if requested by any such Person) confirm such
notice no later than one Trading Day following the day (i)(A) when a Prospectus
or any Prospectus supplement or post-effective amendment to a Registration
Statement is proposed to be filed; (B) when the Commission notifies the
Borrower whether there will be a “review” of such Registration Statement and
whenever the Commission comments in writing on such Registration Statement (the
Borrower shall provide true and complete copies thereof and all written
responses thereto to each of the Holders and the Special Counsel that pertain
to the Holders as a Selling Stockholder or to the Plan of Distribution, but not
information which the Borrower believes would constitute material and non-public
information); and (C) with respect to each Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to a Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of a Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) of the receipt by the Borrower of any notification with respect
to the suspension of the qualification or exemption from qualification of any
of the Registrable Securities for sale in any jurisdiction, or the initiation
or threatening of any Proceeding for such

 

5

 

purpose; and (v) of the occurrence of any event or passage of time that
makes the financial statements included in a Registration Statement ineligible
for inclusion therein or any statement made in such Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to such
Registration Statement, Prospectus or other documents so that, in the case of
such Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.

 

(d)                      The Borrower
shall use its best efforts to avoid the issuance of, or, if issued, obtain the
withdrawal of (i) any order suspending the effectiveness of a Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.

 

(e)                       The
Borrower shall furnish to each Holder, without charge, at least one conformed
copy of each Registration Statement and each amendment thereto, including
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.

 

(f)                         The
Borrower shall promptly deliver to each Holder, without charge, as many copies
of each Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request.  The Borrower hereby consents to the use of
such Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.

 

(g)                      Prior to any
public offering of Registrable Securities, the Borrower shall use its best
efforts to register or qualify or cooperate with the selling Holders in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Registrable Securities for offer and
sale under the securities or Blue Sky laws of all jurisdictions within the
United States, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all
other acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the Registration
Statements; provided, that the Borrower shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or subject the Borrower to any material tax in any such jurisdiction where it
is not then so subject.

 

(h)                      The Borrower
shall cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be delivered to
a transferee pursuant to the Registration Statements, which certificates shall
be free, to the extent permitted by the Loan Agreement, of all restrictive
legends, and to enable such Registrable

 

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Securities to be in such denominations and registered in such names as
any such Holders may request.

 

(i)                          Upon the
occurrence of any event contemplated by Section 3(c)(v), as promptly as
reasonably possible, the Borrower shall prepare a supplement or amendment,
including a post-effective amendment, to the affected Registration Statements
or a supplement to the related Prospectus or any document incorporated or
deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, no Registration Statement nor any
Prospectus will contain an 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, in light of the circumstances under which they were made,
not misleading.

 

(j)                          The
Borrower may require each selling Holder to furnish to the Borrower a certified
statement as to the number of shares of Common Stock beneficially owned by such
Holder and, if requested by the Commission, the controlling person thereof.

 

(k)                       The
Borrower has read and understands the conversion and exercise limitations
contained in the Debentures and Warrants and will not take a position in any
Registration Statement or other filing with the Commission that a Holder is the
beneficial owner of more than the percentage of Common Stock permitted to be
beneficially owned by such Holder absent an affirmative written statement by
such Holder to such effect.

 

(l)                          At any
time, upon written notice to the participating Holders and for a period not to
exceed twenty (20) Trading Days
thereafter (the “Suspension Period”), the Borrower may suspend the use
or effectiveness of any Registration Statement (and the Holders hereby agree
not to offer or sell any Registrable Securities pursuant to such Registration
Statement during the Suspension Period) if the Borrower reasonably believes
that the Borrower may, in the absence of such delay or suspension hereunder, be
required under state or federal securities laws to disclose any corporate
development the disclosure of which could reasonably be expected to have a
material adverse effect upon the Borrower, its stockholders, a potentially
significant transaction or event involving the Borrower, or any negotiations,
discussions, or proposals directly relating thereto.  In the event that the Borrower shall exercise its right to  suspend the effectiveness of a registration
hereunder, the applicable time period during which the Registration Statement
is to remain effective shall be extended by a period of time equal to the
duration of the Suspension Period.  The
Borrower may extend the Suspension Period for an additional twenty (20) Trading Days in accordance
with the provisions of this Section 3(l) with the consent of the Holders of a
majority of the Registrable Securities registered under the applicable
Registration Statement. If so directed by the Borrower, all Holders registering
shares under such Registration Statement shall use their commercially
reasonable efforts to deliver to the Borrower (at the Borrower’s expense) all
copies, other than permanent file copies then in such Holders’ possession, of
the Prospectus relating to such Registrable Securities current at the time of
receipt of such notice.

 

7

 

4.                   Registration
Expenses.  All fees and expenses
incident to the performance of or compliance with this Agreement by the
Borrower shall be borne by the Borrower whether or not any Registrable
Securities are sold pursuant to a Registration Statement.  The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with any Trading Market on which the Common
Stock is then listed for trading, and (B) in compliance with applicable state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for Registrable Securities and of
printing prospectuses if the printing of prospectuses is reasonably requested
by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Borrower and up to $5,000 of the fees
and disbursements of Special Counsel for each Registration Statement, (v)
Securities Act liability insurance, if the Borrower so desires such insurance,
and (vi) fees and expenses of all other Persons retained by the Borrower in
connection with the consummation of the transactions contemplated by this
Agreement.  In addition, the Borrower
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit and the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange as required hereunder.

 

5.                   Indemnification.

 

(a)                       Indemnification
by the Borrower.  The Borrower
shall, notwithstanding any termination of this Agreement, indemnify and hold
harmless each Holder, the officers, directors, agents, investment advisors and
employees of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, reasonable costs of preparation and reasonable attorneys’ fees) and
expenses (collectively, “Losses”), as incurred, arising out of or
relating to any untrue or alleged untrue statement of a material fact contained
in any Registration Statement, any Prospectus or any form of prospectus or in
any amendment or supplement thereto or in any preliminary prospectus, or
arising out of or relating to any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
(in the case of any Prospectus or form of prospectus or supplement thereto, in
light of the circumstances under which they were made) not misleading, except
to the extent, but only to the extent, that (1) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Borrower by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder’s proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto (it being understood that the Holder has approved Annex A
hereto for this purpose) or (2) in the case of an occurrence of an event of the
type specified in

 

8

 

Section 3(c)(ii)-(v), the use by such Holder of an outdated or
defective Prospectus after the Borrower has notified such Holder in writing
that the Prospectus is outdated or defective and prior to the receipt by such
Holder of an Advice or an amended or supplemented Prospectus, but only if and
to the extent that following the receipt of the Advice or the amended or
supplemented Prospectus the misstatement or omission giving rise to such Loss
would have been corrected.  The Borrower
shall notify the Holders promptly of the institution, threat or assertion of
any Proceeding of which the Borrower is aware in connection with the
transactions contemplated by this Agreement.

 

(b)                      Indemnification
by Holders. Each Holder shall, severally and not jointly, indemnify and
hold harmless the Borrower, its directors, officers, agents and employees, each
Person who controls the Borrower (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act), and the directors,
officers, agents or employees of such controlling Persons, to the fullest
extent permitted by applicable law, from and against all Losses, as incurred,
arising solely out of or based solely upon: (x) such Holder’s failure to comply
with the prospectus delivery requirements of the Securities Act or (y) any
untrue statement of a material fact contained in any Registration Statement,
any Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent that, (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Borrower by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder’s proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement (it being understood that the Holder has approved
Annex A hereto for this purpose), such Prospectus or such form of Prospectus or
in any amendment or supplement thereto or (2) in the case of an occurrence of
an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder
of an outdated or defective Prospectus after the Borrower has notified such
Holder in writing that the Prospectus is outdated or  defective and prior to the receipt by such Holder of an Advice or
an amended or supplemented Prospectus, but only if and to the extent that
following the receipt of the Advice or the amended or supplemented Prospectus
the misstatement or omission giving rise to such Loss would have been
corrected.  In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.

 

(c)                       Conduct
of Indemnification Proceedings. If any Proceeding shall be brought or
asserted against any Person entitled to indemnity hereunder (an “Indemnified
Party”), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the “Indemnifying Party”) in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment
of counsel reasonably satisfactory to the Indemnified Party and the payment of
all fees and expenses incurred in connection with defense thereof; provided,
that the failure of any Indemnified Party to give such notice shall not relieve
the Indemnifying Party of its obligations or liabilities pursuant to this
Agreement, except (and only)

 

9

 

to the extent that it shall be finally determined by a court of
competent jurisdiction (which determination is not subject to appeal or further
review) that such failure shall have proximately and materially adversely
prejudiced the Indemnifying Party.

 

An Indemnified Party shall have the right to employ
separate counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party or Parties unless: 
(1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to
such Indemnified Party in any such Proceeding; or (3) the named parties to any
such Proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party, and such Indemnified Party shall have been
advised by counsel that a conflict of interest is likely to exist if the same
counsel were to represent such Indemnified Party and the Indemnifying Party (in
which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to assume
the defense thereof and such counsel shall be at the expense of the Indemnifying
Party).  The Indemnifying Party shall
not be liable for any settlement of any such Proceeding effected without its
written consent, which consent shall not be unreasonably withheld.  No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party
from all liability on claims that are the subject matter of such Proceeding.

 

All fees and expenses of the Indemnified Party
(including reasonable fees and expenses to the extent incurred in connection
with investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten Trading Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an Indemnified
Party is not entitled to indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).

 

(d)                      Contribution.  If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable
considerations.  The relative fault of
such Indemnifying Party and Indemnified Party shall be determined by reference
to, among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of
a material fact, has been taken or made by, or relates to information supplied
by, such Indemnifying Party or Indemnified Party, and the parties’ relative
intent, knowledge,

 

10

 

access to information and opportunity to correct or prevent such
action, statement or omission.  The
amount paid or payable by a party as a result of any Losses shall be deemed to
include, subject to the limitations set forth in Section 5(c), any reasonable
attorneys’ or other reasonable fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.

 

The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph.  Notwithstanding the
provisions of this Section 5(d), no Holder shall be required to contribute, in
the aggregate, any amount in excess of the amount by which the proceeds
actually received by such Holder from the sale of the Registrable Securities
subject to the Proceeding exceeds the amount of any damages that such Holder
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.

 

The indemnity and contribution agreements contained in
this Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties.

 

6.                   Miscellaneous

 

(a)                       Remedies.  In the event of a breach by the Borrower or
by a Holder, of any of their obligations under this Agreement, each Holder or
the Borrower, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this
Agreement.  The Borrower and each Holder
agree that monetary damages would not provide adequate compensation for any
losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.

 

(b)                      No
Piggyback on Registrations.  Other
than (i) securities to be issued to the Borrower’s landlord in connection the
restructuring of its lease, and (ii) pursuant to the exercise of existing
registration rights by certain stockholders of the Borrower as specified in Schedule
3.1(g) of the Loan Agreement, neither the Borrower nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Borrower in a Registration Statement other than the
Registrable Securities, and the Borrower shall not after the date hereof enter
into any agreement providing any such right to any of its security
holders.  Except as and to the extent
specified in Schedule 3.1(g) of the Loan Agreement, the Borrower has not
previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person which have not been fully
satisfied.

 

11

 

(c)                       Compliance.  Each Holder covenants and agrees that it
will comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.

 

(d)                      Discontinued
Disposition.  Each Holder agrees by
its acquisition of such Registrable Securities that, upon receipt of a notice
from the Borrower of the occurrence of any event of the kind described in
Section 3(c), such Holder will forthwith discontinue disposition of such
Registrable Securities under the Registration Statement until such Holder’s
receipt of the copies of the supplemented Prospectus and/or amended
Registration Statement or until it is advised in writing (the “Advice”)
by the Borrower that the use of the applicable Prospectus may be resumed, and,
in either case, has received copies of any additional or supplemental filings
that are incorporated or deemed to be incorporated by reference in such
Prospectus or Registration Statement. 
The Borrower may provide appropriate stop orders to enforce the
provisions of this paragraph.

 

(e)                       Piggy-Back
Registrations.  If at any time
during the Effectiveness Period  there
is not an effective Registration Statement covering all of the Registrable
Securities and the Borrower shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) 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, then the Borrower shall send to each Holder written notice of
such determination and, if within fifteen days after receipt of such notice,
any such Holder shall so request in writing, the Borrower shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered, subject to customary underwriter cutbacks
applicable to all holders of registration rights.

 

(f)                         Amendments
and Waivers. The provisions of this Agreement, including the provisions of
this sentence, may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, unless the
same shall be in writing and signed by the Borrower and the Holders of all of
the then outstanding Registrable Securities. 
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of certain Holders and that does not directly or indirectly affect the
rights of other Holders may be given by Holders of at least a majority of the
Registrable Securities to which such waiver or consent relates, provided,
that the provisions of this sentence may not be amended, modified, or
supplemented except in accordance with the provisions of the immediately
preceding sentence.

 

(g)                      Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (i) the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section prior to 6:30

 

12

 

p.m. (New York
City time) on a Trading Day, (ii) the Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Agreement later than 6:30 p.m.
(New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Trading Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given.  The address for such notices and communications
shall be as follows:

 

If to the Borrower:                                              Aerogen,
Inc.

2071 Stierlin Court

Mountain View, CA 94043

Facsimile No.: (650) 864-7433

Attn: Chief Financial Officer

 

With a copy to:                                                            Cooley
Godward LLP

Five Palo Alto Square

3000 El Camino Real

Palo Alto, CA 94306 

Attn: Robert J. Brigham, Esq.

Facsimile No.:  (650) 849-7400

 

If to the Lender:                                                          To
the address set forth under the Lender’s name on the signature pages hereto.

 

If to Special Counsel:                              Bryan Cave LLP

1290 Avenue of the Americas

New York, NY 10101

Attn.: Eric L. Cohen, Esq.

Fax No.: (212) 541-1432

 

If to any other Person who is then the registered
Holder:

 

To the address of such
Holder as it appears in the stock transfer books of the Borrower

 

or such other address as may be designated in writing
hereafter, in the same manner, by such Person.

 

(h)                      Successors
and Assigns.  This Agreement shall
inure to the benefit of and be binding upon the successors and permitted
assigns of each of the parties and shall inure to the benefit of each
Holder.  The Borrower may not assign its
rights or obligations hereunder without the prior written consent of each
Holder.  Each Holder may assign their
respective rights hereunder in the manner and to the Persons as permitted under
the Loan Agreement.

 

13

 

(i)                          Execution
and Counterparts.  This Agreement
may be executed in any number of counterparts, each of which when so executed
shall be deemed to be an original and, all of which taken together shall
constitute one and the same Agreement. 
In the event that any signature is delivered by facsimile transmission,
such signature shall create a valid binding obligation of the party executing
(or on whose behalf such signature is executed) the same with the same force
and effect as if such facsimile signature were the original thereof.

 

(j)                          Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by and construed and enforced in accordance with the internal laws
of the State of New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all
Proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement (whether brought against a party
hereto or its respective Affiliates, employees or agents) shall be commenced
exclusively in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the New York Courts for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any Proceeding, any claim that it is not personally
subject to the jurisdiction of any New York Court, or that such Proceeding has
been commenced in an improper or inconvenient forum.  Each party hereto hereby irrevocably waives personal service of
process and consents to process being served in any such Proceeding by mailing
a copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.  Each party hereto hereby irrevocably waives,
to the fullest extent permitted by applicable law, any and all right to trial
by jury in any Proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.  If
either party shall commence a Proceeding to enforce any provisions of this
Agreement, then the prevailing party in such Proceeding shall be reimbursed by
the other party for its attorney’s fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such Proceeding.

 

(k)                       Cumulative
Remedies.  The remedies provided
herein are cumulative and not exclusive of any remedies provided by law.

 

(l)                          Severability.
If any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions set forth
herein shall remain in full force and effect and shall in no way be affected,
impaired or invalidated, and the parties hereto shall use their reasonable
efforts to find and employ an alternative means to achieve the same or
substantially the same result as that contemplated by such term, provision,
covenant or restriction.  It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.

 

14

 

(m)                    Headings.  The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES TO FOLLOW]

 

15

 

IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.

 

	
   

  	
  AEROGEN, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jane E. Shaw

  	
   

  
	
   

  	
  Name: Jane E. Shaw

  
	
   

  	
  Title: Chief Executive Officer

  

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE OF LENDER TO FOLLOW]

 

16

 

IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.

 

 

	
   

  	
  SF CAPITAL PARTNERS, LTD.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Brian H. Davidson

  
	
   

  	
   

  	
  Name:

  	
  Brian H. Davidson

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
  c/o Staro Asset
  Management, LLC

  
	
   

  	
  3600 South Lake Drive

  
	
   

  	
  St. Francis, Wisconsin
  53235

  
	
   

  	
  Facsimile No.:  (414) 294-7700

  
	
   

  	
  Attn.:  Brian H. Davidson

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  With a copy to:

  
	
   

  	
  Bryan Cave LLP

  
	
   

  	
  1290 Avenue of the
  Americas

  
	
   

  	
  New York, NY  10104

  
	
   

  	
  Facsimile No.: (212)
  541-4630 and (212) 541-1432

  
	
   

  	
  Attn:  Eric L. Cohen, Esq.

  

 

17

 

Annex A

 

Plan of Distribution

 

The Selling Stockholders and any of their pledgees,
donees, assignees and successors-in-interest may, from time to time, sell any
or all of their shares of Common Stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions.  These sales may be at fixed or negotiated
prices.  The Selling Stockholders will
act independently of us in making decisions regarding the timing, manner and
size of each sale. The Selling Stockholders may use any one or more of the
following methods when selling shares:

 

•                  ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;

 

•                  block trades in which the
broker-dealer will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction;

 

•                  purchases by a broker-dealer as
principal and resale by the broker-dealer for its account;

 

•                  an exchange distribution in
accordance with the rules of the applicable exchange;

 

•                  privately negotiated transactions;

 

•                  short sales;

 

•                  broker-dealers may agree with the
Selling Stockholders to sell a specified number of such shares at a stipulated
price per share;

 

•                  a combination of any such methods of
sale; and

 

•                  any other method permitted pursuant
to applicable law.

 

The Selling Stockholders may also sell shares under
Rule 144 under the Securities Act, if available, rather than under this
prospectus.

 

Broker-dealers engaged by the Selling Stockholders may
arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or
discounts from the Selling Stockholders (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated.  The Selling Stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.

 

The Selling Stockholders may from time to time pledge
or grant a security interest in some or all of the Shares or Warrant Shares
owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell shares of
Common Stock from time to time under this prospectus, or under an amendment to
this prospectus under Rule 424(b)(3) or other applicable provision of the
Securities Act of 1933

 

18

 

amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.

 

Upon the Borrower being notified in writing by a
Selling Stockholder that any material arrangement has been entered into with a
broker-dealer for the sale of Common Stock through a block trade, special
offering, exchange distribution or secondary distribution or a purchase by a
broker or dealer, a supplement to this prospectus will be filed, if required,
pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of
each such Selling Stockholder and of the participating broker-dealer(s), (ii)
the number of shares involved, (iii) the price at which such the shares of
Common Stock were sold, (iv) the commissions paid or discounts or concessions
allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information
set out or incorporated by reference in this prospectus, and (vi) other facts
material to the transaction.  In
addition, upon the Borrower being notified in writing by a Selling Stockholder
that a donee or pledge intends to sell more than 500 shares of Common Stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.

 

The Selling Stockholders also may transfer the shares
of common stock in other circumstances, in which case the transferees, pledgees
or other successors in interest will be the selling beneficial owners for
purposes of this prospectus.

 

The Selling Stockholders and any broker-dealers or
agents that are involved in selling the shares may be deemed to be
“underwriters” within the meaning of the Securities Act in connection with such
sales.  In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.  Because the
Selling Stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, the Selling Stockholders will be subject to the prospectus
delivery requirements of the Securities Act. Each Selling Stockholders has
represented and warranted to the Borrower that it does not have any agreement
or understanding, directly or indirectly, with any person to distribute the
Common Stock.

 

The Borrower is required to pay all fees and expenses
incident to the registration of the shares. 
The Borrower has agreed to indemnify the Selling Stockholders against
certain losses, claims, damages and liabilities, including liabilities under
the Securities Act.

 

19Exhibit
10.15

 

NEITHER THESE SECURITIES NOR THE SECURITIES
ISSUABLE UPON CONVERSION OF THESE SECURITIES HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE BORROWER.  THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF
THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT SECURED BY SUCH SECURITIES.

 

 

No.
1        $950,000.10

 

 

Date: September 9, 2003

 

AEROGEN, INC.

SECURED CONVERTIBLE DEBENTURE DUE DECEMBER 31, 2003

 

THIS DEBENTURE is one of a series of duly
authorized and issued debentures of Aerogen, Inc., a Delaware corporation (the
“Borrower”), designated as its
Secured Convertible Debentures due December 31, 2003, in the aggregate
principal amount of up to Nine Hundred and Fifty Thousand Dollars and Ten Cents
($950,000.10) (the “Debentures”).

 

FOR VALUE RECEIVED, the Borrower promises to
pay to the order of SF Capital Partners, Ltd. or its registered assigns (the “Holder”),
the principal sum of Nine Hundred Fifty Thousand Dollars and Ten Cents
($950,000.10), on December 31, 2003 (the “Maturity Date”), or such
earlier date as this Debenture is required or permitted to be repaid as
provided hereunder, and to pay interest to the Holder on the aggregate then
outstanding principal amount of this Debenture in accordance with the
provisions hereof. All holders of Debentures are referred to collectively, as
the “Holders.”  This Debenture is subject to the following
additional provisions:

 

 

1.                                       Definitions.  In addition to the terms defined elsewhere
in this Debenture: (a) capitalized terms that are not otherwise defined herein
have the meanings given to such terms in the Loan and Securities Purchase
Agreement, dated as of September 9, 2003, among the Borrower and the
lenders identified therein (the “Loan
Agreement”), and (b) the following terms have the meanings indicated
below:

 

“Closing Price” means, for any date, the
price determined by the first of the following clauses that applies: (a) if the
Common Stock is then listed or quoted on an Eligible Market, the closing sale
price per share of the Common Stock for such date (or the nearest preceding
date) on the primary Eligible Market or exchange on which the Common Stock is
then listed or quoted; (b) if prices for the Common Stock are then quoted on
the OTC Bulletin Board, the closing sale price per share of the Common Stock
for such date (or the nearest preceding date) so quoted; (c) if prices for the
Common Stock are then reported in the “Pink Sheets” published by the National
Quotation Bureau Incorporated (or a similar organization or agency succeeding
to its functions of reporting prices), the most recent sale price per share of
the Common Stock so reported; or (d) in all other cases, the fair market value
of a share of Common Stock as determined by an independent appraiser selected
in good faith by a majority in interest of the Lenders.

 

“Common Stock Equivalents” means any
securities of the Borrower or a subsidiary thereof which entitle the holder
thereof to acquire Common Stock at any time, including without limitation, any
debt, preferred stock, rights, options, warrants or other instrument that is at
any time convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock or other securities that entitle the holder to
receive, directly or indirectly, Common Stock.

 

“Borrower  Prepayment
Price” for any Debentures which shall be subject to prepayment
pursuant to Section 11, shall equal the sum of: (i) 110% of the principal
amount of Debentures to be prepaid, and (ii) all accrued and unpaid interest on
the principal amount of the Debentures to be prepaid.

 

“Change of Control” means the occurrence of
any of the following in one or a series of related transactions: (i) an
acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) under the Exchange Act) of more than one-half
of the voting rights or equity interests in the Borrower; (ii) a replacement of
more than one-half of the members of the Borrower’s board of directors in a
single election of directors that is not approved by those individuals who are
members of the board of directors on the date hereof (or other directors previously
approved by such individuals); (iii) a merger or consolidation of the Borrower
or any Subsidiary or a sale of all or substantially all of the assets of the
Borrower (other than any sale, transfer, license or lease of assets relating to
Borrower’s insulin inhaler product and related technology or the MIA Assets
pursuant to the MIA Term Sheet indicated in Section 6.3(f) of the Purchase
Agreement) in one or a series of related transactions, unless following such
transaction or series of transactions, the holders of the Borrower’s securities
prior to the first such transaction continue to hold at least one-half of the
voting rights and equity interests in the surviving entity or acquirer of such
assets; (iv) a recapitalization, reorganization or other transaction involving
the Borrower or any Subsidiary that constitutes or results in a 

 

2

 

transfer of more than one-half of the voting
rights or equity interests in the Borrower, unless following such transaction
or series of transactions, the holders of the Borrower’s securities prior to
the first such transaction continue to hold at least one-half of the voting
rights and equity interests in the surviving entity or acquirer of such assets;
(v) consummation of a “Rule 13e-3 transaction” as defined in Rule 13e-3 under
the Exchange Act with respect to the Borrower, or (vi) the execution by the
Borrower or its controlling shareholders of an agreement providing for or
reasonably likely to result in any of the foregoing events.

 

“Conversion Date” means the date a
Conversion Notice together with the Conversion Schedule is delivered to
the Borrower in accordance with Section 5(a).

 

“Conversion Notice” means a written notice
in the form attached hereto as Exhibit A.

 

“Conversion Price” means $0.35, subject to
adjustment from time to time pursuant to Section 12.

 

“Eligible Market” means any of the New York
Stock Exchange, the American Stock Exchange, the Nasdaq National Market or the
Nasdaq Small Cap Market.

 

“Event of Default” means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative
or governmental body):

 

(i)                           any
default in the payment (free of any claim of subordination) of principal,
interest or liquidated damages in respect of any Debentures, within five (5)
Trading Days of the date when due and payable (whether on a Conversion Date,
the Maturity Date or by acceleration or prepayment or otherwise).

 

(ii)                        the
Borrower or any Subsidiary defaults in any of its obligations under any other
debenture or any mortgage, credit agreement or other facility, indenture
agreement, factoring agreement or other instrument under which there has been
issued, or by which there has been secured or evidenced, any indebtedness for
borrowed money or money due under any long term leasing or factoring
arrangement of the Borrower or any Subsidiary in an amount exceeding $150,000,
whether such indebtedness now exists or is hereafter created, and such default
results in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise become due and payable.

 

(iii)                     the
occurrence of a Change of Control transaction.

 

(iv)                    the
incurrence by the Borrower of any debt obligation that is senior in right of
payment to the Debentures other than Permitted Indebtedness (as defined in the
Security Agreement), or otherwise secured by any of the assets, income or
properties of the Borrower, other than Permitted Liens.

 

3

 

(v)                       the
payment by the Borrower of any dividends or distributions of assets, properties
or cash to any Person that is outside of the ordinary course of the Borrower’s
business and not consistent in amount and type with prior practice as disclosed
in SEC Reports.

 

(vi)                    the
occurrence and continuance of any event of default (whether or not declared)
under any Debentures.

 

(vii)                 the
Borrower defaults in the timely performance of any obligation under the
Transaction Documents and such default continues uncured for a period of ten
Trading Days after the date on which written notice of such default is first
given to the Borrower by the Holder (it being understood that no prior notice
need be given in the case of a default that cannot reasonably be cured within
ten Trading Days).

 

(viii)              any
of the Borrower’s representations and warranties set forth in the Loan
Agreement shall be incorrect as of the Original Issue Date and result in a
Material Adverse Effect.

 

(ix)                      the
occurrence of a Bankruptcy Event (as defined in the Purchase Agreement).

 

(x)                         the
Common Stock: (i) is not listed or quoted, or is suspended from trading, on an
Eligible Market for a period of three Trading Days (which need not be
consecutive Trading Days), and (ii) is not traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices).

 

(xi)                      the
Borrower fails to deliver a stock certificate evidencing Underlying Shares to a
Holder within ten Trading Days after a Conversion Date or the conversion rights
of the Holders pursuant to the terms hereof are otherwise suspended for any
reason.

 

(xii)                   the
Borrower fails to deliver a stock certificate evidencing Warrant Shares to a
Holder within ten Trading Days after an Exercise Date (as defined in the
Warrants) or the exercise rights of the Holders pursuant to the terms thereof
are otherwise suspended for any reason.

 

(xiii)                the
Borrower fails to have available a sufficient number of authorized but unissued
and otherwise unreserved shares of Common Stock available to issue Underlying
Shares upon any conversion of Debentures hereunder or to issue Warrant Shares
upon an exercise of the Warrants.

 

(xiv)               the
Borrower fails to make any cash payment required under the Transaction Documents
(including, without limitations, as prepayment hereunder) and such failure is
not cured within five Trading Days after notice of such default is first given
to the Borrower by a Lender.

 

4

 

(xv)                  the
initial Registration Statement to be filed pursuant to the Registration Rights
Agreement shall not be declared effective by the Commission by the 60th
day following the applicable Effectiveness Date (as defined in the Registration
Rights Agreement).

 

“Original Issue Date” means the date of the
first issuance of any Debentures, regardless of the number of transfers of any
particular Debenture.

 

“Registration
Statement” shall have the meaning set forth in the Loan Agreement.

 

“Security Agreements” shall have the meaning
set forth in the Loan Agreement.

 

“Trading Day” means: (a) a day on which
the shares of Common Stock are traded on an Eligible Market, or (b) if the
shares of Common Stock are not listed on an Eligible Market, a day on which the
shares of Common Stock are traded in the over-the-counter market, as reported
by the OTC Bulletin Board, or (c) if the shares of Common Stock are not
quoted on the OTC Bulletin Board, a day on which the shares of Common Stock are
quoted in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding its
functions of reporting prices); provided, that in the event that the
shares of Common Stock are not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean a business day.

 

“Underlying Shares” means the shares of
Common Stock issuable upon conversion of the Debentures and payment of interest
thereunder.

 

2.                                       Interest.  The Borrower shall pay interest to the
Holder in cash on the aggregate unconverted and then outstanding principal
amount of this Debenture (including any interest added to such principal in
accordance with this Section 2) at the rate of 10% per annum, payable on
the Maturity Date or such earlier date as this Debenture is required or
permitted to be repaid as provided hereunder. 
Interest shall be calculated on the basis of a 360-day year and shall
accrue daily commencing on the Original Issue Date.

 

3.                                       Registration
of Debentures.  The Borrower shall
register the Debentures upon records to be maintained by the Borrower for that
purpose (the “Debenture Register”)
in the name of each record Holder thereof from time to time. The Borrower may
deem and treat the registered Holder of this Debenture as the absolute owner
hereof for the purpose of any conversion hereof or any payment of interest
hereon, and for all other purposes, absent actual notice to the contrary.

 

4.                                       Registration
of Transfers and Exchanges.  The
Borrower shall register the transfer of any portion of this Debenture in the
Debenture Register upon surrender of this Debenture to the Borrower at its
address for notice set forth herein. Upon any such registration or transfer, a
new Debenture, in substantially the form of this Debenture (any such new debenture,
a “New Debenture”), evidencing the
portion of this Debenture so transferred shall be issued to the transferee and
a New Debenture evidencing the remaining portion of this Debenture not so
transferred, if any, shall be issued to the transferring Holder. The acceptance
of the New Debenture by the transferee thereof shall be deemed the acceptance
by such transferee of all of 

 

5

 

the rights and
obligations of a holder of a Debenture. The Borrower agrees that its prior
consent is not required for the transfer of any portion of this Debenture.  This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No service charge or other
fee will be imposed in connection with any such registration of transfer or
exchange.

 

5.                                       Conversion.

 

(a)                                  At
the Option of the Holder.  All or
any portion of the principal amount of this Debenture then outstanding together
with any accrued and unpaid interest thereunder shall be convertible into
shares of Common Stock at the Conversion Price (subject to limitations set
forth in Section 5(b)), at the option of the Holder, at any time and from
time to time from and after the Original Issue Date. The Holder may effect
conversions under this Section 5(a), by delivering to the Borrower a
Conversion Notice together with a schedule in the form of Schedule 1
attached hereto (the “Conversion Schedule”).
If the Holder is converting less than all of the principal amount represented
by this Debenture, or if a conversion hereunder may not be effected in full due
to the application of Section 5(b), the Borrower shall honor such
conversion to the extent permissible hereunder and shall promptly deliver to
the Holder a Conversion Schedule indicating the principal amount which has
not been converted.

 

(b)                                 Certain
Conversion Restrictions.

 

(i)  Notwithstanding
anything to the contrary contained herein, the number of shares of Common Stock
that may be acquired by a Holder upon any conversion of Debentures (or
otherwise in respect hereof) shall be limited to the extent necessary to insure
that, following such conversion (or other issuance), the total number of shares
of Common Stock then beneficially owned by such Holder and its Affiliates and
any other Persons whose beneficial ownership of Common Stock would be
aggregated with such Holder’s for purposes of Section 13(d) of the
Exchange Act, does not exceed 9.999% of the total number of issued and outstanding
shares of Common Stock (including for such purpose the shares of Common Stock
issuable upon such conversion).  For
such purposes, beneficial ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder. This provision shall not restrict the number of shares
of Common Stock which a Holder may receive or beneficially own in order to
determine the amount of securities or other consideration that such Holder may
receive in the event of a merger, sale or other business combination or
reclassification involving the Borrower as contemplated herein.  This restriction may not be waived.

 

(ii)  Notwithstanding
anything to the contrary in this Debenture, including without limitation any
adjustments to the Conversion Price pursuant to Section 12(c) below, if
the Borrower has not previously obtained Shareholder Approval (as defined
below), then the Borrower may not issue shares of Common Stock in excess of the
Issuable Maximum upon conversions of this Debenture. The “Issuable Maximum” means a number of shares
of Common Stock equal to 2,714,286.  If
on any Conversion Date: (A) the aggregate number of shares of Common Stock that
would then be issuable upon conversion in full of all then outstanding
principal amount of Debentures would exceed the Issuable Maximum on such date,
and (B) the Borrower shall not have previously obtained the vote of
shareholders, as may be 

 

6

 

required by the applicable rules and
regulations of the Nasdaq (or any successor entity or any other Eligible Market
on which the Company’s securities then trade), applicable to approve the
issuance of shares of Common Stock in excess of the Issuable Maximum pursuant
to the terms hereof (the “Shareholder
Approval”), then, the Borrower shall issue to the Holder a number of
shares of Common Stock equal to the Issuable Maximum and, with respect to the
remainder of the principal amount of Debentures then held by the Holder for
which a conversion would result in an issuance of shares of Common Stock in
excess of the Issuable Maximum (the “Excess
Principal Amount”), the Holder shall have the right to require the
Borrower to either: (1) seek Shareholder Approval as soon as possible, but
in any event not later than the 90th day after such request, or (2) pay cash to
the Holder, in an amount equal to the then outstanding principal under this
Debenture (and accrued and unpaid interest thereon).  If a Holder shall have elected the first option pursuant to the
immediately preceding sentence and the Borrower shall have failed to obtain the
Shareholder Approval on or prior to the 90th day after such request, then
within three (3) days of such 90th day, the Borrower shall pay cash to such
Holder an amount equal to outstanding principal under this Debenture (and
accrued and unpaid interest thereon). 
The Borrower and the Holder understand and agree that shares of Common
Stock issued to and then held by the Holder as a result of conversions of Debentures
shall not be entitled to cast votes on any resolution to obtain Shareholder
Approval pursuant hereto.

 

(c)                                  Unconverted
Portion of Debentures. If on any prepayment date or in connection with
repayment of outstanding principal amount of this Debenture on the Maturity
Date, the Holder elects to convert the outstanding principal amount of this
Debenture (including any accrued and unpaid interest) to shares of Common Stock
under Section 5(a), and any portion that the Holder is unable to convert
due to Section 5(b) (the “Debenture Balance”)
shall be, at the option of the Holder, repaid
in cash at the applicable amount or exchanged for a non-secured and
non-interest bearing note in a principal amount equal to the Debenture Balance
and which shall be convertible into shares of Common Stock (the “Balance Debenture”). 
The Balance Debenture shall have a two (2) year term and a per share
conversion price equal to the Conversion Price.  The Balance Debenture shall not contain any anti-dilution or
other exercise price adjustments (other than for stock splits, dividends,
recombinations and the like) and shall otherwise be in the same form as this
Debenture.  The Balance Debenture shall
be included within the definition of “Debentures” under the Loan Agreement and
the shares of Common Stock issuable upon conversion of the Balance Debenture
shall be included within the definition of Registrable Securities (as defined
in the Registration Rights Agreement) under the Registration Rights Agreement.

 

6.                                       Mechanics
of Conversion.

 

(a)                                  The
number of Underlying Shares issuable upon any conversion hereunder shall equal
the outstanding principal amount of this Debenture to be converted, divided by
the Conversion Price on the Conversion Date, plus (if indicated in the
applicable Conversion Notice) the amount of any accrued but unpaid interest on
this Debenture through the Conversion Date, divided by the Conversion Price on
the Conversion Date.

 

(b)                                 The
Borrower shall promptly following a Conversion Date (but in no event later than
five Trading Days after such Conversion Date) issue or cause to be issued and 

 

7

 

cause to be delivered to or upon the written
order of the Holder and in such name or names as the Holder may designate a
certificate for the Underlying Shares issuable upon such conversion, free of
restrictive legends. The Holder, or any Person so designated by the Holder to
receive Underlying Shares, shall be deemed to have become holder of record of
such Underlying Shares as of the Conversion Date. The Borrower shall, upon
request of the Holder, use its best efforts to deliver Underlying Shares
hereunder electronically (via a DWAC) through the Depository Trust Corporation
or another established clearing corporation performing similar functions.

 

(c)                                  The
Holder shall not be required to deliver the original Debenture in order to
effect a partial conversion hereunder. Execution and delivery of the Conversion
Notice shall have the same effect as cancellation of the Debenture and issuance
of a New Debenture representing the remaining outstanding principal amount.
Upon surrender of this Debenture following one or more partial conversions, the
Borrower shall promptly deliver to the Holder a New Debenture representing the
remaining outstanding principal amount.

 

(d)                                 The
Borrower’s obligations to issue and deliver Underlying Shares upon conversion
of this Debenture in accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Borrower or any violation or alleged violation of law by the Holder or any
other Person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Borrower to the Holder in connection with the
issuance of such Underlying Shares.

 

(e)                                  If
by the fifth Trading Day after a Conversion Date the Borrower fails to deliver
to the Holder such Underlying Shares in such amounts and in the manner required
pursuant to Section 5, then the Holder will have the right to rescind the
Conversion Notice pertaining thereto by giving written notice to the Borrower
prior to such Holder’s receipt of such Underlying Shares.

 

(f)                                    If by the fifth
Trading Day after a Conversion Date the Borrower fails to deliver to the Holder
the required number of Underlying Shares in the manner required pursuant to
Section 5, and if after such fifth Trading Day and prior to the receipt of
such Underlying Shares, the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Underlying Shares which the Holder anticipated receiving upon
such conversion (a “Buy-In”), then
the Borrower shall: (1) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying
(A) the number of Underlying Shares that the Borrower was required to deliver
to the Holder in connection with the exercise at issue by (B) the Closing Price
at the time of the obligation giving rise to such purchase obligation and (2)
at the option of the Holder, either void the conversion at issue and reinstate
the principal amount of Debentures (plus accrued interest therein) for which
such conversion was not timely honored or deliver to the Holder the number of
shares of Common Stock that would have been issued had the Borrower timely
complied with 

 

8

 

its exercise and delivery obligations
hereunder.  The Holder shall provide the
Borrower reasonably detailed evidence or written notice indicating the amounts
payable to the Holder in respect of the Buy-In.

 

7.                                       Events
of Default.

 

(a)                                  At
any time or times following the occurrence of an Event of Default, the Holder
may elect, by notice to the Borrower (an “Event
Notice”), to require the Borrower to repurchase all or any portion
of the outstanding principal amount of this Debenture and the Warrant held by
such Holder, as indicated in the Event Notice, at a repurchase price equal to
110% of such outstanding principal amount, plus all accrued but unpaid interest
thereon through the date of payment.

 

(b)                                 Upon
the occurrence and during the continuance of any Bankruptcy Event, all
outstanding unconverted principal and accrued but unpaid interest on this
Debenture shall immediately become due and payable in full in cash (free of any
claim of subordination), without any further action by the Holder, and the
Borrower shall immediately be obligated to repurchase this Debenture pursuant
to the preceding paragraph as if the Holder had delivered an Event Notice
immediately prior to the occurrence of such Bankruptcy Event.

 

(c)                                  In
connection with any Event of Default, the Holder need not provide and the
Borrower hereby waives any presentment, demand, protest or other notice of any
kind, and the Holder may immediately and without expiration of any grace period
enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Any such declaration may be rescinded and
annulled by the Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereto.

 

8.                                       Ranking.  This Debenture ranks pari passu with all
other Debentures (as defined in the Loan Agreement) now or hereafter issued
pursuant to the Transaction Documents and is senior to all existing and
hereafter created Indebtedness of the Borrower. Other than Permitted
Indebtedness, no Indebtedness of the Borrower is senior to this Debenture in
right of payment, whether with respect of interest, damages or upon liquidation
or dissolution or otherwise. The Borrower will not, and will not permit any
Subsidiary to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any indebtedness of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom, that is senior in any respect to the
Borrower’s obligations under the Debentures, other than Permitted Indebtedness.

 

9.                                       Charges,
Taxes and Expenses.  Issuance of
certificates for Underlying Shares upon conversion of (or otherwise in respect
of) this Debenture shall be made without charge to the Holder for any issue or
transfer tax, withholding tax, transfer agent fee or other incidental tax or
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Borrower; provided, however, that the Borrower
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the registration of any certificates for Underlying Shares
or Debentures in a name other than that of 

 

9

 

the Holder.
The Holder shall be responsible for all other tax liability that may arise as a
result of holding or transferring this Debenture or receiving Underlying Shares
in respect hereof.

 

10.                                 Reservation
of Underlying Shares.  The Borrower
covenants that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued and otherwise unreserved Common Stock,
solely for the purpose of enabling it to issue Underlying Shares as required
hereunder, the number of Underlying Shares which are then issuable and
deliverable upon the conversion of (and otherwise in respect of) this entire
Debenture (taking into account the adjustments of Section 12), free from
preemptive rights or any other contingent purchase rights of persons other than
the Holder. The Borrower covenants that all Underlying Shares so issuable and
deliverable shall, upon issuance in accordance with the terms hereof, be duly
and validly authorized, issued and fully paid and nonassessable.

 

11.                                 Prepayment
at the Option of the Borrower.

 

(a)                                  At
any time following the Original Issue Date and prior to the Maturity Date, upon
delivery of a written notice to the Holder (a “Borrower
Prepayment Notice” and the date such notice is delivered by the
Borrower, the “Borrower Notice Date”),
the Borrower shall be entitled to prepay all or a portion of the principal
amount of this Debenture (including accrued and unpaid interest thereunder),
for an amount in cash equal to the Borrower Prepayment Price which shall be due
on the 10th Trading Day immediately following the Borrower Notice
Date.  The Holder may convert any
portion of the outstanding principal amount of the Debentures subject to a
Borrower Prepayment Notice prior to the date that the Borrower Prepayment Price
is due and paid in full. Once delivered, the Borrower shall not be entitled to
rescind a Borrower Prepayment Notice. 
Any payment made hereunder by the Borrower shall be applied first: to
any liquidated damages owed pursuant to any Transaction Document, second: to
accrued and unpaid interest and third: to the principal amount of Debenture
subject to prepayment hereunder.

 

(b)                                 The
Borrower Prepayment Price shall be free of any claim of subordination. If any
portion of the Borrower Prepayment Price shall not be timely paid by the
Borrower, interest shall accrue thereon at the rate of 12% per annum (or the
maximum rate permitted by applicable law, whichever is less) until the Borrower
Prepayment Price plus all such interest is paid in full, which payment shall
constitute liquidated damages and not a penalty.  In addition, if any portion of the Borrower Prepayment Price
remains unpaid after such date, the Holder subject to such prepayment may elect
by written notice to the Borrower to invalidate ab initio such Borrower Prepayment Notice with respect to
the unpaid amount, notwithstanding anything herein contained to the contrary.  If the Holder makes such an election, this
Debenture shall be reinstated with respect to such unpaid amount and the
Borrower shall no longer have any prepayment rights under this Section 10.

 

(c)                                  Any
election by the Borrower pursuant to Section 13 of the Security Agreements
to sell a portion of the Collateral (as defined in the Security Agreements) at
a price (the “Purchase Price”)
which shall be equal to or greater than the fair market value of such
Collateral (as determined in good faith by the Borrower and the Holder), shall
be preceded by the delivery to the Holder of a Borrower Prepayment Notice
indicating that a portion of the amount owning in respect of Debentures
(including accrued and unpaid interest thereon and 

 

10

 

unpaid liquidated damages) shall be subject
to prepayment pursuant to the terms and conditions of this Section at the
Borrower Prepayment Price and the Borrower shall direct that the purchaser of
such Collateral deliver the Purchaser Price to the Holder in satisfaction of
the Borrower’s obligation to deliver the Borrower Prepayment Price.  Notwithstanding anything herein to the
contrary, if, as a potential result of a sale of Collateral pursuant to the
immediately preceding sentence, there shall remain an amount owning in respect
of Debentures (including accrued and unpaid interest thereon and unpaid
liquidated damages), then the Borrower shall deliver a Borrower Prepayment
Notice pursuant to which it shall pay a Borrower Prepayment Price equal to no
less than 50% of the Purchase Price.

 

12.                                 Certain
Adjustments.  The Conversion Price
is subject to adjustment from time to time as set forth in this
Section 12.

 

(a)                                  Stock
Dividends and Splits.  If the
Borrower, at any time while this Debenture is outstanding: (i) pays a stock
dividend on its Common Stock or otherwise makes a distribution on any class of
capital stock that is payable in shares of Common Stock, (ii) subdivides
outstanding shares of Common Stock into a larger number of shares, or (iii)
combines outstanding shares of Common Stock into a smaller number of shares,
then in each such case the Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock
outstanding immediately before such event and of which the denominator shall be
the number of shares of Common Stock outstanding immediately after such
event.  Any adjustment made pursuant to
clause (i) of this paragraph shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution, and any adjustment pursuant to clause (ii) or (iii)
of this paragraph shall become effective immediately after the effective date
of such subdivision or combination.

 

(b)                                 Fundamental
Transactions.  Subject to the
provisions of this paragraph, if, at any time while this Debenture is
outstanding, (i) the Borrower effects any merger or consolidation of the
Borrower with or into another Person, (ii) the Borrower effects any sale of all
or substantially all of its assets in one or a series of related transactions,
(iii) any tender offer or exchange offer (whether by the Borrower or another
Person) is completed pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or property, or (iv)
the Borrower effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which all of the Common Stock is effectively
converted into or exchanged for other securities, cash or property (other than
as a result of a subdivision or combination of shares of Common Stock covered
by Section 12(a) above) (in any such case, a “Fundamental Transaction”), then upon any subsequent conversion
of this Debenture, the Holder shall have the right to receive, for each
Underlying Share that would have been issuable upon such conversion absent such
Fundamental Transaction, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the Borrower
shall apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of
the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental 

 

11

 

Transaction, then the Holder shall be given
the same choice as to the Alternate Consideration it receives upon any
conversion of this Debenture following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any successor to the
Borrower or surviving entity in such Fundamental Transaction (or, if different,
the ultimate parent of such successor or entity or the entity issuing the
Alternate Consideration) shall issue to the Holder a new debenture consistent
with the foregoing provisions and evidencing the Holder’s right to convert such
debenture into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this
paragraph (c) and insuring that this Debenture (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction.

 

(c)                                  Subsequent
Equity Sales.

 

(i)                  If the Borrower
or any subsidiary thereof, as applicable, at any time while this Debenture is
outstanding, shall issue shares of Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock, at a price per share
(the “Effective Price”) less than
the Conversion Price (if the holder of the Common Stock or Common Stock
Equivalent so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights issued in connection with
such issuance, be entitled to receive shares of Common Stock at a price less
than the Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price), then, at the option of the Holder for such
conversions as it shall indicate, the Conversion Price shall be adjusted to
mirror the conversion, exchange or purchase price for such Common Stock or
Common Stock Equivalents (including any reset provisions thereof) at
issue.  Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued.  The Borrower shall notify the Holder in
writing, no later than the Trading Day following the issuance of any Common
Stock or Common Stock Equivalent subject to this section, indicating therein
the applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms. 
No further adjustments shall be made to the Conversion Price upon the
actual issuance of Common Stock upon conversion or exercise of the applicable
Common Stock Equivalent.

 

(ii)               If, at any time
while this Debenture is outstanding, the Borrower or any Subsidiary issues
Common Stock Equivalents with an Effective Price or a number of underlying
shares that floats or resets or otherwise varies or is subject to adjustment
based (directly or indirectly) on market prices of the Common Stock (a “Floating Price Security”), then for purposes of applying the
preceding paragraph in connection with any subsequent conversion, the Effective
Price will be determined separately on each Conversion Date and will be deemed
to equal the lowest Effective Price at which any holder of such Floating Price
Security is entitled to acquire Common Stock, whether prior, on or after such
Conversion Date (regardless of whether any such holder actually acquires any
shares on such date).

 

(iii)            Notwithstanding the
foregoing, no adjustment will be made under this paragraph (d) in respect of:
(A) the issuance of securities upon the exercise or conversion of any Common
Stock Equivalents issued by the Borrower prior to the date of this 

 

12

 

Agreement (but will apply to any amendments,
modifications and reissuances thereof), (B) the grant of options or warrants,
or the issuance of additional securities, under any duly authorized Borrower
stock option, restricted stock plan or stock purchase plan, including any
amendments or other modifications thereto, (C) the issuance of Common Stock in
connection with a restructuring of the Borrower’s lease for its principal
business office in Mountain View, CA, 
(D) the issuance of Common Stock or Common Stock Equivalents pursuant to
a Strategic Transaction, or (E) the issuance of any Common Stock or Common
Stock Equivalents in the Additional Closing or any other such issuance to
Holder or Holder’s Affiliates.

 

(d)                                 Reclassifications;
Share Exchanges.   In case of any
reclassification of the Common Stock, or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities, cash or property
(other than compulsory share exchanges which constitute Change of Control transactions),
the Holders of the Debentures then outstanding shall have the right thereafter
to convert such shares only into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of Common Stock
following such reclassification or share exchange, and the Holders shall be
entitled upon such event to receive such amount of securities, cash or property
as a holder of the number of shares of Common Stock of the Borrower into which
such shares of Debentures could have been converted immediately prior to such
reclassification or share exchange would have been entitled. This provision
shall similarly apply to successive reclassifications or share exchanges.

 

(e)                                  Calculations.   All calculations under this Section 12
shall be made to the nearest cent or the nearest share, as applicable. The
number of shares of Common Stock outstanding at any given time shall not
include shares owned or held by or for the account of the Borrower, and the
disposition of any such shares shall be considered an issue or sale of Common
Stock.

 

(f)                                    Notice
of Adjustments.   Upon the
occurrence of each adjustment pursuant to this Section 12, the Borrower at
its expense will promptly compute such adjustment in accordance with the terms
hereof and prepare a certificate describing in reasonable detail such
adjustment and the transactions giving rise thereto, including all facts upon
which such adjustment is based. Upon written request, the Borrower will
promptly deliver a copy of each such certificate to the Holder.

 

(g)                                 Notice
of Corporate Events.   If the
Borrower (i) declares a dividend or any other distribution of cash, securities
or other property in respect of its Common Stock, including without limitation
any granting of rights or warrants to subscribe for or purchase any capital
stock of the Borrower or any Subsidiary, (ii) authorizes or approves, enters
into any agreement contemplating or solicits stockholder approval for any
Fundamental Transaction or (iii) authorizes the voluntary dissolution,
liquidation or winding up of the
affairs of the Borrower, then the Borrower shall deliver to the Holder a notice
describing the material terms and conditions of such transaction, at least 20
calendar days for transactions described in subsections (i) and (iii) above,
and at least 10 calendar days for transactions described in
subsection (ii) above, prior to the applicable record or effective date on
which a Person would need to hold Common Stock in order to participate in or
vote with respect to such transaction, and the Borrower will take all steps
reasonably necessary in order to insure that the Holder is 

 

13

 

given the practical opportunity to convert this
Debenture prior to such time so as to participate in or vote with respect to
such transaction; provided, however, that the failure to deliver such notice or
any defect therein shall not affect the validity of the corporate action
required to be described in such notice.

 

13.                                 Fractional
Shares.   The Borrower shall not be required to issue or cause to be issued
fractional Underlying Shares on conversion of this Debenture. If any fraction
of an Underlying Share would, except for the provisions of this Section, be
issuable upon conversion of this Debenture, the number of Underlying Shares to
be issued will be rounded to the nearest whole share.

 

14.                                 Notices.   Any and all notices or other communications
or deliveries hereunder (including without limitation any Conversion Notice)
shall be in writing and shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section prior to 6:30
p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section on a day that
is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading
Day, (iii) the Trading Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given. The addresses for such
communications shall be: (i) if to the Borrower, to 2071 Stierlin Court,
Mountain View, CA 94043, facsimile: (650) 864-7433, attention Chief Financial
Officer, or (ii) if to the Holder, to the address or facsimile number appearing
on the Borrower’s stockholder records or such other address or facsimile number
as the Holder may provide to the Borrower in accordance with this Section.

 

15.                                 Miscellaneous.

 

(a)                                  This
Debenture shall be binding on and inure to the benefit of the parties hereto
and their respective successors and assigns. This Debenture may be amended only in writing signed by the Borrower and the
Holder and their successors and assigns.

 

(b)                                 Subject
to Section 15(a), above, nothing in this Debenture shall be construed to
give to any person or corporation other than the Borrower and the Holder any legal or equitable right, remedy or cause
under this Debenture. This Debenture shall inure to the sole and exclusive
benefit of the Borrower and the Holder.

 

(c)                                  All
questions concerning the construction, validity, enforcement and interpretation
of this Debenture shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, without regard to the
principles of conflicts of law thereof. 
Each party agrees that all proceedings shall be commenced exclusively in
the state and federal courts sitting in the City of New York, Borough of
Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the New York Courts for any proceeding, and
hereby irrevocably waives, and agrees not to assert in any proceeding, any
claim that it is not personally subject to the jurisdiction of any New York
Court or that a New York Court is an inconvenient forum for such proceeding.  Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in 

 

14

 

any such proceeding by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Debenture and agrees that such service shall constitute good and sufficient
service of process and notice thereof. 
Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.  Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
legal proceeding.  The prevailing party
in a proceeding shall be reimbursed by the other party for its attorney’s fees
and other costs and expenses incurred with the investigation, preparation and
prosecution of such proceeding.

 

(d)                                 The
headings herein are for convenience only, do not constitute a part of this
Debenture and shall not be deemed to limit or affect any of the provisions
hereof.

 

(e)                                  In
case any one or more of the provisions of this Debenture shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Debenture shall not in any way be affected or
impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Debenture.

 

(f)                                    No
provision of this Debenture may be waived or amended except in a written
instrument signed, in the case of an amendment, by the Borrower and the Holder
or, or, in the case of a waiver, by the Holder. No waiver of any default with
respect to any provision, condition or requirement of this Debenture shall be
deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof,
nor shall any delay or omission of either party to exercise any right hereunder
in any manner impair the exercise of any such right.

 

(g)                                 Notwithstanding
any provision to the contrary contained in the Debentures, it is expressly agreed
and provided that the total liability of the Borrower under the Debentures for
payments in the nature of interest shall not exceed the maximum lawful rate
authorized under applicable law (the “Maximum
Rate”), and, without limiting the foregoing, in no event shall any
rate of interest or default interest, or both of them, when aggregated with any
other sums in the nature of interest that the Borrower may be obligated to pay
under the Debentures exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Debentures is
increased or decreased by statute or any official governmental action
subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate of interest applicable to the
Debentures from the effective date forward, unless such application is
precluded by applicable law. If under any circumstances whatsoever, interest in
excess of the Maximum Rate is paid by the Borrower to any Holder with respect
to indebtedness evidenced by the Debentures, such excess shall be applied by
such Holder to the unpaid principal balance of any such indebtedness or be
refunded to the Borrower, the manner of handling such excess to be at such
Holder’s election.

 

(h)                                 Except
pursuant to Sections 7 and 11 hereunder, the outstanding principal amount and
interest under this Debenture may not be prepaid by the Borrower without the
prior written consent of the Holder.

 

15

 

(i)                                     The
obligations under this Debenture are secured pursuant to the Security
Agreements.

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS]

 

16

 

IN WITNESS
WHEREOF, the Borrower has caused this Debenture to be duly executed by a duly
authorized officer as of the date first above indicated.

 

AEROGEN,
INC.

 

 

	
   

  	
   

  
	
  By:

  	
   

  	
  /s/ Jane E. Shaw

  	
   

  
	
   

  	
  Name:

  	
  Jane E. Shaw

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  

 

17

 

EXHIBIT A

 

CONVERSION
NOTICE

 

(To be Executed by the Registered Holder

in order to convert Debentures)

 

The undersigned hereby elects to convert the
principal amount of Debenture indicated below, into shares of Common Stock of
Aerogen, Inc., as of the date written below. If shares are to be issued in the
name of a Person other than undersigned, the undersigned will pay all transfer
taxes payable with respect thereto and is delivering herewith such certificates
and opinions as reasonably requested by the Borrower in accordance therewith.
No fee will be charged to the Holder for any conversion, except for such
transfer taxes, if any. All terms used in this notice shall have the meanings
set forth in the Debenture.

 

 

	
  Conversion calculations:

  	
   

  	 

	
   

  	
  Date to Effect Conversion

  	 

	
   

  	
   

  	 

	
   

  	
   

  	 

	
   

  	
  Principal amount of Debenture owned prior
  to conversion

  	 

	
   

  	
   

  	 

	
   

  	
   

  	 

	
   

  	
  Principal amount of Debenture to be
  Converted

  (including           of
  interest added)

  	 

	
   

  	
   

  	 

	
   

  	
   

  	 

	
   

  	
  Principal amount of Debenture remaining
  after Conversion

  	 

	
   

  	
   

  	 

	
   

  	
   

  	 

	
   

  	
  Number of shares of Common Stock to be
  Issued

  	 

	
   

  	
   

  	 

	
   

  	
   

  	 

	
   

  	
  Applicable Conversion Price

  	 

	
   

  	
   

  	 

	
   

  	
   

  	 

	
   

  	
  Name of Holder

  	 

	
   

  	
   

  	 

	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
				

 

 

[  ] By the delivery of this Conversion Notice the Holder
represents and warrants to the Borrower that its ownership of the Common Stock
does not exceed the restrictions set forth in Section 5(b)(i) of the
Debenture.

 

18

 

Schedule 1

 

CONVERSION
SCHEDULE

 

This Conversion Schedule reflects
conversions made under the above referenced Debentures.

 

Dated:

 

	
  Date of
  Conversion

  	
   

  	
  Amount of 

  Conversion

  	
   

  	
  Aggregate 

  Principal 

  Amount 

  Remaining 

  Subsequent to

  Conversion

  	
   

  	
  Applicable Conversion 

  Price

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

19

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