Document:

exv10w3

 

Exhibit 10.3

REGISTRATION RIGHTS AGREEMENT

Dated as of June 17, 2007

among

Lexicon Pharmaceuticals, Inc.

and

Invus, L.P.

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	Page
	ARTICLE I
	 	 	 	 
	 
	 	 	 	 
	DEFINITIONS
	 	 	 	 
	 
	 	 	 	 
	SECTION 1.01. Definitions
	 	 	1	 
	 
	 	 	 	 
	ARTICLE II
	 	 	 	 
	 
	 	 	 	 
	REGISTRATION RIGHTS
	 	 	 	 
	 
	 	 	 	 
	SECTION 2.01. Demand Registrations
	 	 	4	 
	SECTION 2.02. Piggyback Registrations
	 	 	6	 
	SECTION 2.03. Shelf Registration
	 	 	8	 
	 
	 	 	 	 
	ARTICLE III
	 	 	 	 
	 
	 	 	 	 
	REGISTRATION PROCEDURES
	 	 	 	 
	 
	 	 	 	 
	SECTION 3.01. Registration Procedures
	 	 	9	 
	SECTION 3.02. Registration Expenses
	 	 	14	 
	SECTION 3.03. Participation in Underwritten Registrations
	 	 	15	 
	SECTION 3.04. Hold-Back Agreements
	 	 	15	 
	ARTICLE IV
	 	 	 	 
	 
	INDEMNIFICATION AND CONTRIBUTION
	 	 	 	 
	 
	SECTION 4.01. Indemnification by the Company
	 	 	16	 
	SECTION 4.02. Indemnification by Holders of Registrable Securities
	 	 	16	 
	SECTION 4.03. Conduct of Indemnification Proceedings
	 	 	17	 
	SECTION 4.04. Contribution
	 	 	17	 
	SECTION 4.05. Additional Indemnity
	 	 	19	 
	 
	 	 	 	 
	ARTICLE V
	 	 	 	 
	 
	 	 	 	 
	MISCELLANEOUS
	 	 	 	 
	 
	 	 	 	 
	SECTION 5.01. Rule 144
	 	 	19	 
	SECTION 5.02. Limitations on Subsequent Registration Rights
	 	 	19	 
	SECTION 5.03. Specific Performance
	 	 	19	 
	SECTION 5.04. Other Agreements
	 	 	19	 
	SECTION 5.05. Charter Amendments Affecting the Company’s Common Stock
	 	 	20	 

 

 

	 	 	 	 	 
	 	 	Page
	SECTION 5.06. Amendments and Waivers
	 	 	20	 
	SECTION 5.07. Notices
	 	 	20	 
	SECTION 5.08. Successors and Assigns
	 	 	21	 
	SECTION 5.09. Governing Law
	 	 	22	 
	SECTION 5.10. Severability
	 	 	22	 
	SECTION 5.11. Entire Agreement
	 	 	22	 
	SECTION 5.12. Securities Held by the Company or its Subsidiaries
	 	 	22	 
	SECTION 5.13. Further Assurances
	 	 	22	 
	SECTION 5.14. Termination
	 	 	22	 
	SECTION 5.15. Interpretation
	 	 	23	 
	SECTION 5.16. Counterparts
	 	 	23	 

 

 

REGISTRATION RIGHTS AGREEMENT

          THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of
June 17, 2007 by and among Lexicon Pharmaceuticals, Inc., a Delaware corporation (the
“Company”), and Invus, L.P., a Bermuda limited partnership (the “Investor”).

          WHEREAS, concurrently with the execution and delivery of this Agreement, the Company and the
Investor will enter into (a) a warrant agreement (the “Warrant Agreement”) which will
govern the terms of warrants to purchase (the “Warrants”) an aggregate of 16,498,353 shares
of common stock, par value $0.001 per share (“Company Common Stock”) to be issued by the
Company to the Investor, (b) a securities purchase agreement (the “Securities Purchase
Agreement”), upon the terms and subject to the conditions of which, (i) the Company will issue
and sell to the Investor, and the Investor will purchase, a number of shares of Company Common
Stock, together with any shares already owned by the Investor and its affiliates (including those
issued upon exercise of any Warrants), equal to approximately 40% of the outstanding shares of
Company Common Stock and (ii) the Investor will have the right to cause the Company to conduct up
to two Rights Offerings (as defined herein) and (c) a stockholders agreement;

          NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, the Investor and the Company hereby
agree as follows:

ARTICLE I

DEFINITIONS

          SECTION 1.01. Definitions.

          (a) Capitalized terms used herein and not otherwise defined herein have the meanings ascribed
to them in the Securities Purchase Agreement. In addition, the following capitalized terms shall
have the meanings ascribed to them below:

          “Affiliate,” of a specified person means a person who, directly or indirectly through
one or more intermediaries, controls, is controlled by, or is under common control with, such
specified person.

          “Assigned Transferee” means any transferee of Registrable Securities from a Holder who
has received a right to make a Demand Registration in connection therewith pursuant to Section
5.08.

          “Business Day” means any day that is not a Saturday or a Sunday and on which the
principal offices of the SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day that is not a Saturday or a Sunday and on which
banks are not authorized to close in New York City.

          “control” (including the terms “controlled by” and “under common control
with”)

 

 

means the possession, directly or indirectly, or as trustee or executor, of the power to
direct or cause the direction of the management and policies of a person, whether through the
ownership of voting securities, as trustee or executor, by contract, credit arrangement or
otherwise, including the ownership, directly or indirectly, of securities having the power to elect
a majority of the board of directors or similar body governing the affairs of such person.

          “Demanding Holder” means any Holder initiating a registration request in compliance
with Section 2.01(a).

          “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.

          “Holders” means the Investor and any Assigned Transferee.

          “Initial Closing” has the meaning assigned to it in the Securities Purchase Agreement.

          “Person” means an individual, partnership, corporation, limited liability company,
trust or unincorporated organization, or a government or agency or political subdivision thereof.

          “Prospectus” means the prospectus included in a Registration Statement, as amended or
supplemented by any prospectus supplement and by all other amendments thereto, including
post-effective amendments, and all material incorporated by reference into such Prospectus.

          “Public Distribution” shall mean any bona fide public distribution of Stock pursuant
to an effective registration statement under the Securities Act or any other applicable law
(including a Public Offering), or any bona fide public sale in an open market transaction under
Rule 144 if such sale is in compliance with the requirements of paragraphs (c), (d), (e), (f) and
(g) of such Rule (notwithstanding the provisions of paragraph (k) of such Rule).

          “Public Offering” shall mean any bona fide underwritten public distribution of Stock
pursuant to an effective registration statement under the Securities Act or any other applicable
law.

          The terms “register,” “registered” and “registration” refer to a
registration effected by preparing and filing a registration statement in compliance with the
Securities Act and the declaration or ordering of the effectiveness of such registration statement
by the Commission.

          “Registrable Securities” means each share of Stock held by the Holders, or acquired by
the Holders after the date hereof, until (i) it has been effectively registered under the
Securities Act and disposed of by such Holders pursuant to an effective registration statement, or
(ii) it is sold by such Holders pursuant to Rule 144.

          “Registration Statement” means any registration statement of the Company relating to a
Demand Registration pursuant to Section 2.01, a Piggyback Registration pursuant to
Section 2.02, or a Shelf Registration pursuant to Section 2.03, in each case, including the

2

 

Prospectus included therein, all amendments and supplements thereto (including post-effective
amendments) and all exhibits and material incorporated by reference therein.

          “Required Number” means (i) if the Securities Purchase Agreement is terminated prior
to the Initial Closing, three; (ii) if the Initial Closing under the Securities Purchase Agreement
has occurred, five; and (iii) if the number of shares of Company Common Stock owned by all Holders
at any time exceeds 50% of the aggregate number of shares of Company Common Stock outstanding at
such time, an unlimited number.

          “Rights Offering Notice” has the meaning assigned to it in the Securities Purchase
Agreement.

          “Rights Offering Trigger Date” has the meaning assigned to it in the Securities
Purchase Agreement.

          “Rule 144” means Rule 144 under the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the SEC.

          “SEC” means the Securities and Exchange Commission.

          “Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

          “Selling Holder” means a Holder who sells or proposes to sell Registrable Securities
pursuant to a Registration Statement under the Securities Act.

          “Shelf Registration” or “Shelf Registration Statement” is defined in Section
2.03.

          “Stock” means the following securities: (i) the Company Common Stock or (ii) any
security or other instrument (a) received as a dividend on, or other payment made to the holders
of, the Company Common Stock (or any other security or instrument referred to in this definition);
(b) issuable upon the conversion, exchange or exercise of any security convertible, exchangeable or
exercisable into Company Common Stock or (c) issued in connection with a split of the Company
Common Stock (or any other security or instrument referred to in this definition) or as a result of
any exchange or reclassification of the Company Common Stock (or any other security or instrument
referred to in this definition), reorganization, consolidation, merger or recapitalization.

          “Underwritten Registration” or “Underwritten Offering” means a registration in
which Stock of the Company is sold to an underwriter for re-offering to the public.

          (b) The following terms have the meaning set forth in the Sections set forth below:

3

 

	 	 	 
	 	 	Location of
	Defined Term	 	Definition
	Advice
	 	§ 3.01(a)
	Agreement
	 	Preamble
	Company
	 	Preamble
	Company Common Stock
	 	Recitals
	Deferral Period
	 	§ 2.01(a)
	Demand Notice
	 	§ 2.01(a)
	Demand Registration
	 	§ 2.01(a)
	Demand Registration Statement
	 	§ 2.01(b)
	Indemnified Holder
	 	§ 4.01
	Indemnified Party
	 	§ 4.03
	Indemnifying Party
	 	§ 4.03
	Investor
	 	Preamble
	Piggyback Holders
	 	§ 2.02(a)
	Piggyback Registration
	 	§ 2.02(a)
	Registration Expenses
	 	§ 3.02(a)
	Securities Purchase Agreement
	 	Recitals
	Shelf Registration or Shelf Registration Statement
	 	§ 3.01(a)
	Subsequent Holder
	 	§ 5.08
	Suspension Notice
	 	§ 2.01(a)
	Suspension Period
	 	§ 3.01(a)
	Warrant Agreement
	 	Recitals
	Warrants
	 	Recitals

ARTICLE II

REGISTRATION RIGHTS

          SECTION 2.01. Demand Registrations.

          (a) At any time and from time to time the Holders may make a written request of the Company
for registration with the SEC, under and in accordance with the provisions of the Securities Act,
of all or part of their Registrable Securities (a “Demand Registration”) by giving written
notice to the Company of such demand (a “Demand Notice”); provided, that the Company shall
be required to effect only one Demand Registration during any six-month period; provided, further,
that the Holders may not exercise the rights provided by this Section 2.01(a) during the period
commencing three months prior to the delivery of a Rights Offering Notice and ending on the closing
of the applicable Rights Offering or, if the applicable Rights Offering Notice is not delivered,
ninety (90) days after the applicable Rights Offering Trigger Date. The Company shall not be
required to effect more than the Required Number of Demand Registrations. Each such Demand Notice
will specify the number of Registrable Securities
proposed to be sold pursuant to such Demand Registration and will also specify the intended
method of disposition thereof.

4

 

          The Company shall give written notice, of any Demand Notice by any Holder, which request
complies with this Section 2.01(a), within 5 days after the receipt thereof, to each Holder who did
not initially join in such request. Within 10 days after receipt of such notice, any such Holder
may request in writing that its Registrable Securities be included in such registration, and the
Company shall include in the Demand Registration the Registrable Securities of each such Holder
requested to be so included, subject to the provisions of Section 2.01(e). Each such request shall
specify the number of shares of Registrable Securities proposed to be sold and the intended method
of disposition thereof.

          Promptly after receipt of any Demand Notice, but in no event later than 60 days after receipt
of such Demand Notice, the Company shall file a Registration Statement with the SEC with respect to
the Registrable Securities included in the Demand Notice and shall use its reasonable best efforts
to have such Registration Statement declared effective as promptly as practicable; provided,
however, that the Company may postpone the filing of such Registration Statement for a period of up
to 90 days (the “Deferral Period”) if the Board of Directors reasonably determines that
such a filing would materially adversely affect any proposed material financing, acquisition,
divestiture or other material transaction by the Company. The Company shall not be entitled to
request more than one such deferral with respect to any Demand Registration within any 365-day
period. If the Company does elect to defer any such Demand Registration, the Holders requesting
such Demand Registration may, at their election by written notice to the Company, (i) confirm their
request to proceed with such Demand Registration upon the expiration of the Deferral Period or (ii)
withdraw their request for such Demand Registration in which case no such request for a Demand
Registration shall be deemed to have occurred for purposes of this Agreement and no further request
for a Demand Registration may be made until prior to the expiration of the Deferral Period.

          (b) Except as provided in subsection (c) below, a registration will not be deemed to have been
effected as a Demand Registration unless it has been declared effective by the SEC; provided, that
if a registration requested pursuant to this Section 2.01 has become effective, (i) the offering of
Registrable Securities pursuant to such registration is or becomes the subject of any stop order,
injunction or other order or requirement of the SEC or any other governmental or administrative
agency, or if any court prevents or otherwise limits the sale of Registrable Securities pursuant to
the registration, or (ii) the registration requested pursuant to this Section 2.01 does not remain
continuously effective for a period of at least 90 days beyond the effective date thereof (or such
shorter period as is required to complete the distribution by the Holders of the Registrable
Securities included in such registration statement) (the “Demand Registration Statement”),
then such Demand Registration Statement shall not count as a Demand Registration that may be
requested by the Demanding Holder(s) and the Company shall continue to be obligated to effect a
registration pursuant to this Section 2.01.

          (c) The Demanding Holders may withdraw all or any part of the Registrable Securities from a
Demand Registration at any time (whether before or after the filing or effective date of the Demand
Registration Statement), and if all such Registrable Securities are withdrawn, to withdraw the
demand related thereto. Upon such withdrawal by the Demanding Holders, the
Company shall withdraw any Demand Registration Statement relating to the withdrawn Registrable
Securities and, so long as such Demand Registration statement has not been declared effective by
the Commission and the Demanding Holders elect to bear the out-of-pocket

5

 

expenses associated with
such withdrawn registration statement, such withdrawn registration statement shall not count as a
Demand Registration; provided, if the Company has not complied with its obligations under this
Agreement in connection with such withdrawn registration statement or a Suspension Period is in
effect, the Company shall not be entitled to a reimbursement of its out-of-pocket expenses pursuant
to this sentence. Notwithstanding the foregoing, any request for a Demand Registration that is
withdrawn by the Demanding Holders as a result of information concerning the business or financial
condition of the Company that is provided to the Demanding Holders after the date on which a Demand
Notice under Section 2.01(a) has been delivered to the Company, shall not count as a Demand
Registration.

          (d) If the Demanding Holders so elects, the offering of Registrable Securities pursuant to a
Demand Registration shall be in the form of an Underwritten Offering. The Demanding Holders shall
select (with the consent of the Company, not to be unreasonably withheld) one or more nationally
recognized firms of investment bankers to act as the managing underwriter or underwriters in
connection with such offering and shall select any additional investment bankers and managers to be
used in connection with such offering; provided, that in the event that the Company and the
Demanding Holders are unable to jointly agree on such investment bankers and managers, such
investment bankers and managers shall be selected by the Demanding Holders and shall be reasonably
satisfactory to the Company. The Company shall (together with all Holders of Registrable Securities
proposing to distribute such Registrable Securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters selected for such
underwriting in the manner set forth above.

          (e) If, in any Demand Registration involving an Underwritten Offering the managing underwriter
or underwriters thereof advise the Demanding Holders or the Company in writing that in its or their
reasonable opinion the number of Registrable Securities proposed to be sold in such Demand
Registration exceeds the number that can be sold in such offering or will adversely affect the
success of such offering (including, without limitation, an impact on the selling price or the
number of Registrable Securities that any participant may sell), the Company shall include in such
registration only the number of Registrable Securities, if any, which in the opinion of such
underwriter or underwriters can be sold without having an adverse effect on the success of the
offering and in accordance with the following priority: (i) first, Registrable Securities held by
Demanding Holders and (ii) second, pro rata (based upon the number of Registrable Securities
requested to be included in such registration by such Holders) among the other Holders of
Registrable Securities who have requested to include Registrable Securities in such registration.
If all Registrable Securities requested to be sold in the Underwritten Offering are included
therein, the Company may include other shares of Stock in such offering in accordance with the
following priority, but not to exceed the number recommended by the managing underwriter or
underwriters: (x) first, pro rata among any other stockholders of the Company having piggyback or
other similar registration rights and (y) second, shares of Stock proposed to be sold by or for the
account of the Company.

          SECTION 2.02. Piggyback Registrations.

          (a) If at any time the Company proposes to (i) file a registration statement under the
Securities Act with respect to an offering by the Company for its own account or for

6

 

the account of
any holders of any class of common equity securities (other than (A) a registration statement on
Form S-4 or S-8 (or any substitute form that may be adopted by the SEC), (B) a registration
statement filed in connection with a Demand Registration or a Shelf Registration or (C) a
registration statement filed in connection with an offering of securities solely to the Company’s
existing securityholders) or (ii) effect an offering of stock pursuant to an effective shelf
registration statement (it being understood that prior to the filing of a shelf registration for
primary issuances by the Company, the Company shall offer to the Investor the option to include or,
in the case of a shelf registration statement in existence at the Initial Closing, the Company
shall offer to the Investor the option to cause the Company to amend such shelf registration
statement to include, Registrable Securities of the Investor in such shelf registration statement
and, if the Investor refuses such option, then its rights to piggyback on an offering to be
registered under the Company’s shelf registration statement shall only be available if there is an
effective Shelf Registration Statement under Section 2.03 hereof) then the Company shall give
written notice of such proposed filing or offering to the Holders as soon as practicable (but in no
event less than 20 days before the anticipated filing date or commencement of such offering), and
such notice shall offer such Holders the opportunity to include in such registration or offering
such number of shares of Registrable Securities as each such Holder may request, which request
shall specify the Registrable Securities intended to be disposed of by such Holder and the intended
method of distribution thereof (or, if the offering is a proposed Underwritten Offering, that such
Holder elects to have the number of Registrable Securities so specified included in such
Underwritten Offering) (a “Piggyback Registration”). In any Piggyback Registration proposed
to be effected as an Offering, the Registrable Securities requested by the Holders thereof (the
“Piggyback Holders”) to be included in such Underwritten Offering shall be included on the
same terms and conditions as any similar securities of the Company or any other securityholder
included therein and to permit the sale or other disposition of such Registrable Securities in
accordance with the intended method of distribution thereof.

          No registration effected under this Section 2.02 and no failure to effect a registration under
this Section 2.02(a), shall relieve the Company of its obligations pursuant to Section 2.01, and no
failure to effect a registration under this Section 2.02(a) and complete the sale of shares in
connection therewith shall relieve the Company of any other obligation under this Agreement
(including, without limitation, the Company’s obligations under Section 3.02 and 4.01).

          (b) Unless the registration statement is being filed pursuant to a Demand Registration (in
which case the priority of piggyback rights shall be as provided in Section 2.01(e) above), if the
managing underwriter or underwriters advise the Company in writing that in its or their reasonable
opinion the number of equity securities of the Company proposed to be sold in such registration
(including Registrable Securities to be included pursuant to subsection (a) above) will adversely
affect the success of such offering (including, without limitation, an impact on the selling price
or the number of equity securities of the Company that any participant may sell), the Company shall
include in such registration the number of equity securities of the Company, if any, which in the
opinion of such underwriter or underwriters can be sold without having an adverse effect on the
offering and in accordance with the following priority: (i) first, the securities the Company
proposes to sell for its own account, and (ii) second, pro rata based
on the number of Registrable Securities that each Holder or other Person having similar rights
shall have requested to be included therein.

7

 

          (c) The Piggyback Holders may withdraw all or any part of the Registrable Securities from a
Piggyback Registration at any time (before but not after the effective date of such registration
statement), by delivering written notice of such withdrawal request to the Company, unless such
Piggyback Registration is underwritten, in which case Registrable Securities may not be withdrawn
after the effective date of the Registration Statement.

          SECTION 2.03. Shelf Registration.

          (a) Upon the request of the Demanding Holders requesting a Demand Registration under Section
2.01, the Company shall cause to be filed with the SEC as promptly as practicable after such
request, but in no event later than 90 days thereafter, a shelf registration statement pursuant to
Rule 415 under the Securities Act (a “Shelf Registration” or a “Shelf Registration
Statement”), which Shelf Registration Statement shall provide for resales of all Registrable
Securities held by Holders who shall have provided the information required pursuant to Section
3.01(b). The Company shall use its reasonable best efforts to have such Shelf Registration declared
effective, subject to Section 2.03(c) below, and to keep such Shelf Registration Statement
continuously effective, supplemented and amended to the extent necessary to ensure that it is
available for resales of Registrable Securities by such Holders, and to ensure that it conforms
with the requirements of this Agreement, the Securities Act and the policies, rules and regulations
of the SEC as announced from time to time, until the earlier of (i) such time as all of the
Registrable Securities covered by such Shelf Registration Statement have been sold or (ii) such
time as all of the Registrable Securities covered by such Shelf Registration Statement may be sold
without restriction pursuant to Rule 144. A request of the Demanding Holders under this Section
2.03(a) shall be deemed to be a request for a Demand Registration under Section 2.01 above.

          (b) A registration will not be deemed to have been effected as a Shelf Registration unless it
has been declared effective by the SEC and the Company has complied in all material respects with
its obligations under this Agreement with respect thereto; provided, that if, after it has become
effective, (i) the offering of Registrable Securities pursuant to such registration is or becomes
the subject of any stop order, injunction or other order or requirement of the SEC or any other
governmental or administrative agency, or if any court prevents or otherwise limits the sale of
Registrable Securities pursuant to the registration (for any reason other than the acts or
omissions of the Holders), or (ii) the Shelf Registration does not remain continuously effective
for the period described in subsection (a) above, then such Shelf Registration Statement shall not
count as a Shelf Registration and the Company shall continue to be obligated to effect a
registration pursuant to this Section 2.03.

          (c) With respect to any Shelf Registration that has been declared effective (i) the Company
may suspend use of such Shelf Registration for a period of up to ninety (90) days if
the Board of Directors of the Company reasonably determines that the continued effectiveness
or use thereof would materially adversely affect any proposed material financing, acquisition,
divestiture or other material corporate transaction by the Company and (ii) the Company may

8

 

suspend
use of such Shelf Registration during any period if each of the Company and the holders of a
majority of the Registrable Securities included in such Shelf Registration consents in writing to
such suspension for such period.

          (d) Each Holder of Registrable Securities shall not effect any Public Distribution of
Registrable Securities pursuant to an effective Shelf Registration Statement during the period
commencing three months prior to the delivery of a Rights Offering Notice and ending on the closing
of the applicable Rights Offering or, if the applicable Rights Offering Notice is not delivered,
ninety (90) days after the applicable Rights Offering Trigger Date.

ARTICLE III

REGISTRATION PROCEDURES

          SECTION 3.01. Registration Procedures.

          (a) In connection with any Registration Statement and any related Prospectus required by this
Agreement to permit the sale or resale of Registrable Securities, the Company shall:

     (i) prepare and file with the SEC a registration statement with respect to such
Registrable Securities within the time periods specified herein, make all required
filings with the NASD and use its reasonable best efforts to cause such registration
statement to become effective as promptly as practicable (subject to the Company’s
right to withdraw the registration statement under the circumstances described in
Sections 2.1(c) or 2.2(d));

     (ii) promptly prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement as may be necessary to keep the
Registration Statement effective for the applicable period set forth in Sections
2.1, 2.2 or 2.3, as applicable, or such shorter period as will terminate when all
Registrable Securities covered by such Registration Statement have been sold
(subject to Section 2.03(c)); cause the Prospectus to be supplemented by a required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under
the Securities Act, and to comply fully with the applicable provision of Rules 424
and 430A under the Securities Act in a timely manner; and comply with the provisions
of the Securities Act with respect to the disposition of all securities covered by
such Registration Statement during the applicable period in accordance with the
intended method or methods of distribution by the sellers thereof set forth in such
Registration Statement or supplement to the Prospectus;

     (iii) use its reasonable best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements for the period
specified in Sections 2.1, 2.2 or 2.3, as applicable (subject to Section
2.03(c)); upon the occurrence of any event that would cause any such Registration
Statement or the Prospectus contained therein (A) to contain a material misstatement
or omission or (B) not to be effective and usable for resale of Registrable
Securities during the period required by this Agreement, the Company

9

 

shall file as
promptly as practicable an appropriate amendment to such Registration Statement, in
the case of clause (A), correcting any such misstatement or omission, and, in the
case of either clause (A) or (B), use its reasonable best efforts to cause such
amendment to be declared effective and such Registration Statement and related
Prospectus to become usable for their intended purposes(s) as soon as practicable
thereafter;

     (iv) provide (A) the Holders of Registrable Securities participating in the
registration, (B) the underwriters (which term, for purposes of this Agreement,
shall include a Person deemed to be an underwriter within the meaning of Section
2(11) of the Securities Act), if any, of the Registrable Securities to be
registered, (C) the sale or placement agent therefor, if any, (D) counsel for such
underwriters or agent, and (E) counsel for the Holders thereof, as selected by
Holders of a majority of the Registrable Securities covered by such registration
statement, the opportunity to participate in the preparation of such registration
statement, each prospectus included therein or filed with the SEC, and each
amendment or supplement thereto, and for a reasonable period prior to the filing of
such registration statement, and throughout the period specified in Section 3.04(b)
hereof, make available for inspection by the parties referred to in (A) through (E)
above such financial and other information and books and records of the Company,
provide access to properties of the Company and cause the officers, directors,
employees, counsel and independent certified public accountants of the Company to
respond to such inquiries as shall be reasonably necessary to conduct a reasonable
investigation within the meaning of Section 11 of the Securities Act;

     (v) advise the underwriters, if any, and Selling Holders promptly and, if
requested by such Persons, to confirm such advice in writing, (A) when the
Prospectus or any Prospectus supplement or post-effective amendment has been filed,
and, with respect to any Registration Statement or any post-effective amendment
thereto, when the same has become effective, (B) of any request by the SEC for
amendments to the Registration Statement or amendments or supplements to the
Prospectus or for additional information relating thereto, (C) of the issuance by
the SEC of any stop order suspending the effectiveness of the Registration Statement
under the Securities Act or of the suspension by any state securities commission of
the qualification of the Registrable Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for any of the preceding purposes,
(D) of the existence of any fact or the happening of any event that makes any
statement of a material fact made in the registration Statement, the Prospectus, any
amendment or supplement thereto, or any document incorporated by reference therein
untrue, or that requires the making of any additions to or changes in the
Registration Statement or the Prospectus in order to make the statements therein not
misleading. If at any time the SEC shall
issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory authority shall
issue an order suspending the qualification or exemption from qualification of the
Registrable Securities under state securities or Blue Sky laws, the Company shall
use its

10

 

reasonable best efforts to obtain the withdrawal or lifting of such order at
the earliest possible time;

     (vi) furnish to each Selling Holder named in any Registration Statement or
Prospectus and each of the underwriter(s) in connection with such sale, if any, such
number of copies of any Registration Statement or Prospectus included therein or any
amendments or supplements to any such Registration Statement or Prospectus
(including all documents incorporated by reference after the initial filing of such
Registration Statement and all exhibits filed therewith), reasonably requested by
such Person;

     (vii) if requested by any selling Holders or the underwriter(s) in connection
with such sale, if any, promptly include in any Registration Statement or
Prospectus, pursuant to a supplement or post-effective amendment if necessary, such
information as such selling Holders and such underwriter(s), if any, may reasonably
request to have included therein, including, without limitation, information
relating to the “Plan of Distribution” of the Registrable Securities, information
with respect to the principal amount of Registrable Securities being sold to such
underwriter(s), the purchase price being paid therefor and any other terms of the
offering of the Registrable Securities to be sold in such offering, and make all
required filings of such Prospectus supplement or post-effective amendment as soon
as practicable after the Company is notified of the matters to be included in such
Prospectus supplement or post-effective amendment;

     (viii) deliver to each Selling Holder and each of the underwriter(s), if any,
without charge, as many copies of the Prospectus (including each preliminary
prospectus) and any amendment or supplement thereto as such Persons reasonably may
request; the Company hereby consents to the use of the Prospectus and any amendment
or supplement thereto by each of the Selling Holders and each of the underwriter(s),
if any, in connection with the offering and the sale of the Registrable Securities
covered by the Prospectus or any amendment or supplement thereto;

     (ix) in connection with any Underwritten Offering pursuant to a Demand
Registration, enter into an underwriting agreement with one or more underwriters
designated in accordance with this Agreement, such agreement to be of the form,
scope and substance as is customary in underwritten offerings, and take all such
other actions as are reasonably requested by the managing underwriter(s) in order to
expedite or facilitate the disposition of such Registrable Securities and in such
connection at each closing under such underwriting agreement (i) make such
representations and warranties to the underwriters in form, scope and substance as
are customarily made by issuers to underwriters in underwritten offerings with
respect to the business of the Company; (ii) obtain
opinions of counsel to the Company and updates thereof (which counsel and
opinions (in form, scope and substance) shall be reasonably satisfactory to the
managing underwriter(s)) addressed to the managing underwriter(s) covering the
matters customarily covered in opinions requested in underwritten offerings and

11

 

such other matters as may be reasonably requested by the underwriters; (iii) obtain
“comfort” letters and updates thereof from the Company’s independent certified
public accountants addressed to the underwriters, such “comfort” letters to be in
customary form and covering matters of the type customarily covered in “comfort”
letters in connection with underwritten offerings; (iv) deliver such documents and
certificates as may be reasonably requested by the managing underwriter(s) to
evidence compliance with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company;

     (x) prior to any public offering of Registrable Securities, cooperate with the
Selling Holders, the underwriter(s), if any, and their respective counsel in
connection with the registration and qualification of the Registrable Securities
under the securities or Blue Sky laws of such jurisdictions as the Selling Holders
or underwriter(s), if any, may request and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions or the
Registrable Securities covered by the applicable Registration Statement; provided,
however, that the Company shall not be required to register or qualify as a foreign
corporation where it is not now so qualified or to take any action that would
subject it to the service of process in suits or to taxation, except as is required
as a result of the Registration Statement, in any jurisdiction where it is not now
so subject;

     (xi) in connection with any sale of Registrable Securities that will result in
such securities no longer being Registrable Securities, cooperate with the Selling
Holders and the underwriter(s), if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and to register such Registrable Securities in such
denominations and such names as the Selling Holders or the underwriter(s), if any,
may request at least two Business Days prior to such sale of Registrable Securities;

     (xii) if requested by the Selling Holders, provide a CUSIP number for all
Registrable Securities not later than the effective date of the Registration
Statement covering such Registrable Securities and provide the Company’s transfer
agent(s) and registrar(s) for the Registrable Securities with printed certificates
for the Registrable Securities;

     (xiii) cooperate and assist in any filings required to be made with the NASD
and in the performance of any due diligence investigation by any underwriter
(including any “qualified independent underwriter”) that is required to be retained
in accordance with the rules and regulations of the NASD), and use its reasonable
best efforts to cause such Registration Statement to become effective and approved
by such governmental agencies or authorities as may be
necessary to enable the Selling Holders or underwriters, if any, to consummate
the disposition of such Registrable Securities;

12

 

     (xiv) otherwise use its reasonable best efforts to comply with all applicable
rules and regulations of the SEC, and make generally available to its security
holders, as soon as practicable, a consolidated earnings statement meeting the
requirements of Rule 158 under the Securities Act (which need not be audited)
covering a period of at least twelve month periods, but not more than eighteen
months, beginning with the first month of the Company’s first quarter commencing
after the effective date of the Registration Statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act;

     (xv) cause all Registrable Securities covered by the Registration Statement to
be listed on each securities exchange on which securities of the same class issued
by the Company are then listed if requested by the Selling Holders holding a
majority of the Registered Securities or the managing underwriter(s), if any; and

     (xvi) in connection with any offering of at least $25,000,000 or of a number of
shares representing at least 5% of the total number of outstanding shares of Company
Common Stock, cause its officers to use their reasonable best efforts to support the
marketing of the Registrable Securities covered by such Registration Statement
(including, by participating in customary “road show” presentations and similar
marketing efforts), and otherwise to facilitate, cooperate with and participate in
each proposed offering contemplated herein.

          Each Selling Holder, upon receipt of any notice from the Company of the happening of any event
described in subsection (5)(B), (C), or (D) of Section 3.01(a) or in Section 2.03(c) (a
“Suspension Notice”), shall forthwith discontinue disposition of the Registrable Securities
pursuant to the Registration Statement relating thereto until such Selling Holder receives copies
of the supplemented or amended Prospectus contemplated hereby or until it is advised in writing
(the “Advice”) by the Company that the use of the Prospectus may be resumed, and has
received copies of any additional or supplemented filings that are incorporated by reference in the
Prospectus, and, if so directed by the Company, such Selling Holder will, or will request the
managing underwriter or underwriters, if any, to deliver to the Company (at the Company’s expense)
all copies, other than permanent file copies then in such Selling Holder’s possession, of the
Prospectus covering such Registrable Securities current at the time of receipt of such notice. The
period from the date on which any Holder receives a Suspension Notice to the date on which any
Holder receives either the Advice or copies of the supplemented or amended Prospectus contemplated
hereby relating to such notice shall hereinafter be referred to as the “Suspension Period.”
If the Company shall give any Suspension Notice, (i) the Company shall use its reasonable best
efforts and take such actions as are reasonably necessary to render Advice and end the Suspension
Period as promptly as practicable and (ii) the time periods for which a Registration Statement is
required to be kept effective pursuant to Sections 2.1, 2.2 or 2.3, as the case may be, shall be
extended by the number of days during the period from and including the date of the giving of such
Suspension Notice to and including the date when each
Selling Holder shall have received (A) the copies of the supplemented or amended Prospectus
contemplated by Section 3.01(a) or (B) the Advice.

13

 

          (b) All Holders of Registrable Securities desiring to include any of their Registrable
Securities in any Registration Statement pursuant to this Agreement shall furnish to the Company in
writing, within 20 days after receipt of a request therefor, such information as the Company may
reasonably request specified in item 507 of Regulation S-K under the Securities Act for use in
connection with any Registration Statement or Prospectus or preliminary Prospectus included
therein. Each Holder as to which any Registration Statement is being effected agrees to furnish
promptly to the Company all information required to be disclosed in order to make the information
previously furnished to the Company by such Holder not materially misleading.

          SECTION 3.02. Registration Expenses.

          (a) All expenses incident to the Company’s performance of or compliance with its obligations
under this Agreement will be paid by the Company, regardless of whether any registration statement
required hereunder becomes effective, including, without limitation:

     (i) all registration and filing fees;

     (ii) fees and expenses of compliance with securities or blue sky laws
(including, without limitation, reasonable fees and disbursements of counsel in
connection with blue sky qualifications of the Registrable Securities and
determination of their eligibility for investment under the laws of such
jurisdictions as the managing underwriters or Holders of Registrable Securities
being sold may designate);

     (iii) printing (including, without limitation, expenses of printing or
engraving certificates for the Registrable Securities in a form eligible for trading
on the Nasdaq or for deposit with the Depository Trust Company and of printing
prospectuses), messenger, telephone and delivery expenses;

     (iv) reasonable fees and disbursements of counsel for the Company;

     (v) reasonable fees and disbursements of counsel for the Holders;

     (vi) reasonable fees and disbursements of all independent certified public
accountants of the Company (including, without limitation, the expenses of any
special audit and “cold comfort” letters required by or incident to such
performance);

     (vii) fees and expenses of other Persons retained by the Company; and

     (viii) fees and expenses associated with any NASD filing required to be made in
connection with the registration of the Registrable Securities, including, if
applicable, the reasonable fees and expenses of any “qualified
independent underwriter” (and its counsel) that is required to be retained in
accordance with the rules and regulations of the NASD (all such expenses being
herein called “Registration Expenses”).

14

 

          (b) The Company will, in any event, pay its internal expenses (including, without limitation,
all salaries and expenses of its officers and employees performing legal or accounting duties), the
expense of any annual audit, the fees and expenses incurred in connection with the listing of the
Registrable Securities to be registered on Nasdaq or on each national securities exchange on which
similar securities issued by the Company are then listed and the fees and expenses of any Person,
including special experts, retained by the Company.

          SECTION 3.03. Participation in Underwritten Registrations. No Holder may participate
in any Underwritten Registration hereunder unless such Holder agrees to sell its Registrable
Securities on the basis provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements and applicable to such Persons. Notwithstanding the
foregoing, (x) no Selling Holder shall be required to make any representations or warranties except
those which relate solely to such Holder and its intended method of distribution, and (y) the
liability of each such Holder to any underwriter under such underwriting agreement will be limited
to liability arising from misstatements or omissions regarding such Holder and its intended method
of distribution and any such liability shall not exceed an amount equal to the amount of net
proceeds such Holder derives from such registration; provided, however, that in an offering by the
Company in which any Holder requests to be included in a Piggyback Registration, the Company shall
use its reasonable best efforts to arrange the terms of the offering such that the provisions set
forth in clauses (x) and (y) of this Section 3.03 are true. Nothing in this Section 3.03 shall be
construed to create any additional rights regarding the registration of Registrable Securities in
any Person otherwise than as set forth herein.

          SECTION 3.04. Hold-Back Agreements.

          (a) Upon the written request of the managing underwriter or underwriters of a Public Offering,
each Holder of Registrable Securities shall not effect any Public Distribution of such securities,
or any securities convertible into or exchangeable or exercisable for such securities, including a
sale pursuant to Rule 144 (except as part of such Public Offering), during the 14-day period prior
to, and during the 90-day period following, the offering date for each Public Offering made
pursuant to such registration statement (as identified by such underwriter or underwriters or the
Company in good faith).

          (b) The Company agrees and it shall use its reasonable best efforts to cause its Affiliates
(other than Persons who are Holders hereunder) to agree: (i) not to effect any Public Distribution
of any securities being registered in accordance with Article II hereof, or any securities
convertible into or exchangeable or exercisable for such securities, during the 14-day period prior
to, and during the 90-day period following, the offering date for each Public Offering made
pursuant to a registration statement filed under Article II hereof, if requested in writing by the
managing underwriters (except as part of such Public Offering or pursuant to stock options or other
employee benefit plans); and (ii) to use its reasonable best efforts to cause each holder of stock
issued by the Company at any time on or after the date of this Agreement to
agree not to effect any Public Distribution, including a sale pursuant to Rule 144, of any
securities of the Company during the period set forth in clause (i) above (except as part of such
Public Offering, if and to the extent permitted).

15

 

ARTICLE IV

INDEMNIFICATION AND CONTRIBUTION

          SECTION 4.01. Indemnification by the Company. The Company agrees to indemnify and hold
harmless each Selling Holder, each person, if any, who controls such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) (hereinafter referred to as a
“controlling person”), the respective officers, directors, partners, employees, representatives and
agents of any Holder or any controlling person, solely in their capacities as such (each an
“Indemnified Holder”), to the fullest extent lawful, from and against any and all losses,
claims, damages, liabilities, judgments, actions and expenses (including without limitation and as
incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending
any claim or action, or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel to any Indemnified
Holder) directly or indirectly caused by, related to, based upon, arising out of or in connection
with any untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (or any amendment or supplement thereto), or any omission or
alleged omission to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses are caused by an untrue statement or omission or alleged untrue statement
or omission that is made in reliance upon and in conformity with information relating to any of the
Holders furnished in writing to the Company by any of the Holders expressly for use therein.

          SECTION 4.02. Indemnification by Holders of Registrable Securities. Each Selling
Holder agrees, severally and not jointly, to indemnify and hold harmless the Company and its
directors, officers and any person controlling (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) the Company and its respective officers, directors,
partners, employees, representatives and agents of each such person, to the same extent as the
foregoing indemnity from the Company to each of the Indemnified Holders, but only with respect to
losses, claims, damages, liabilities, judgments, actions and expenses (including without limitation
and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or
defending any claim or action, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, including the reasonable fees and expenses of counsel to the
Company) directly or indirectly caused by, related to, based upon, arising out of or in connection
with any untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (or any amendment or supplement thereto), or any omission or
alleged omission to state therein 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 such untrue
statement or omission is contained in any information relating to such Holder furnished in writing
by such Holder expressly for use in any Registration Statement or Prospectus. In case any action or
proceeding shall be brought against the Company
or its directors or officers or any such controlling person in respect of which indemnity may
be sought against a Holder of Registrable Securities, such Holder shall have the rights and duties
given the Company, and the Company or its directors or officers or such controlling person shall
have the rights and duties given to each Holder by the preceding paragraph. Each Selling Holder
also agrees to indemnify and hold harmless each other Selling Holder or underwriters

16

 

participating
in the distribution on substantially the same basis as that of the indemnification of the Company
provided in this Section 4.02. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of
the Registrable Securities giving rise to such indemnification obligation. The Company shall be
entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the same extent as provided
above with respect to information so furnished in writing by such Persons specifically for
inclusion in any Registration Statement or Prospectus.

          SECTION 4.03. Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder (an “Indemnified Party”) will (a) promptly give notice of any
claim, action or proceeding (including any governmental or regulatory investigation or proceeding)
or the commencement of any such action or proceeding to the Person against whom such indemnity may
be sought (an “Indemnifying Party”); provided, that the failure to give such notice shall
not relieve the Indemnifying Party of its obligations pursuant to this Agreement except to the
extent that such Indemnifying Party has been prejudiced in any material respect by such failure,
and (b) permit the Indemnifying Party to assume the defense of such claim with counsel reasonably
satisfactory to such Indemnified Party; provided, that the Indemnified Party shall have the right
to employ separate counsel and participate in the defense of such claim, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party
has agreed to pay for such fees and expenses, (ii) the Indemnifying Party shall have failed to
assume the defense of such claim and employ counsel reasonably satisfactory to such Indemnified
Party or (iii) in the reasonable judgment of such Indemnified Party, based upon advice of its
counsel, a conflict of interest may exist between such Indemnified Party and the Indemnifying Party
with respect to such claims. If such defense is not assumed by the Indemnifying Party, the
Indemnifying Party will not be subject to any liability for any settlement of any such claim
effected without the Indemnifying Party’s prior written consent, which consent shall not be
unreasonably withheld, but if settled with such consent or if there be a final judgment for the
plaintiff, the Indemnifying Party agrees to indemnify and hold harmless any Indemnified Party from
and against any loss, claim damage, liability or expense by reason of any settlement of any such
claim or action. No Indemnifying Party shall, without the prior written consent of each Indemnified
Party, settle or compromise or consent to the entry of judgment in or otherwise seek to terminate
any pending or threatened action, claim, litigation or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not any Indemnified Party is a
party thereto), unless such settlement, compromise, consent or termination includes an
unconditional release of each Indemnified Party from all liability arising out of such action,
claim, litigation or proceeding. An Indemnifying Party who is not entitled to, or elects not to,
assume the defense of the claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such Indemnifying Party with respect to such claim, unless
in the reasonable judgment of any Indemnified Party a conflict of interest may exist between such
Indemnified Party and any other such Indemnified Parties with respect to such
Claim, in which event the Indemnifying Party shall be obligated to pay the fees and expenses
of such additional counsel.

          SECTION 4.04. Contribution. If the indemnification provided for in this Article IV is
unavailable to an Indemnified Party (other than by reason of exceptions provided in those Sections)
in respect of any losses, claims, damages, liabilities or expenses referred to

17

 

therein, then each
applicable Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall have a joint
and severable obligation to contribute to the amount paid or payable by such Indemnified Party as a
result of such losses, claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party, on the one hand, and of the
Indemnified Party, on the other, in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses. The relative fault of the Indemnifying
Party, on the one hand, and of the Indemnified Party, on the other, shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the Indemnifying Party
or by the Indemnified Party and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or payable by a party
as a result of the losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in the second paragraph of Section 4.01,
any legal or other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim.

          The parties hereto agree that it would not be just and equitable if contribution pursuant to
this Section 4.04 were determined by pro rata allocation (even if the Holders were treated as one
entity for such purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses
referred to in the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 4.04, none of the Indemnified Holders shall be required to contribute,
in the aggregate, any amount in excess of the amount by which the net proceeds received by such
Holder with respect to the Registrable Securities exceeds the greater of (A) the amount paid by
such Holder for its Registrable Securities and (B) the amount of any damages which such Holder has
otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Holders’ obligation to contribute pursuant to this
Section 4.04 are several in proportion to the respective number of Registrable Securities held by
each of the Holders hereunder and not joint.

          For purposes of this Article IV, each controlling person of a Holder shall have the same
rights to contribution as such Holder, and each officer, director, and person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act shall have the same rights to contribution as the Company, subject in each case to the
limitations set forth in the immediately preceding paragraph. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may be made against
another party or parties under this Article IV, notify such party or parties from whom contribution
may be sought, but the omission to so notify such party or parties shall not relieve the party or
parties from who contribution may be sought from any obligation it or they may have under this
Article IV or otherwise except to the extent that it has been prejudiced in any material respect by
such failure. No party shall be liable for contribution with respect to any

18

 

action or claim settled
without its written consent; provided, however, that such written consent was not unreasonably
withheld.

          SECTION 4.05. Additional Indemnity. The indemnity, contribution and expense
reimbursement obligations under this Article IV shall be in addition to any liability each
Indemnifying Party may otherwise have; provided, however, that any payment made by the Company
which results in an Indemnified Party receiving from any source(s) indemnification, contribution or
reimbursement for an amount in excess of the actual loss, liability or expense incurred by such
Indemnified Party, shall be refunded to the Company by the Indemnified Party receiving such excess
payment.

ARTICLE V

MISCELLANEOUS

          SECTION 5.01. Rule 144. The Company agrees it will file in a timely manner all reports
required to be filed by it pursuant to the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder and will take such further action as any Holder of
Registrable Securities may reasonably request in order that such Holder may effect sales of
Registrable Securities without registration within the limitations of the exemptions provided by
Rule 144. At any reasonable time and upon the request of a Holder of Registrable Securities, the
Company will furnish such Holder with such information as may be necessary to enable the Holder to
effect sales of Registrable Securities pursuant to Rule 144 and will deliver to such Holder a
written statement as to whether it has complied with such information and requirements.

          SECTION 5.02. Limitations on Subsequent Registration Rights. From and after the date
of this Agreement, the Company shall not, without the prior written consent of the Holders, enter
into any agreement with any holder or prospective holder of any securities of the Company giving
such holder or prospective holder any registration rights the terms of which are more favorable
than the registration rights granted to Holders of Registrable Securities hereunder.

          SECTION 5.03. Specific Performance. Each Holder, in addition to being entitled to
exercise all rights provided herein or granted by law, including recovery of liquidated or other
damages, will be entitled to specific performance of its rights under this Agreement. The Company
agrees that monetary damages would not be adequate compensation for any loss incurred by reason of
a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.

          SECTION 5.04. Other Agreements. The Company will not on or after the date of this
Agreement enter into any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof.

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          SECTION 5.05. Charter Amendments Affecting the Company’s Common Stock. The Company
will not amend its Certificate of Incorporation in any respect that would materially and adversely
affect the rights of the Holders hereunder.

          SECTION 5.06. 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 or departures from the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of the outstanding shares of Registrable Securities.

          SECTION 5.07. Notices. Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by any party to the others shall be made in
writing, by hand-delivery, telegraph, telex, telecopier, registered first-class mail or air courier
guaranteeing overnight delivery as follows:

          (a) if to the Company:

Lexicon Pharmaceuticals, Inc.

8800 Technology Forest Place

The Woodlands, Texas 77381

Attn: President and Chief Executive Officer

Fax: (281) 863-8095

with copies to each of:

Lexicon Pharmaceuticals, Inc.

8800 Technology Forest Place

The Woodlands, Texas 77381

Attn: Executive Vice President and General Counsel

Fax: (281) 863-8010

and

Lexicon Pharmaceuticals, Inc.

8800 Technology Forest Place

The Woodlands, Texas 77381

Attn: Executive Vice President and Chief Financial Officer

Fax: (281) 863-8095

and

Vinson & Elkins L.L.P.

First City Tower

1001 Fannin Street, Suite 2500

Houston, TX 77002-6760

Attn: Mr. David Palmer Oelman

Fax: (713) 615-5861

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          (b) if to the Investor:

Invus, L.P.

c/o The Invus Group, L.L.C.

750 Lexington Avenue (30th Floor)

New York, New York 10022

Attention: Mr. Raymond Debbane

                 Mr. Christopher Sobecki

with a copy to:

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

Fax: (212) 455-2502

Attention: Mr. Robert Spatt

                 Mr. Peter Malloy

          (c) if to any other Holder:

at the most current address of such Holder maintained by the registrar of
the Company Common Stock.

or to such other place and with such other copies as any party hereto may designate as to itself by
written notice to the others. All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business Days after being
deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied: and on the next Business Day if timely delivered to an air courier
guaranteeing overnight delivery.

          SECTION 5.08. Successors and Assigns.

          (a) This Agreement shall inure to the benefit of and be binding upon the successors and
permitted assigns of each of the parties, including without limitation and without the need for an
express assignment, subsequent holders of Registrable Securities or of the Warrants (the
“Subsequent Holders”); provided, that the Company may not assign its rights or obligations
under this Agreement to any other person or entity without the written consent of a majority of the
outstanding shares of Registrable Securities.

          (b) A Holder of Registrable Securities may assign to a Subsequent Holder all or any portion of
the rights (including one or more Demand Registration rights) of such
transferring Holder under this Agreement; provided, that such assignment of Demand
Registration Rights to a Subsequent Holder shall not increase the Required Number of Demand
Registrations that would have been available to Holders of Registrable Securities pursuant to this
Agreement had the transfer not occurred; provided, further, that no assignment pursuant to this
Section 5.08(a) may be made to a Subsequent Holder that is not an affiliate of the Investor if,
following the transfer of shares of Company Common Stock to such
Subsequent Holder, such

21

 

Subsequent
Holder shall beneficially own less than 3% of the aggregate number of shares of Company Common
Stock then outstanding.

          SECTION 5.09. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the Laws of the State of New York. All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined exclusively in any New York state or
federal court, in each case sitting in the Borough of Manhattan. The parties hereto hereby (a)
submit to the exclusive jurisdiction of any New York state or federal court, in each case sitting
in the Borough of Manhattan, for the purpose of any Action arising out of or relating to this
Agreement brought by any party hereto, and (b) irrevocably waive, and agree not to assert by way of
motion, defense, or otherwise, in any such Action, any claim that it is not subject personally to
the jurisdiction of the above-named courts, that its property is exempt or immune from attachment
or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is
improper, or that this Agreement or the Transactions contemplated hereby may not be enforced in or
by any of the above-named courts.

          SECTION 5.10. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held invalid, illegal or
unenforceable, the validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be affected or impaired thereby.
Upon such determination that any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually acceptable manner in order
that the transactions contemplated hereby be consummated as originally contemplated to the fullest
extent possible.

          SECTION 5.11. Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein with respect to the registration rights granted by the Company with respect
to the Registrable Securities. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.

          SECTION 5.12. Securities Held by the Company or its Subsidiaries. Whenever the consent
or approval of Holders of a specified percentage or Registrable Securities is required hereunder,
Registrable Securities held by the Company or its Subsidiaries shall not be counted in determining
whether such consent or approval was given by the Holders of such required percentage.

          SECTION 5.13. Further Assurances. Each party shall cooperate and take such action as
may be reasonably requested by another party in order to carry out the provisions and purposes of
this Agreement and the transactions contemplated hereby.

          SECTION 5.14. Termination. Unless sooner terminated in accordance with its terms or as
otherwise herein provided, including specifically in Section 2.03(a), this Agreement shall
terminate upon the earlier to occur of (i) the mutual agreement by the parties

22

 

hereto and (ii) with
respect to any Holder, such Holder ceasing to own any Registrable Securities.

          SECTION 5.15. Interpretation. The words “hereof”, “herein” and “hereunder” and words
of like import used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. When reference is made in this Agreement to an Article or
a Section, such reference shall be to an Article or Section of this Agreement, unless otherwise
indicated. The table of contents, table of defined terms and headings contained in this Agreement
are for convenience of reference only and shall not affect in any way the meaning or interpretation
of this Agreement. The language used in this Agreement shall be deemed to be the language chosen
by the parties hereto to express their mutual intent, and no rule of strict construction shall be
applied against any party. Whenever the context may require, any pronouns used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns
and pronouns shall include the plural, and vice versa. Any reference to any federal, state, local
or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. Whenever the words “include,” “includes” or
“including” are used in this Agreement, they shall be deemed to be followed by the words “without
limitation.”

          SECTION 5.16. Counterparts. This Agreement may be executed and delivered (including by
facsimile transmission) in one or more counterparts, and by the parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.

[signature page follows]

23

 

     IN WITNESS HEREOF, the parties hereto have executed and delivered this Agreement as of
the date first written above.

	 	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	LEXICON PHARMACEUTICALS, INC.,

a Delaware limited liability company	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Arthur T. Sands
 

Arthur T. Sands, M.D., Ph.D.
	 	 
	 

	 	Title:
	 	President and Chief Executive Officer	 	 
	 
	 	 	 	 	 	 
	 	 	INVESTOR	 	 
	 
	 	 	 	 	 	 
	 	 	INVUS, L.P.,

a Bermuda limited partnership	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Raymond Debbane
 

Raymond Debbane
	 	 
	 

	 	Title:
	 	President of Invus Advisors, LLC,

its General Partner	 	 

[Signature Page to Registration Rights Agreement]exv10w4

 

Exhibit 10.4

STOCKHOLDERS’ AGREEMENT

Dated as of June 17, 2007

between

Lexicon Pharmaceuticals, Inc.

and

Invus, L.P.

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	Page	 
	ARTICLE I
	 	 	 	 
	CERTAIN DEFINITIONS
	 	 	 	 
	 
	 	 	 	 
	SECTION 1.01 Certain Definitions
	 	 	1	 
	 
	 	 	 	 
	ARTICLE II
	 	 	 	 
	 
	 	 	 	 
	CORPORATE GOVERNANCE
	 	 	 	 
	 
	 	 	 	 
	SECTION 2.01 Composition of the Board
	 	 	6	 
	SECTION 2.02 Vacancies
	 	 	7	 
	SECTION 2.03 Committees; Subsidiary Board
	 	 	7	 
	SECTION 2.04 Certificate of Incorporation and By-Laws to Be Consistent
	 	 	8	 
	SECTION 2.05 Approval of the Investor Required for Certain Actions
	 	 	8	 
	SECTION 2.06 Termination of Corporate Governance Provisions
	 	 	8	 
	 
	 	 	 	 
	ARTICLE III
	 	 	 	 
	 
	 	 	 	 
	VOTING OF SHARES
	 	 	 	 
	 
	 	 	 	 
	SECTION 3.01 Agreement with Respect to Voting of Common Stock
	 	 	9	 
	SECTION 3.02 Termination of Voting Provisions
	 	 	9	 
	 
	 	 	 	 
	ARTICLE IV
	 	 	 	 
	 
	 	 	 	 
	STANDSTILL, ACQUISITIONS
	 	 	 	 
	OF SECURITIES AND OTHER MATTERS
	 	 	 	 
	 
	 	 	 	 
	SECTION 4.01 Acquisitions of Common Stock
	 	 	10	 
	SECTION 4.02 Rights to Purchase New Securities
	 	 	12	 
	 
	 	 	 	 
	ARTICLE V
	 	 	 	 
	 
	RESTRICTIONS ON TRANSFERABILITY OF SECURITIES
	 	 	 	 
	SECTION 5.01 General
	 	 	14	 
	SECTION 5.02 Restrictive Legends
	 	 	15	 
	SECTION 5.03 Termination of Transfer Restriction Provisions
	 	 	15	 
	 
	 	 	 	 
	ARTICLE VI
	 	 	 	 
	 
	 	 	 	 
	INFORMATION RIGHTS
	 	 	 	 

i

 

	 	 	 	 	 
	 	 	Page	 
	SECTION 6.01 Furnishing of Information; Confidentiality
	 	 	16	 
	 
	 	 	 	 
	ARTICLE VII
	 	 	 	 
	MISCELLANEOUS
	 	 	 	 
	 
	 	 	 	 
	SECTION 7.01 Termination Generally
	 	 	17	 
	SECTION 7.02 No Recourse
	 	 	17	 
	SECTION 7.03 Notices
	 	 	17	 
	SECTION 7.04 No Third Party Beneficiaries
	 	 	18	 
	SECTION 7.05 Expenses
	 	 	18	 
	SECTION 7.06 Governing Law
	 	 	19	 
	SECTION 7.07 Waiver of Jury Trial
	 	 	19	 
	SECTION 7.08 Specific Performance
	 	 	19	 
	SECTION 7.09 Counterparts
	 	 	19	 
	SECTION 7.10 Entire Agreement
	 	 	19	 
	SECTION 7.11 Assignment
	 	 	20	 
	SECTION 7.12 Amendment
	 	 	20	 
	SECTION 7.13 Waiver
	 	 	20	 
	SECTION 7.14 Severability
	 	 	20	 
	SECTION 7.15 No Partnership
	 	 	20	 
	SECTION 7.16 Public Announcements
	 	 	20	 
	SECTION 7.17 Delays or Omissions
	 	 	21	 
	SECTION 7.18 Interpretation
	 	 	21	 
	SECTION 7.19 Cumulative Remedies
	 	 	21	 
	SECTION 7.20 Construction
	 	 	21	 

ii

 

STOCKHOLDERS’ AGREEMENT

     This Stockholders’ Agreement (this “Agreement”) is made as of June 17, 2007, among
Lexicon Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and Invus, L.P., a
Bermuda limited partnership (the “Investor”).

     WHEREAS, concurrently with the execution and delivery of this Agreement, the Company and the
Investor will enter into (a) a warrant agreement (the “Warrant Agreement”) which will
govern the terms of warrants to purchase (the “Warrants”) an aggregate of 16,498,353 shares
of common stock, par value $0.001 per share (“Company Common Stock”) to be issued by the
Company to the Investor, (b) a securities purchase agreement (the “Securities Purchase
Agreement”), upon the terms and subject to the conditions of which, (i) the Company will issue
and sell to the Investor, and the Investor will purchase, a number of shares of Company Common
Stock that, together with any shares already owned by the Investor and any shares received by the
Investor upon exercise of the Warrants, equal to 40% of the outstanding shares of Company Common
Stock and (ii) the Investor will have the right to cause the Company to conduct up to two Rights
Offerings (as defined herein) and (c) a registration rights agreement (the “Registration Rights
Agreement”) providing for certain registration rights with respect to the Company Common Stock
issuable as contemplated by the Securities Purchase Agreement and upon the exercise of the
Warrants; and

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, the Investor and the Company hereby
agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

     SECTION 1.01   Certain Definitions. (a) As used in this Agreement, the following terms
shall have the following respective meanings:

     “affiliate” means, with respect to a specified person, a person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is under common
control with, such specified person.

     “beneficial owner” (and the related terms “beneficially owned,”
“beneficial owner” and “beneficial ownership”) has the meaning ascribed to
such term in Rule 13d-3 under the Exchange Act.

     “Board” means the Board of Directors of the Company.

     “By-Laws” means the Restated By-Laws of the Company, effective February 3, 2000, as
they may hereafter be amended from time to time.

     “Cause” means, with respect to any director, a conviction of, or a plea of nolo
contendere to, a crime constituting (i) a felony under the laws of the United States or any state
thereof or (ii) a misdemeanor for which a sentence of more than six months’ imprisonment is
imposed.

 

 

     “Certificate of Incorporation” means the Restated Certificate of Incorporation of the
Company, dated as of April 5, 2000, as it may hereafter be amended from time to time.

     “Commission” means the Securities and Exchange Commission.

     “Confidential Information” means any information obtained by the Investor pursuant to
Section 6.01, except for any information that (a) is or becomes publicly available other than as a
result of a disclosure by the Investor, (b) is already in the Investor’s possession (provided, that
such information was not known by the Investor to be subject to any legal or contractual obligation
of confidentiality owed to the Company), (c) is or becomes available to the Investor on a
non-confidential basis from a source other than the Company (provided, that such source was not
known by the Investor to be subject to any legal or contractual obligation to the Company to keep
such information confidential), or (d) is independently developed by the Investor or on the
Investor’s behalf without violating any of the Investor’s obligations under section 6.01(c).

     “control” (including the terms “controlled by” and “under common control
with”) means the possession, directly or indirectly, or as trustee or executor, of the power to
direct or cause the direction of the management and policies of a person, whether through the
ownership of voting securities, as trustee or executor, by contract, credit arrangement or
otherwise, including the ownership, directly or indirectly, of securities having the power to elect
a majority of the board of directors or similar body governing the affairs of such person.

     “DGCL” means the General Corporation Law of the State of Delaware, as in effect from
time to time.

     “Encumbrance” (including correlative terms such as “Encumber”) means any
security interest, pledge, mortgage, lien, charge, adverse claim of ownership or use,
hypothecation, violation, condition or restriction of any kind or other encumbrance of any kind.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.

     “group” means a “group” within the meaning of Section 13(d)(3) of the Exchange Act.

     “Independence Standard” means the standard of independence necessary for a director to
qualify as an “Independent Director” as such term (or any replacement term) is used under the rules
and listing standards of the Nasdaq Stock Market or any other securities exchange on which the
Company Common Stock is then listed as such rules and listing standards may be amended from time to
time.

     “Independent Directors” means directors who comply with the Independence Standards.

     “Initial Closing” means the closing of the issuance, purchase and sale of the Initial
Shares (as such term is defined in the Securities Purchase Agreement) as contemplated by the
Securities Purchase Agreement.

2

 

     “Investor Designated Director” means such person as is so designated by the Investor
prior to the Initial Closing and from time to time in accordance with this Agreement, to serve as a
member of the Board.

     “Law” means any statute, law (including common law), ordinance, regulation, rule,
code, executive order, injunction, judgment, decree or other order issued or promulgated by any
national, supranational, state, federal, provincial, local or municipal government or any
administrative or regulatory body with authority therefrom with jurisdiction over the Company or
the Investor, as the case may be (including any requirements under the DGCL and the Exchange Act).

     “Marketed Offering” means a registered, underwritten Qualified Offering that is
broadly marketed and has at least 12 buyers (which shall include a registered, directed share
program to at least such number of buyers).

     “Nasdaq Regulation” means the rules and regulations of the Nasdaq Stock Market or any
other applicable securities exchange on which the Company Common Stock is then listed.

     “New Securities” means any capital stock of the Company, whether now authorized or
not, and rights, options or warrants to purchase such capital stock, and securities of any type
whatsoever (including convertible debt securities) that are, or may become, convertible into or
exchangeable or exercisable for capital stock of the Company; provided, that the term “New
Securities” does not include (a) capital stock or rights, options or warrants to acquire capital
stock of the Company issued to employees, consultants, officers or directors of the Company or any
Subsidiary, or which have been reserved for issuance, pursuant to employee stock option, stock
purchase, stock bonus plan, or other similar compensation plan or arrangement approved by the
Board, (b) securities of the Company issued to all then-existing stockholders in connection with
any stock split, stock dividend, reclassification or recapitalization of the Company, (c)
securities of the Company issued upon the exercise of warrants that are outstanding as of the date
of this Agreement, and (iv) securities of the Company issued in connection with a transaction of
the type described in Rule 145 under the Securities Act.

     “Permitted Transferee” means, with respect to a specified person, any affiliate of
such person.

     “person” means any individual, corporation, partnership, limited partnership, limited
liability company, syndicate, person (including a “person” or “group” within the meaning of Section
13(d)(3) of the Exchange Act), trust, association, or entity or government, political subdivision,
agency or instrumentality of government.

     “Qualified Offering” means a bona fide financing transaction by the Company comprised
of an issuance of Company Common Stock by the Company (excluding any shares issued pursuant to
stock options or other stock-based awards issued to employees, consultants,
officers or directors of the Company or any Subsidiary, warrants outstanding as of the date
hereof, the issuance of the Initial Shares, the issuance of any Warrant Shares and the Rights
Offerings) at a price greater than $4.50 per share (appropriately adjusted for any stock splits,

3

 

reverse splits, stock dividends, combinations or similar transactions occurring after the date
hereof and prior to any such Qualified Offering) and which transaction is not entered into in
connection with the entry by the Company into any other transaction (including, a collaboration or
license for the discovery, development or commercialization of pharmaceutical products) involving
the purchaser of such Company Common Stock.

     The terms “register,” “registered” and “registration” refer to a
registration effected by preparing and filing a registration statement in compliance with the
Securities Act and the declaration or ordering of the effectiveness of such registration statement
by the Commission.

     “Related Agreements” means the Securities Purchase Agreement, the Registration Rights
Agreement and the Warrant Agreement.

     “Representative” means, as to any person, such person’s affiliates and its and their
directors, officers, employees, agents, advisors (including financial advisors, counsel and
accountants) and such person’s financing sources.

     “Required Director Number” shall mean (i) until the first anniversary of the Initial
Closing, three Investor Designated Directors, (ii) from and after the first anniversary of the
Initial Closing, a number of Investor Designated Directors equal to the greater of three or 30% of
all members of the Board, rounded up to the nearest whole number of directors; provided, that, if
the percentage of all the outstanding shares of Company Common Stock represented by the number of
shares of Company Common Stock beneficially owned by the Investor falls below 30%, then the
Required Director Number shall be a number of Investor Designated Directors equal to such
percentage of all members of the Board, rounded up to the nearest whole number of directors, and
(iii) from and after the date on which the shares of Company Common Stock (excluding any Restricted
Shares) beneficially owned by the Investor represent more than 50% of the total number of shares of
Company Common Stock then outstanding, a percentage of all the members of Board, rounded up to the
nearest whole number of directors, equal to the percentage of all the outstanding Company Common
Stock represented by the number of shares of Company Common Stock (including Restricted Shares)
beneficially owned by the Investor.

     “Rights” means the rights to purchase shares of Company Common Stock to be issued by
the Company pursuant to the Rights Offerings as contemplated by the Securities Purchase Agreement.

     “Rights Offerings” means the issuance by the Company to its stockholders of rights to
purchase shares Company Common Stock as contemplated by the Securities Purchase Agreement.

     “Rights Offering Threshold” means, as applicable, the First Rights Offering Amount or
the Second Rights Offering Amount (as such terms are defined in the Securities Purchase Agreement).

     “Rule 144” means Rule 144 under the Securities Act, as such rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the SEC.

4

 

     “Sale” means any sale, assignment, transfer, distribution or other disposition of a
security or of a participation therein, or other conveyance of legal or beneficial interest
therein, or any short position in a security or any other action or position otherwise reducing
risk related to ownership through hedging or other derivative instruments.

     “Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

     “Sell” and “Sold” means to complete a Sale.

     “subsidiary” or “subsidiaries” of any person means any corporation,
partnership, limited liability company, joint venture, association or other legal entity of which
such person (either alone or together with any other subsidiary) owns, directly or indirectly, more
than 50% of the stock or other equity interests, the holders of which are generally entitled to
vote for the election of the board of directors or other governing body of such corporation or
other legal entity.

     “Unaffiliated Board” means a majority of (a) the members of the Board not designated
by the Investor pursuant to this Agreement and present at any meeting at which an action by such
members is to be taken or (b) all of the members of the Board not designated by the Investor
pursuant to this Agreement, if action is taken by written consent as permitted under the By-Laws.

     “Unrestricted Shares” means all shares of Company Common Stock beneficially owned by
the Investor that are not Restricted Shares.

     “Warrant Shares” means any shares of Company Common Stock issuable upon the exercise
of the Warrants.

     (b)   Each of the following terms is defined in the Section set forth opposite such term:

	 	 	 
	 	 	Location of
	Defined Term	 	Definition
	Agreement
	 	Preamble
	Company
	 	Preamble
	Company Common Stock
	 	Recitals
	Investor
	 	Preamble
	Midrange Price
	 	§ 4.02(c)
	Notice of Issuance
	 	§ 4.02(b)
	Offering Size
	 	§ 4.02(c)
	Overallotment Shares
	 	§ 4.02(d)
	Percentage Limit
	 	§ 4.01(a)
	Pro Rata Number
	 	§ 4.02(a)
	Price Range
	 	§ 4.02(c)
	Registration Rights Agreement
	 	Recitals
	Restricted Shares
	 	§ 4.01(a)

5

 

	 	 	 
	 	 	Location of
	Defined Term	 	Definition
	Securities Purchase Agreement
	 	Recitals
	Subsidiary Board
	 	§ 2.03(c)
	Warrant Agreement
	 	Recitals
	Warrants
	 	Recitals

ARTICLE II

CORPORATE GOVERNANCE

     SECTION 2.01   Composition of the Board. (a) From and after the Initial Closing, the
Investor shall be entitled to designate the Required Director Number of persons to serve as members
of the Board. Prior to the Initial Closing, the Investor shall designate three persons for election
or appointment as Investor Designated Directors and the Company shall nominate such designees and
shall take such further action as may be necessary to cause such designees to be elected or
appointed to the Board as Investor Designated Directors effective no later than the Initial Closing
Date (as such term is defined in the Securities Purchase Agreement) and from time to time upon
changes in the Required Number of Directors. The Board shall include its determination that the
Investor Designated Directors are Independent Directors in any minutes relating to a meeting at
which such determination is made (or, if action is taken by the unanimous written consent of the
Board, in any consent filed with the minutes of the proceedings of the Board) and in any filing,
announcement or other document or communication required by applicable Law or Nasdaq Regulation. So
long as the Board shall remain classified under the DGCL, it shall be divided into three classes of
an equal, or as close as possible to an equal, number of directors and the Investor Designated
Directors shall be allocated among the classes of the Board as equally as possible (for example,
the initial three Investor Designated Directors shall each be placed in different classes) and
shall otherwise serve and be compensated in a manner consistent with the other members of the Board
and the terms of the Certificate of Incorporation and the By-Laws.

     (b)   From and after the Initial Closing, in connection with each stockholders’ meeting of the
Company at which directors will be elected, the Investor shall be entitled, at any time prior to
the mailing of the applicable proxy statement of the Company, to designate and nominate for
election to the Board the Investor Designated Directors in accordance with Section 2.01(a). The
Company and the Board will include the Investor’s designees in each slate of directors proposed,
recommended or nominated for election by the Company or the Board, and will recommend and use all
reasonable efforts to cause the election of such designees.

     (c)   The Company, subject to the Board’s fiduciary duties, shall take all necessary and
desirable actions within its control (including calling special meetings of the Board and
stockholders) to effectuate the provisions of this Section 2.01. Without limiting the foregoing,
the Company shall use its best efforts, in connection with each annual or special
meeting of stockholders held to elect directors to the Board, to solicit from its stockholders
eligible to vote in the election of directors proxies in favor of the election of each person
designated for election as an Investor Designated Director in accordance with this Section 2.01,

6

 

and against the election of any candidate whose election would adversely impact the election to, or
opportunity to serve on, the Board of any such Investor Designated Director.

     SECTION 2.02   Vacancies. From and after the Initial Closing, in the event of any
vacancy for any reason in any Board seat reserved for Investor Designated Directors, the Investor
shall have the sole right to nominate another person to serve as an Investor Designated Director.
To the extent permitted by the Certificate of Incorporation and the By-Laws, the Company shall
nominate such designees and shall take such further action as may be necessary to cause such
designees to be elected or appointed to the Board as Investor Designated Directors as soon as
possible after the occurrence of the nomination to fill such vacancy. No Investor Designated
Director shall be removed as a director of the Company without Cause, without the approval of a
majority of the other Investor Designated Directors then in office.

     SECTION 2.03   Committees; Subsidiary Board. (a) From and after the Initial Closing,
the Board shall have such committees as may be required by applicable Law or Nasdaq Regulation, and
such other committees as the Board may from time to time establish. Each such committee and the
Board shall take all actions necessary so that each such committee shall be comprised of not less
than three directors. From and after the Initial Closing, upon the request of the Investor and to
the extent permitted by applicable Law and Nasdaq Regulation, subject to Section 2.03(b), the
Company and the Board shall take all actions necessary so that the Investor shall have the same
proportional representation (rounded to the nearest whole number of directors, but in no event less
than one) on each committee of the Board as it has on the Board. The quorum, notice and action
requirements of each committee of the Board shall, to the extent requested by the Investor, be the
same as the quorum, notice and action requirements of the Board.

     (b)   To the extent that no Investor Designated Director is permitted under applicable Law or
Nasdaq Regulations to serve on a particular committee of the Board, the Company and the Board shall
take all action necessary to permit at least one Investor Designated Director to attend each
meeting of such committee as a non-voting observer, in each case to the extent permitted by such
applicable Law or Nasdaq Regulation, and such observer shall be provided with such notice of the
meeting and information regarding the meeting as is provided to members of such committee.
Notwithstanding the foregoing, if the Board is to consider a transaction involving the Company, on
the one hand, and the Investor or its affiliates, on the other hand, and the Board establishes a
special committee in connection with the consideration of such transaction, the Investor Designated
Directors shall not be entitled to be members of, and the Investor shall not be entitled to attend,
the meetings of such special committee.

     (c)   Subject to applicable Law and Nasdaq Regulations, from and after the Initial Closing,
upon the request of the Investor, the Company and the Board shall take all actions necessary so
that the composition of the board of directors, general partner, managing member
(or controlling committee thereof) or any other board or committee serving a similar function
with respect to each of the Company’s subsidiaries (each a “Subsidiary Board”) and each
committee of each Subsidiary Board shall be proportionate to the composition requirements of the
Board and of each committee thereof, such that the Investor shall have the same proportional
representation (rounded to the nearest whole number of directors, but in no event less than one) on
each Subsidiary Board and committee thereof as it has on the Board and committees thereof.

7

 

The
quorum, notice and action requirements of each Subsidiary Board and of each committee of each
Subsidiary Board shall, to the extent requested by the Investor, be the same as the quorum, notice
and action requirements of the Board and each committee thereof.

          SECTION 2.04   Certificate of Incorporation and By-Laws to Be Consistent. The Board
shall take or cause to be taken all lawful action necessary or appropriate to ensure that none of
the Certificate of Incorporation or the By-Laws or any of the corresponding constituent documents
of the Company’s subsidiaries contain any provisions inconsistent with this Agreement or which
would in any way nullify or impair the terms of this Agreement or the rights of the Company or of
the Investor hereunder.

          SECTION 2.05   Approval of the Investor Required for Certain Actions. From and after
the Initial Closing, in addition to any approval by the Board required by the Certificate of
Incorporation, the By-Laws, applicable Law or Nasdaq Regulation, the prior written approval of the
Investor shall be required in order for the Company to take, or the Board to approve, authorize or
effect, any of the following (including by merger, consolidation or otherwise):

     (a)   the creation (by reclassification or otherwise) or issuance of any new class or
series of shares of capital stock of the Company (or securities convertible into or
exercisable for shares of capital stock of the Company) having rights, preferences or
privileges senior to or on parity with the Company Common Stock;

     (b)   any amendment to the Certificate of Incorporation or By-Laws, or the adoption of
or amendment to the certificate of incorporation or by-laws of any subsidiary of the
Company, that would adversely affect the Investor’s rights under this Agreement or any of
the Related Agreements;

     (c)   any action to repurchase, retire, redeem or otherwise acquire any equity
securities (or securities convertible into or exchangeable for equity securities) of the
Company or any subsidiary of the Company, pursuant to self-tender offers, stock repurchase
programs, open market transactions, privately-negotiated purchases or otherwise;

     (d)   any increase in the authorized number of directors of the Board above twelve
(12);

     (e)   take any action to adopt, or propose to adopt, or maintain any shareholders’
rights plan, “poison pill” or other similar plan or agreement, unless the Investor is exempt
from the provisions of such shareholders’ rights plan, “poison pill” or other similar
plan or agreement; or

     (f)   any authorization of, or entering into an agreement for, or the commitment to
agree to take, any of the foregoing actions.

          SECTION 2.06   Termination of Corporate Governance Provisions. (a) The provisions of
Section 2.01, 2.02, 2.03 and 2.04 shall terminate on the date on which the shares of Company Common
Stock beneficially owned by the Investor represent less than 10% of the aggregate number of shares
of Company Common Stock then outstanding. The Investor shall

8

 

have the right to cause any or all of
the provisions of Sections 2.01, 2.02, 2.03 and 2.04, as specified in writing by the Investor, to
terminate on any date following the date on which the shares of Company Common Stock (excluding any
Restricted Shares) beneficially owned by the Investor represent more than 50% of the aggregate
number of shares of Company Common Stock then outstanding.

          (b)   The provisions of Section 2.05 shall terminate upon the earlier to occur of (i) the
tenth anniversary of the Initial Closing and (ii) the date on which the shares of Company Common
Stock beneficially owned by the Investor represent less than 15% of the aggregate number of shares
of Company Common Stock then outstanding.

ARTICLE III

VOTING OF SHARES

          SECTION 3.01   Agreement with Respect to Voting of Common Stock. (a) In any election
of directors at a meeting of the stockholders of the Company occurring following the Initial
Closing, so long as the Company is in compliance with Article 2 and the Required Director Number of
Investor Designated Directors are nominated to and, if applicable serving on, the Board, the
Investor shall cause all shares of Company Common Stock held by it and entitled to vote for the
election of directors to be represented at such meeting either in person or by proxy and to be
voted for all persons nominated by the Board for election as directors, including the Investor
Designated Directors.

          (b)   With respect to all other matters submitted to a vote of the holders of Company Common
Stock after the Initial Closing, the Investor shall vote any Restricted Shares beneficially owned
by it, if any, on such matters in the same proportion as all the votes cast by other holders of
Company Common Stock, unless the Investor and the Company (acting with the approval of the
Unaffiliated Board) shall agree otherwise, and shall be free to vote all Unrestricted Shares in its
sole discretion.

          SECTION 3.02   Termination of Voting Provisions. The provisions of Section 3.01 shall
terminate on the earliest to occur of:

     (a)   the tenth anniversary of the Initial Closing;

     (b)   the date on which the shares of Company Common Stock beneficially owned by the
Investor represent less than 10% of the aggregate number of shares of Company Common Stock
then outstanding;

     (c)   on the date on which the shares of Company Common Stock (excluding any Restricted
Shares) beneficially owned by the Investor represent more than 50% of the aggregate number
of shares of Company Common Stock then outstanding; or

     (d)   the termination of 4.01 pursuant to Section 4.01(c).

9

 

ARTICLE IV

STANDSTILL, ACQUISITIONS

OF SECURITIES AND OTHER MATTERS

     SECTION 4.01   Acquisitions of Common Stock. (a) From and after the Initial Closing,
without the prior approval of the Unaffiliated Board, the Investor shall not, and shall cause its
affiliates not to, purchase or otherwise acquire, directly or indirectly, beneficial ownership of
any shares of Company Common Stock if, after giving effect to any such acquisition, the number of
shares of Company Common Stock beneficially owned by the Investor would exceed 49% of the aggregate
number of shares of Company Common Stock then outstanding. Notwithstanding the foregoing, this
Section 4.01 shall not restrict the acquisition by the Investor or its affiliates of any securities
of the Company (i) by way of stock splits, stock dividends, reclassifications, recapitalizations,
or other distributions by the Company to holders of the Company Common Stock, or (ii) pursuant to
the acquisition of Company Common Stock or other securities as permitted or contemplated by the
Related Agreements, including upon the exercise of Rights issued in accordance with the Securities
Purchase Agreement and the acquisition of any New Securities pursuant to Section 4.02. Any shares
of Company Common Stock acquired by the Investor from third parties after the date hereof, to the
extent, and for so long as, such shares result in the Investor beneficially owning in excess of the
Percentage Limit of all shares of Company Common Stock then outstanding, are referred to herein as
“Restricted Shares”. For the avoidance of doubt, no shares of Common Stock that were
Unrestricted Shares shall become Restricted Shares upon and as a result of the acquisition by the
Investor or its affiliates of additional shares of Company Common Stock as contemplated by the
second sentence of this Section 4.01(a). “Percentage Limit” shall mean 40%; provided, that
if, as a result of any acquisition by the Investor or its affiliates of additional shares of
Company Common Stock or other securities as contemplated by the second sentence of this Section
4.01(a), the Investor’s percentage ownership (excluding any shares that are Restricted Shares
immediately prior to such acquisition) of all the outstanding shares of Company Common Stock would
exceed 40%, then the Percentage Limit shall be such percentage ownership.

     (b)   Except for acquisitions and actions permitted by this Article IV and by the Related
Agreements, the Investor agrees that, from and after the Initial Closing, it will not, and shall
cause its affiliates not to, without the prior approval of the Unaffiliated Board, directly or
indirectly:

     (i)   make or participate, directly or indirectly, in any “solicitation” of
“proxies” (as such terms are used in the rules of the Commission) to vote any voting
securities of the Company or any subsidiary thereof; provided, however, that the
prohibition in this Section 4.01(b) shall not apply to solicitations exempted from
the proxy solicitation rules by Rule 14a-2 under the Exchange Act or any successor
provision;

     (ii)   submit to the Board a written proposal for or offer of (with or without
conditions), any merger, recapitalization, reorganization, business combination or
other extraordinary transaction involving the Company or any subsidiary thereof or
any of their securities or assets, or make any public announcement with respect

10

 

to
such a proposal or offer if it would reasonably be expected that the Company would
conclude that it would have to make a public announcement of such proposal;

     (iii)   enter into any discussions, negotiations, arrangements or
understandings with any third party (other than any person that would be a Permitted
Transferee) with respect to any of the foregoing or any transaction prohibited by
Section 4.01(a), or otherwise form, join or in any way engage in discussions
relating to the formation of, or participation in, a group with any third party
(other than any person that would be a Permitted Transferee), in connection with any
of the foregoing or any transaction prohibited by Section 4.01(a); or

     (iv)   request the Company or any of its Representatives, directly or
indirectly, to amend or waive any provision of this paragraph (including this
sentence);

provided, however, that none of the foregoing shall (A) prevent, restrict, Encumber or in any way
limit the exercise of the fiduciary rights and obligations of any Investor Designated Director as a
director or prevent, restrict, Encumber or in any way limit the ability of any Investor Designated
Director to vote on matters, influence officers, employees, agents, management or the other
directors of the Company, to take any action or make any statement at any meeting of the Board or
any committee thereof, or otherwise act in his or her capacity as director; (B) prevent the
Investor or any affiliate thereof from Selling any shares of Company Common Stock held by it or
voting its shares of Company Common Stock; (C) apply to or restrict any discussions or other
communications between or among directors, members, officers, employees or agents of any member of
the Investor or any affiliate thereof; (iv) prohibit the Investor or any affiliate thereof from
soliciting, offering, seeking to effect or negotiating with any person with respect to transfers of
shares of Company Common Stock otherwise permitted by this Section 4.01 or (D) restrict any
disclosure or statements required to be made by any Investor Designated Director or the Investor
under applicable Law or Nasdaq Regulation.

     (c)   The provisions of this Section 4.01 shall terminate on the earliest to occur of:

     (i)   the tenth anniversary of the Initial Closing;

     (ii)   the date on which the shares of Company Common Stock beneficially owned
by the Investor represent less than 10% of the aggregate number of shares of Company
Common Stock then outstanding;

     (iii)   on the date on which the shares of Company Common Stock (excluding any
Restricted Shares) beneficially owned by the Investor represent more than 50% of the
aggregate number of shares of Company Common Stock then outstanding;

     (iv)   the date on which any person announces or makes public any proposal or
offer relating to (i) any direct or indirect acquisition or purchase, in one
transaction or a series of transactions, of assets (including equity securities of
any subsidiary of the Company) or businesses that constitute 50% or more of the

11

 

revenues, net income or assets of the Company and its subsidiaries, taken as a
whole, or 50% or more of any class of equity securities of the Company, (ii) any
tender offer or exchange offer that if consummated would result in any person
beneficially owning 50% or more of any class of equity securities of the Company, or
(iii) any merger, consolidation, business combination, recapitalization,
liquidation, dissolution, joint venture, share exchange or similar transaction
involving the Company or any of its subsidiaries pursuant to which any person or the
stockholders of any person would beneficially own 50% or more of any class of equity
securities of the Company or of any resulting parent company of the Company, or on
which the Board recommends, proposes to recommend, approves or proposes to approve
any of the foregoing transactions; or

     (v)   the date on which any person (other than the Investor or its affiliates
or any other person controlled by the Investor) acquires beneficial ownership, in
one or a series of transactions, of assets (including equity securities of any
subsidiary of the Company) or businesses that constitute 20% or more of the
revenues, net income or assets of the Company and its subsidiaries, taken as a
whole, or 20% or more of any class of equity securities of the Company, or on which
the Board recommends, proposes to recommend, approves or proposes to approve any of
the foregoing transactions.

     SECTION 4.02   Rights to Purchase New Securities. (a) From and after the Initial
Closing, in the event that the Company proposes to issue New Securities, except in connection with
a bona fide acquisition of the business or assets of another person (it being understood that in
such event, the Investor shall be entitled to purchase in the open market a number of shares of
Company Common Stock necessary to maintain its Pro Rata Number), the Investor shall have the right
to purchase, in lieu of the person to whom the Company proposed to issue such New Securities, in
accordance with paragraph (b) below, a number of New Securities equal to the product of (i) the
total number or amount of New
Securities which the Company proposes to issue at such time and (ii) a fraction the numerator
of which shall be the total number of shares of Company Common Stock which the Investor
beneficially owns at the relevant measurement point (excluding shares, if any, acquired by the
Investor in violation of its obligations under Section 4.01), and the denominator of which shall be
the aggregate number of shares of Company Common Stock then outstanding (the number referred to in
clause (ii), the “Pro Rata Number”).

     (b)   Subject to the provisions of Section 4.02(c), in the event that the Company proposes to
undertake an issuance of New Securities, it shall give written notice (a “Notice of
Issuance”) of its intention to the Investor indicating the exact price per New Security and the
exact number of New Securities to be issued by the Company, and describing the material terms of
the New Securities and the material terms upon which the Company proposes to issue such New
Securities. The Investor shall have 10 business days from the date of receipt of the Notice of
Issuance to agree to purchase all or a portion of the Investor’s pro rata share of such number of
New Securities (as determined pursuant to paragraph (a) above) for the same consideration and
otherwise upon the terms specified in the Notice of Issuance (unless better terms are provided to
any other purchaser) by giving written notice to the Company and stating therein the quantity of
New Securities to be purchased by the Investor. If the Investor exercises its right to

12

 

purchase
New Securities pursuant to this Section 4.02(b), the purchase and sale of such New Securities shall
close at the same time as the issuance of New Securities to the other purchaser or purchasers and,
subject to the preceding sentence, shall be issued on the same terms and subject to the same
conditions as applicable to the other purchaser or purchasers; provided, that (i) such terms and
conditions applicable to the Investor shall not include any restrictions on the transferability of
such New Securities or any standstill, voting or other restriction, it being understood that all
restrictions of such nature are contained in this Agreement, (ii) the Investor shall not be
required to make any representations and warranties except those that relate solely to the Investor
and (iii) the Investor will not be required to undertake any indemnification obligation. The rights
given by the Company under this Section 4.02(b) shall terminate if unexercised within 10 business
days after receipt of the Notice of Issuance referred to in this Section 4.02(b). Notwithstanding
anything to the contrary contained herein, if (i) the price or any other material terms upon which
the Company proposes to issue such New Securities are amended by the Company following the delivery
to the Investor of the Notice of Issuance or (ii) the offering of New Securities to which a Notice
of Issuance relates is not completed within 60 days from the delivery of such notice to the
Investor, the Investor’s election with respect to the purchase of New Securities covered by such
Notice of Issuance shall be void and the Company shall be obligated to deliver a new Notice of
Issuance to the Investor, and the Investor shall be entitled to make a new election with respect to
the purchase by it of New Securities covered by such notice within the 10-business day period from
the date of delivery of the new Notice of Issuance and otherwise in accordance with the procedure
specified in the second sentence of this Section 4.02(b).

     (c)   Notwithstanding anything to the contrary contained in Section 4.02(b), if the Company
proposes to issue New Securities in an aggregate amount of at least $25,000,000, in a Marketed
Offering, the Notice of Issuance may, (A) in lieu of providing the price at which the Company
proposes to issue New Securities as a fixed dollar amount, provide an estimated range of prices
within which the underwriter for such offering reasonably estimates the shares will ultimately be
priced and (B) in lieu of providing an exact number of New Securities to be issued
by the Company in such offering, provide an estimated number the underwriter for such offering
reasonably estimates will ultimately be issued in such offering (the “Offering Size”). If
the Investor desires to exercise its rights under this Section 4.02 with respect to such Marketed
Offering, the Investor shall be required to make an election with respect to the purchase of up to
a number of New Securities being offered equal to its pro rata portion of the Offering Size no
later than 10 business days from the date of receipt of the Notice of Issuance; provided, that (i)
the Investor’s obligation to purchase the number of New Securities subject to its election shall be
conditioned upon (A) the issuance by the Company of a number of shares of Company Common Stock at
least equal to the Offering Size and (B) the New Securities so issued being priced not higher than
10% above the closing price of the Company Common Stock on the Nasdaq Stock Market or the principal
securities exchange on which the Company Common Stock is then listed on the date immediately prior
to the date on which the Notice of Issuance is delivered to the Investor pursuant to this Section
4.02(c) (the “Midrange Price”) and not lower than 10% below the Midrange Price (the
“Price Range”).

     Any Notice of Issuance provided by the Company to the Investor in connection with a Marketed
Offering may specify a number of shares, not to exceed 15% of the Offering Size, that the
underwriters or agents in such offering shall be entitled to purchase upon exercise

13

 

of an
overallotment option, if any (the “Overallotment Shares”). If the Investor desires to
exercise its rights under this Section 4.02 with respect to Overallotment Shares, the Investor
shall be required to make an election with respect to the purchase of up to its pro rata portion of
the Overallotment Shares at the same time the Investor makes an election pursuant to Section
4.02(c); provided, that (i) the Investor’s obligation to purchase Overallotment Shares in
accordance with its election shall be conditioned upon the Overallotment Shares being priced within
the Price Range.

     The Investor shall be required to make the election contemplated by this Section 4.02(c) only
with respect to that amount of New Securities as shall not exceed the current Rights Offering
Threshold. The Investor shall retain the right to make an election in accordance with Section
4.02(b) following the final determination of the offering price and the number of New Securities,
and, if applicable, the underwriters’ determination with respect to their exercise of their
overallotment option, in any such Marketed Offering with respect to (i) all New Securities
exceeding the current Rights Offering Threshold, (ii) all New Securities in excess of the Offering
Size and, if applicable, any overallotment option in excess of the number of Overallotment Shares
specified in the Notice of Issuance provided by the Company in connection with such Marketed
Offering, (iii) all New Securities priced outside the Price Range and (iv) all New Securities in
any offering where the Offering Size is not met. If an offering contemplated by Section 4.02(c) is
not completed within 60 days following the Notice of Issuance with respect thereto, then the
Company will be required to comply again with the provisions of Sections 4.02(b) and 4.02(c) in
order to avail itself of the benefits of this Section 4.02(c). In case an offering contemplated by
this Section 4.02(c) is consummated, the Investor shall be obligated to purchase its shares
hereunder at the closing of such offering if and to the extent the conditions to the Investor’s
obligations hereunder are met, and if such conditions are not met and to the extent the Investor
exercises its right under this Section 4.02, the Investor shall purchase such shares as promptly as
reasonably practicable thereafter, and on the same terms and subject to the same conditions that
would be applicable to the underwriters in such offering; provided, however that (i) such terms and
conditions applicable to the Investor shall not include any restrictions on the
transferability of such New Securities or any standstill, voting or other restrictions, it being
understood that all restrictions of such nature are contained in this Agreement, (ii) the Investor
shall not be required to make any representations and warranties except those that relate solely to
the Investor and (iii) the Investor shall not be required to undertake any indemnity obligations.

     (d)   The provisions of this Section 4.02 shall terminate upon the earlier to occur of the
tenth anniversary of the Initial Closing and the date on which the Investor beneficially owns less
than 10% of the aggregate number of shares of Company Common Stock then outstanding.

ARTICLE V

RESTRICTIONS ON TRANSFERABILITY OF SECURITIES

     SECTION 5.01   General. (a) The shares of Company Common Stock beneficially owned by
the Investor shall not be subject to transfer restrictions, except as expressly provided in this
Article 5.

14

 

          (b)   The Investor agrees that neither it nor its affiliates will transfer shares of Company
Common Stock to any person (other than a Permitted Transferee) if, to the knowledge of the
Investor, after such transfer the purchaser thereof (or any person or group including such
purchaser) would beneficially own more than 14.9% of the aggregate number of shares of Company
Common Stock then outstanding; provided, however, that, subject to Section 4.01, this Section
5.01(b) shall not restrict the Investor from tendering, voting or otherwise having its shares
participate in any tender offer or exchange offer or any merger, consolidation, business
combination, recapitalization, liquidation, dissolution, joint venture, share exchange or similar
transaction.

          SECTION 5.02   Restrictive Legends. (a) Each certificate evidencing shares of
Company Common Stock shall be stamped or otherwise imprinted with legends in substantially the
following form (in addition to any legends required by agreement or by applicable state securities
Laws):

     (i)   THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SECURITIES GENERALLY MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR PURSUANT TO AN APPLICABLE
EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.

     (ii)   THE SECURITIES EVIDENCED HEREBY ARE SUBJECT TO CERTAIN RESTRICTIONS
UNDER THE TERMS OF THE STOCKHOLDERS’ AGREEMENT DATED      , 2007, AS AMENDED
FROM TIME TO TIME, BETWEEN THE ISSUER AND THE HOLDER HEREOF AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF THAT AGREEMENT.

          (b)   The Company shall, at the request of a holder of shares of Company Common Stock, remove
from each certificate evidencing such shares transferred in compliance with the terms of Section
5.01 and with respect to which no rights or obligations under this Agreement shall transfer, the
legend described in Sections 5.02(a)(ii), and shall remove from each certificate evidencing such
shares the legend described in Section 5.02(a)(i) if such shares are to be transferred in a
transaction registered under the Securities Act or pursuant to Rule 144.

          SECTION 5.03   Termination of Transfer Restriction Provisions. The provisions of
Section 5.01 shall terminate on the earliest to occur of:

     (a)   the tenth anniversary of the Initial Closing;

     (b)   the date on which the shares of Company Common Stock beneficially owned by the
Investor represent less than 10% of the aggregate number of shares of Company Common Stock
then outstanding; or

15

 

     (c)   on the date on which the shares of Company Common Stock (excluding any Restricted
Shares) beneficially owned by the Investor represent more than 50% of the aggregate number
of shares of Company Common Stock then outstanding.

ARTICLE VI

INFORMATION RIGHTS

          SECTION 6.01   Furnishing of Information; Confidentiality. (a) The Company shall
furnish or make available to the Investor and its Representatives, promptly after such information
becomes available to the Company:

     (i)   such annual budget, business plans and financial forecasts as are
customarily provided to the Board;

     (ii)   following the end of each fiscal quarter and fiscal year of the Company,
such consolidated financial statements and operations reports of the Company
(including audit reports with respect to fiscal years) as are customarily provided
to the Board;

     (iii)   following the end of each calendar month, such internal management
financial and operations reports regarding the Company’s financial results and
operations as are customarily provided to the Company’s senior management;

     (iv)   all information that is provided to members of the Board in their
capacity as such; and

     (v)   such other financial, management and operations reports reasonably
requested by the Investor (including audited annual and unaudited quarterly
financial statements in the event the Company is no longer obligated to provide such
information in filings with the Commission).

          (b)   The Company shall, and shall cause its subsidiaries and the officers, directors,
employees, auditors and agents of the Company and its subsidiaries to, afford the Investor and its
Representatives reasonable access at all reasonable times to the officers, employees, agents,
properties, offices and other facilities, books and records of the Company and each subsidiary.

          (c)   All Confidential Information shall be kept confidential by the Investor and shall not be
disclosed by the Investor in any manner whatsoever other than as may be required by applicable Law
or Nasdaq Regulation. The Investor acknowledges that any information provided to the Investor by
the Company pursuant to this Section 6.01(c) may constitute material non-public information and
that its possession of such information may subject the Investor to the restrictions of the
Securities Act and the Exchange Act.

          (d)   The Investor may suspend the provisions of this Article VI at any time by delivery of a
written notice to such effect to the Company. The provisions of this Article VI shall

16

 

terminate on
the date on which the shares of Company Common Stock beneficially owned by the Investor and its
affiliates represent less than 10% of the aggregate number of shares of Company Common Stock then
outstanding.

ARTICLE VII

MISCELLANEOUS

     SECTION 7.01   Termination Generally. Except as otherwise specifically provided
herein, (i)   this Agreement shall terminate, except for this Article 7, which shall survive such
termination, (a) upon the written agreement to that effect, signed by all parties hereto or all
parties then possessing any rights hereunder, (b) when the Investor and any of its Permitted
Transferees cease to beneficially own any shares of Common Stock or (c) upon the termination of the
Securities Purchase Agreement prior to the Initial Closing thereunder.

     SECTION 7.02   No Recourse(i)   . Notwithstanding anything that may be expressed or
implied in this Agreement, the Company and the Investor covenant, agree and acknowledge that no
recourse under this Agreement, or any documents or instruments delivered in connection with this
Agreement, shall be had against any current or future director, officer, employee, stockholder,
partner or member of the Investor or of any of its affiliates, assignees or transferees, whether by
the enforcement of any assessment or by any legal or equitable proceeding, or by virtue of any
applicable Law, it being further expressly agreed and acknowledged that no personal liability
whatsoever shall attach to, be imposed on or otherwise be incurred by any current or future
director, officer, employee, stockholder, partner or member of the Investor or of any of its
affiliates, assignees or transferees for any obligations of the Investor under this Agreement, or
any documents or instruments delivered in connection with this Agreement, for any claim based on,
in respect of, or by reason of, such obligations or their creation.

     SECTION 7.03   Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be deemed to have been
duly given upon receipt) by delivery in person, by telecopy or by recognized overnight courier
service to the respective parties at the following addresses (or at such other address for a party
as shall be specified by notice given in accordance with this Section 7.03):

     (a)            if to the Company:

Lexicon Pharmaceuticals, Inc.

8800 Technology Forest Place

The Woodlands, Texas 77381

Attn: President and Chief Executive Officer

Fax: (281) 863-8095

with copies to each of:

Lexicon Pharmaceuticals, Inc.

8800 Technology Forest Place

The Woodlands, Texas 77381

Attn: Executive Vice President and General Counsel

17

 

Fax: (281) 863-8010

and

Lexicon Pharmaceuticals, Inc.

8800 Technology Forest Place

The Woodlands, Texas 77381

Attn: Executive Vice President and Chief Financial Officer

Fax: (281) 863-8095

and

Vinson & Elkins L.L.P.

First City Tower

1001 Fannin Street, Suite 2500

Houston, TX 77002-6760

Attn: Mr. David Palmer Oelman

Fax: (713) 615  -  5861

     (b)            if to the Investor:

Invus, L.P.

c/o The Invus Group, L.L.C.

750 Lexington Avenue (30th Floor)

New York, New York 10022

Attention: Mr. Raymond Debbane

                 Mr. Christopher Sobecki

with a copy to:

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Telecopy No.: (212) 455-2502

Attention: Mr. Robert Spatt

                 Mr. Peter Malloy

     SECTION 7.04   No Third Party Beneficiaries. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and, to the extent permitted by this Agreement,
their respective successors and permitted assigns, and nothing herein, express or implied, is
intended to or shall confer upon any other person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.

     SECTION 7.05   Expenses. Upon demand by the Investor from time to time, the Company
shall promptly reimburse the Investor for, or shall promptly pay directly on behalf of the Investor
or its affiliates, all out-of-pocket costs, fees and expenses (including all fees and expenses of
counsel and other advisors) reasonably incurred by the Investor and its affiliates or

18

 

on their
behalf in connection with or related to the investigation and consideration of the Company and the
Transactions (as defined in the Securities Purchase Agreement), the authorization, preparation,
negotiation, execution, performance and enforcement of the Securities Purchase Agreement and the
Ancillary Agreements (as defined in the Securities Purchase Agreement) and other documentation
related thereto, the consummation of the transactions contemplated by such agreements, and the
monitoring and administration of the Investor’s and its affiliates’ investment in the Company,
except that the Company’s prior written consent will be required for the reimbursement of fees and
expenses of consultants or experts engaged to advise on the Company’s conduct of its business
strategy or operations.

     SECTION 7.06   Governing Law. This Agreement shall be governed by, and construed in accordance with, the Laws of the State
of New York, except as to matters governed by the internal corporation Laws of the State of
Delaware. All actions and proceedings arising out of or relating to this Agreement shall be heard
and determined exclusively in any New York state or federal court, in each case sitting in the
Borough of Manhattan. The parties hereto hereby (a) submit to the exclusive jurisdiction of any New
York state or federal court, in each case sitting in the Borough of Manhattan, for the purpose of
any action or proceeding arising out of or relating to this Agreement brought by any party hereto,
and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any
such action or proceeding, any claim that it is not subject personally to the jurisdiction of the
above-named courts, that its property is exempt or immune from attachment or execution, that the
action or proceeding is brought in an inconvenient forum, that the venue of the action or
proceeding is improper, or that this Agreement or the transactions contemplated hereby may not be
enforced in or by any of the above-named courts.

     SECTION 7.07   Waiver of Jury Trial. Each of the parties hereto hereby waives to the
fullest extent permitted by applicable Law any right it may have to a trial by jury with respect to
any litigation directly or indirectly arising out of, under or in connection with this Agreement or
the transactions contemplated hereby. Each of the parties hereto (a) certifies that no
representative, agent or attorney of any other party has represented, expressly or otherwise, that
such other party would not, in the event of litigation, seek to enforce that foregoing waiver and
(b) acknowledges that it and the other parties hereto have been induced to enter into this
Agreement and the transactions contemplated hereby, as applicable, by, among other things, the
mutual waivers and certifications in this Section 7.07.

     SECTION 7.08   Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any provision of this Agreement was not performed in accordance with
the terms hereof and that the parties hereto shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at Law or in equity.

     SECTION 7.09   Counterparts. This Agreement may be executed and delivered (including
by facsimile transmission) in one or more counterparts, and by the different parties hereto in
separate counterparts, each of which when executed and delivered shall be deemed to be an original
but all of which taken together shall constitute one and the same agreement.

     SECTION 7.10   Entire Agreement. This Agreement and the Related Agreements constitute
the entire agreement among the parties with respect to the subject matter hereof and

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thereof and
supersede all prior agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof and thereof.

     SECTION 7.11   Assignment. This Agreement shall not be assigned by operation of Law or
otherwise without the express written consent of the parties hereto (which consent may be granted
or withheld in the sole discretion of any party) and any such assignment or attempted assignment
without such consent shall be void; provided, that the Investor may assign any or all its rights
under this Agreement to one or more of its affiliates which purchase or hold shares of Company
Common Stock; provided, further, that no such assignment shall relieve the Investor of any of its
obligations hereunder and all shares of Company Common Stock held by any subsidiary or affiliate of
the Investor shall be deemed to be held by the Investor for all purposes under this Agreement. Any
affiliate of the Investor which holds or acquires shares of Company Common Stock shall be subject
to the obligations of the Investor hereunder and all shares owned by the Investor and its
affiliates shall be aggregated and considered to be owned by the Investor for all ownership
thresholds hereunder.

     SECTION 7.12   Amendment. This Agreement may not be amended or modified except (a) by
an instrument in writing signed by, or on behalf of, the Company and the Investor or (b) by a
waiver in accordance with Section 7.13.

     SECTION 7.13   Waiver. Any party to this Agreement may (a) extend the time for the
performance of any of the obligations or other acts of the other party or (c) waive compliance with
any of the agreements of the other party or conditions to such party’s obligations contained
herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing
signed by the party to be bound thereby. Any waiver of any term or condition shall not be construed
as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a
waiver of any other term or condition of this Agreement. The failure of any party hereto to assert
any of its rights hereunder shall not constitute a waiver of any of such rights. All rights and
remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.

     SECTION 7.14   Severability. If any term or other provision of this Agreement is held
to be invalid, illegal or incapable of being enforced by any rule of Law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in full force and
effect for so long as the economic or legal substance of the transactions is not affected in any
manner materially adverse to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of the parties as closely as possible
in a mutually acceptable manner in order that the transactions contemplated hereby be consummated
as originally contemplated to the fullest extent possible.

     SECTION 7.15   No Partnership. No partnership, joint venture or joint undertaking is intended to be, or is, formed among
the parties hereto or any of them by reason of this Agreement or the transactions contemplated
herein.

     SECTION 7.16   Public Announcements. Except as required by Law, no party to this
Agreement shall make, or cause to be made, any press release or public announcement in

20

 

respect of
this Agreement or otherwise communicate with any news media without the prior written consent of
the other parties, and the parties shall cooperate as to the timing and contents of any such press
release or public announcement.

     SECTION 7.17   Delays or Omissions. It is agreed that no delay or omission to exercise
any right, power or remedy accruing to any party, upon any breach, default or noncompliance by
another party under this Agreement, shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein,
or of or in any similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character on the Investors’ part
of any breach, default or noncompliance under this Agreement or any waiver on such party’s part of
any provisions or conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under this Agreement, by
law, or otherwise afforded to any party, shall be cumulative and not alternative.

     SECTION 7.18   Interpretation. The words “hereof”, “herein” and “hereunder” and words
of like import used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. When reference is made in this Agreement to an Article or
a Section, such reference shall be to an Article or Section of this Agreement, unless otherwise
indicated. The table of contents, table of defined terms and headings contained in this Agreement
are for convenience of reference only and shall not affect in any way the meaning or interpretation
of this Agreement. The language used in this Agreement shall be deemed to be the language chosen
by the parties hereto to express their mutual intent, and no rule of strict construction shall be
applied against any party. Whenever the context may require, any pronouns used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns
and pronouns shall include the plural, and vice versa. Any reference to any federal, state, local
or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. Whenever the words “include,” “includes” or
“including” are used in this Agreement, they shall be deemed to be followed by the words “without
limitation.”

     SECTION 7.19   Cumulative Remedies. The rights and remedies provided by this Agreement
are cumulative and the use of any one right or remedy by any party shall not preclude or waive its
right to use any or all
other remedies. Said rights and remedies are given in addition to any other rights the parties
may have by Law or otherwise.

     SECTION 7.20   Construction. Each party hereto acknowledges and agrees it has had the
opportunity to draft, review and edit the language of this Agreement and that no presumption for or
against any party arising out of drafting all or any part of this Agreement will be applied in any
controversy, claim or dispute relating to, in connection with or involving this Agreement.
Accordingly, the parties hereto hereby waive the benefit of any rule of Law or any legal decision
that would require, in cases of uncertainty, that the language of a contract should be interpreted
most strongly against the party who drafted such language.

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(signature page follows)

22

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of
the date first written above by their respective officers thereunto duly authorized.

	 	 	 	 	 
	 	COMPANY:

LEXICON PHARMACEUTICALS, INC.,

a Delaware corporation

 	 
	 	By:  	/s/ Arthur T. Sands
 	 
	 	 	Name:  	Arthur T. Sands, M.D., Ph.D. 	 
	 	 	Title:  	President and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	INVESTOR:

INVUS, L.P.,

a Bermuda limited partnership

 	 
	 	By:  	/s/ Raymond Debbane
 	 
	 	 	Name:  	Raymond Debbane 	 
	 	 	Title:  	President of Invus Advisors, LLC,

its General Partner

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