-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F0sAk16Zw8i95naI+gFHmR8Y4EtQ0a3X40adwve/ZrlYmA4YmGpbTgSsTHK3Rp+Z N6KoQludwiSnmrxgEMNnPA== 0001072613-06-000769.txt : 20060404 0001072613-06-000769.hdr.sgml : 20060404 20060404103341 ACCESSION NUMBER: 0001072613-06-000769 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20060404 DATE AS OF CHANGE: 20060404 GROUP MEMBERS: CHESTNUT STREET PARTNERS, INC. GROUP MEMBERS: CHESTNUT VENTURE PARTNERS, L.P. GROUP MEMBERS: M/C VENTURE INVESTORS, LLC GROUP MEMBERS: M/C VP V, LLC SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ARTISOFT INC CENTRAL INDEX KEY: 0000877931 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 860446453 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-41833 FILM NUMBER: 06735853 BUSINESS ADDRESS: STREET 1: 5 CAMBRIDGE CENTER STREET 2: 3RD FLOOR CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6173540600 MAIL ADDRESS: STREET 1: 5 CAMBRIDGE CENTER STREET 2: 3RD FLOOR CITY: CAMBRIDGE STATE: MA ZIP: 02142 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: M/C Venture Partners V, L.P. CENTRAL INDEX KEY: 0001297712 IRS NUMBER: 043526474 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 75 STATE STREET, SUITE 2500 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 617-345-7234 MAIL ADDRESS: STREET 1: 75 STATE STREET, SUITE 2500 CITY: BOSTON STATE: MA ZIP: 02109 SC 13D/A 1 sch13da_14263.htm SCHEDULE 13D/A - ARTISOFT, INC. Unassociated Document

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
SCHEDULE 13D
(Rule 13d-101)
 
 
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13d-2(a)
(Amendment No. 2)*
 

 
ARTISOFT, INC.
(Name of Issuer)

COMMON STOCK
(Title of Class of Securities)

04314L 20 5
(CUSIP Number)

JOHN W. WATKINS
75 STATE STREET, SUITE 2500
BOSTON, MASSACHUSETTS 02109
(617) 345-7200
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications)

FEBRUARY 9, 2006
(Date of Event which Requires Filing of this Statement)
 

 
If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box.   o 

NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7 for other parties to whom copies are to be sent.

*The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).
 
 
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 2 of 12 Pages
     
 
         
 
1
 
 
 
NAMES OF REPORTING PERSONS.
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY).
 
M/C Venture Partners V, L.P.
04-3526474
 
2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a)  o
(b)  o
 
 
 
3
 
 
SEC USE ONLY
 
 
 
4
 
SOURCE OF FUNDS
 
WC
 
5
 
 
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
o
 
6
 
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
Delaware
 
 
 
 
7
 
 
SOLE VOTING POWER
 
 
0
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED
BY EACH
8
 
 
SHARED VOTING POWER
 
 
26,187,410(*)(**)
 
REPORTING
PERSON
WITH
9
 
 
SOLE DISPOSITIVE POWER
 
 
0
 
 
 
10
 
SHARED DISPOSITIVE POWER
 
 
26,187,410(*)(**)
 
     
11
 
 
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
26,187,410
 
12  
 
 
CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
 
 
 
o
 
 
 
13  
 
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
47.10%(***)
 
 
14  
 
TYPE OF REPORTING PERSON
 
PN
 
 
 
 
  
 
(*) Includes 20,931,572 shares of Common Stock, warrants to purchase 589,918 shares of the Common Stock and 2,831 shares of Series D Preferred Stock (which are immediately convertible at the election of the Reporting Person into 2,359,166 shares of Common Stock). See Item 5.

(**) Pursuant to rule 13d-4, the Reporting Person disclaims beneficial ownership of the securities reflected herein and declares that this Statement shall not be construed as an admission that such person is the beneficial owner of any securities covered hereby. See Item 5.

(***) See Item 5.
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 3 of 12 Pages
     
 
         
 
1
 
 
 
NAMES OF REPORTING PERSONS.
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY).
 
M/C VP V, LLC
04-3526473
 
2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a)  o
(b)  o
 
 
 
3
 
 
SEC USE ONLY
 
 
 
4
 
SOURCE OF FUNDS
 
OO
 
5
 
 
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
o
 
6
 
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
Delaware
 
 
 
 
7
 
 
SOLE VOTING POWER
 
 
0
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED
BY EACH
8
 
 
SHARED VOTING POWER
 
 
26,187,410(*)(**)
 
REPORTING
PERSON
WITH
9
 
 
SOLE DISPOSITIVE POWER
 
 
0
 
 
 
10
 
SHARED DISPOSITIVE POWER
 
 
26,187,410(*)(**)
 
     
11
 
 
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
26,187,410
 
12  
 
 
CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
 
 
 
o
 
 
 
13  
 
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
47.10%(***)
 
 
14  
 
TYPE OF REPORTING PERSON
 
PN
 
 
 
 
  
 
(*) Includes 20,931,572 shares of Common Stock, warrants to purchase 589,918 shares of the Common Stock and 2,831 shares of Series D Preferred Stock (which are immediately convertible at the election of the Reporting Person into 2,359,166 shares of Common Stock). See Item 5.

(**) Pursuant to rule 13d-4, the Reporting Person disclaims beneficial ownership of the securities reflected herein and declares that this Statement shall not be construed as an admission that such person is the beneficial owner of any securities covered hereby. See Item 5.

(***) See Item 5.
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 4 of 12 Pages
     
 
         
 
1
 
 
 
NAMES OF REPORTING PERSONS.
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY).
 
M/C Venture Investors, LLC
04-3459400
 
2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a)  o
(b)  o
 
 
 
3
 
 
SEC USE ONLY
 
 
 
4
 
SOURCE OF FUNDS
 
WC
 
5
 
 
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
o
 
6
 
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
Delaware
 
 
 
 
7
 
 
SOLE VOTING POWER
 
 
0
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED
BY EACH
8
 
 
SHARED VOTING POWER
 
 
26,187,410(*)(**)
 
REPORTING
PERSON
WITH
9
 
 
SOLE DISPOSITIVE POWER
 
 
0
 
 
 
10
 
SHARED DISPOSITIVE POWER
 
 
26,187,410(*)(**)
 
     
11
 
 
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
26,187,410(*)(**)
 
12  
 
 
CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
 
 
 
o
 
 
 
13  
 
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
47.10%(***)
 
 
14  
 
TYPE OF REPORTING PERSON
 
PN
 
 
 
 
  
 
(*) Includes 486,595 shares of Common Stock, warrants to purchase 10,989 shares of the Common Stock and 53 shares of Series D Preferred Stock (which are immediately convertible at the election of the Reporting Person into 44,167 shares of Common Stock). See Item 5.

(**) Pursuant to rule 13d-4, the Reporting Person disclaims beneficial ownership of the securities reflected herein and declares that this Statement shall not be construed as an admission that such person is the beneficial owner of any securities covered hereby. See Item 5.

(***) See Item 5.
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 5 of 12 Pages
     
 
         
 
1
 
 
 
NAMES OF REPORTING PERSONS.
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY).
 
Chestnut Venture Partners, L.P.
04-3545072
 
2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a)  o
(b)  o
 
 
 
3
 
 
SEC USE ONLY
 
 
 
4
 
SOURCE OF FUNDS
 
WC
 
5
 
 
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
o
 
6
 
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
Delaware
 
 
 
 
7
 
 
SOLE VOTING POWER
 
 
0
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED
BY EACH
8
 
 
SHARED VOTING POWER
 
 
26,187,410(*)(**)
 
REPORTING
PERSON
WITH
9
 
 
SOLE DISPOSITIVE POWER
 
 
0
 
 
 
10
 
SHARED DISPOSITIVE POWER
 
 
26,187,410(*)(**)
 
     
11
 
 
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
26,187,410(*)(**)
 
12  
 
 
CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
 
 
 
o
 
 
 
13  
 
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
47.10%(***)
 
 
14  
 
TYPE OF REPORTING PERSON
 
PN
 
 
 
 
  
 
(*) Includes 758,190 shares of Common Stock, warrants to purchase 24,093 shares of the Common Stock and 116 shares of Series D Preferred Stock (which are immediately convertible at the election of the Reporting Person into 96,667 shares of Common Stock). See Item 5.

(**) Pursuant to rule 13d-4, the Reporting Person disclaims beneficial ownership of the securities reflected herein and declares that this Statement shall not be construed as an admission that such person is the beneficial owner of any securities covered hereby. See Item 5.

(***) See Item 5.
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 6 of 12 Pages
     
 
         
 
1
 
 
 
NAMES OF REPORTING PERSONS.
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY).
 
Chestnut Street Partners, Inc.
04-2922556
 
2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
 
(a)  o
(b)  o
 
 
 
3
 
 
SEC USE ONLY
 
 
 
4
 
SOURCE OF FUNDS
 
OO
 
5
 
 
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
o
 
6
 
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
Delaware
 
 
 
 
7
 
 
SOLE VOTING POWER
 
 
0
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED
BY EACH
8
 
 
SHARED VOTING POWER
 
 
26,187,410(*)(**)
 
REPORTING
PERSON
WITH
9
 
 
SOLE DISPOSITIVE POWER
 
 
0
 
 
 
10
 
SHARED DISPOSITIVE POWER
 
 
26,187,410(*)(**)
 
     
11
 
 
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
26,187,410
 
12  
 
 
CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
 
 
 
o
 
 
 
13  
 
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
47.10%(***)
 
 
14  
 
TYPE OF REPORTING PERSON
 
CO
 
 
 
 
  
 
(*) Includes 20,931,572 shares of Common Stock, warrants to purchase 589,918 shares of the Common Stock and 2,831 shares of Series D Preferred Stock (which are immediately convertible at the election of the Reporting Person into 2,359,166 shares of Common Stock). See Item 5.

(**) Pursuant to rule 13d-4, the Reporting Person disclaims beneficial ownership of the securities reflected herein and declares that this Statement shall not be construed as an admission that such person is the beneficial owner of any securities covered hereby. See Item 5.

(***) See Item 5.
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 7 of 12 Pages
     
 

 
Item 1.     Security and Issuer
This Statement on Schedule 13D relates to shares of Common Stock, par value $0.01 per share ("Common Stock"), of Artisoft, Inc., a corporation incorporated under the laws of the State of Delaware ("Artisoft" or the "Issuer"). The principal executive office of the Issuer is located at 5 Cambridge Center, Cambridge, Massachusetts 02142.


Item 2.     Identity and Background
(a) This Statement is being filed by (1) M/C Venture Partners V, L.P. ("M/C Venture Partners V"); (2) M/C VP V, LLC (“M/C VP V”), which is the sole general partner of M/C Venture Partners V; (3) M/C Venture Investors, LLC ("M/C Venture Investors"); (4) Chestnut Venture Partners, L.P. ("Chestnut Venture Partners") and (5) Chestnut Street Partners, Inc. (“Chestnut Street Partners”), which is the sole general partner of Chestnut Venture Partners (each a "Reporting Person" and collectively, the "Reporting Persons").

(b) The residence or business address of each of the Reporting Persons is 75 State Street, Suite 2500, Boston, Massachusetts 02109.

(c) The principal business of M/C Venture Partners V, M/C Venture Investors and Chestnut Venture Partners is investing in securities and other investment instruments. The principal business of M/C VP V and Chestnut Street Partners is to act as general partner of M/C Venture Partners V and Chestnut Venture Partners, respectively.

(d)(e) During the last five years, none of the persons listed in Item 2(a) have been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

(f) Each of M/C Venture Partners V and Chestnut Venture Partners are Delaware limited partnerships. Each of M/C VP V and M/C Venture Investors are Delaware limited liability companies. Chestnut Street Partners is a Delaware corporation.


Item 3.     Source and Amount of Funds or Other Consideration

2005 Financing

On September 28, 2005, M/C Venture Partners V acquired 4,352,109 shares of Common Stock of the Issuer for a total purchase price of $4,955,311.31. The working capital of M/C Venture Partners V was the source of funds for this purchase. No part of the purchase price was or will be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading or voting the securities. In addition, on September 28, 2005, M/C Venture Partners V acquired a warrant to purchase 836,318 shares of Common Stock of the Issuer in satisfaction of outstanding liquidated damages arising out of the Issuer’s failure to register shares of Common Stock issued to M/C Venture Partners V pursuant to that certain stock purchase agreement dated as of September 28, 2004.

On September 28, 2005, M/C Venture Investors acquired 177,743 shares of Common Stock of the Issuer for a total purchase price of $202,378.18. The working capital of M/C Venture Investors was the source of funds for this purchase. No part of the purchase price was or will be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading or voting the securities. In addition, on September 28, 2005, M/C Venture Investors acquired a warrant to purchase 15,579 shares of Common Stock of the Issuer in satisfaction of outstanding liquidated damages arising out of the Issuer’s failure to register shares of Common Stock issued to M/C Venture Investors pursuant to that certain stock purchase agreement dated as of September 28, 2004.

On September 28, 2005, Chestnut Venture Partners acquired 81,074 shares of Common Stock of the Issuer for a total purchase price of $92,310.86. The working capital of Chestnut Venture Partners was the source of funds for this purchase. No part of the purchase price was or will be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading or voting the securities. In addition, on September 28, 2005, Chestnut Venture Partners acquired a warrant to purchase 34,156 shares of Common Stock of the Issuer in satisfaction of outstanding liquidated damages arising out of the Issuer’s failure to register shares of Common Stock issued to Chestnut Venture Partners pursuant to that certain stock purchase agreement dated as of September 28, 2004.

2006 Financing

On February 9, 2006, M/C Venture Partners V acquired 2,831 shares of Series D Convertible Preferred Stock, par value $1.00 per share (the “Series D Preferred Stock”), of the Issuer for a total purchase price of $2,831,607.00. The working capital of M/C Venture Partners V was the source of funds for this purchase. No part of the purchase price was or will be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading or voting the securities. In addition, on February 9, 2006, M/C Venture Partners V acquired a warrant to purchase 589,918 shares of Common Stock of the Issuer.

On February 9, 2006, M/C Venture Investors acquired 53 shares of Series D Preferred Stock of the Issuer for a total purchase price of $52,749.00. The working capital of M/C Venture Investors was the source of funds for this purchase. No part of the purchase price was or will be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading or voting the securities. In addition, on February 9, 2006, M/C Venture Investors acquired a warrant to purchase 10,989 shares of Common Stock of the Issuer.

On February 9, 2006, Chestnut Venture Partners acquired 116 shares of Series D Preferred Stock of the Issuer for a total purchase price of $115,644.00. The working capital of Chestnut Venture Partners was the source of funds for this purchase. No part of the purchase price was or will
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 8 of 12 Pages
     
 
 
 
be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading or voting the securities. In addition, on February 9, 2006, Chestnut Venture Partners acquired a warrant to purchase 24,093 shares of Common Stock of the Issuer.
 
 
Item 4.     Purpose of Transaction
The Reporting Persons acquired and continue to hold the shares of Common Stock, Series D Preferred Stock and the warrants to purchase Common Stock reported herein for investment purposes. The Reporting Persons intend to review continuously their position in the Issuer. Depending on market conditions and other factors that the Reporting Persons may deem relevant to their investment decisions, the Reporting Persons may in the future acquire additional shares of Common Stock, Series D Preferred Stock or warrants to purchase Common Stock, or options or other derivative securities related to the Common Stock, in the open market or in privately negotiated purchases or otherwise and may also, depending on then-current circumstances, dispose of all or a portion of its shares of Common Stock, Series D Preferred Stock or its warrants to purchase Common Stock, or options or other derivative securities related to the shares of Series D Preferred Stock or Common Stock, in one or more transactions, in each case to the extent then permitted by applicable law and regulation.

Each of M/C Venture Partners V, M/C Venture Investors and Chestnut Venture Partners (collectively, the "M/C Entities") acquired its respective shares of Common Stock and Series D Preferred Stock and warrants to purchase shares of Common Stock pursuant to securities purchase agreements, entered into as of September 28, 2005 (the “Common Stock Agreement”) and February 9, 2006 (the “Series D Preferred Stock Agreement”) (as stated in Item 3 above) each by and between the Issuer, the M/C Entities and the other investors named therein.

The Common Stock Agreement provides for the purchase and sale of an aggregate of 11,329,785 shares of Common Stock at a price per share of $1.1386, and includes standard representations and warranties of the Issuer and the investors, as well as additional terms and conditions, including those set forth below. The representations and warranties will survive for one year after the closing. Artisoft has agreed to indemnify the investors and specified related parties against damages with respect to breaches of the representations, warranties and covenants of Artisoft in the Common Stock Agreement. The Common Stock Agreement may be modified, waived or amended pursuant to an instrument in writing signed by the Issuer and with investors constituting a majority-in-interest of the shares held by the investors (subject to certain conditions). In addition, the M/C Entities acquired warrants to purchase up to an aggregate of 886,053 shares of Common Stock in satisfaction of outstanding liquidated damages arising out of the Issuer’s failure to register shares of Common Stock issued to the M/C Entities pursuant to the Common Stock Agreement.

The Series D Preferred Stock Agreement provides for the purchase and sale of an aggregate of 5,000 shares of Series D Preferred Stock at a price per share of $1,000.00, and includes standard representations and warranties of the Issuer and the investors, as well as additional terms and conditions, including those set forth below. The representations and warranties will survive for one year after the closing. Artisoft has agreed to indemnify the investors and specified related parties against damages with respect to breaches of the representations, warranties and covenants of Artisoft in the Series D Preferred Stock Agreement. The Series D Preferred Stock Agreement may be modified, waived or amended pursuant to an instrument in writing signed by the Issuer and with investors constituting a majority-in-interest of the shares held by the investors (subject to certain conditions). In addition, the M/C Entities acquired warrants to purchase up to an aggregate of 1,041,667 shares of Common Stock. Each share of Series D Preferred Stock is immediately convertible at the election of the holder into shares of Common Stock of the Issuer. The Series D Preferred Stock shall be convertible into such number of shares of the Issuer’s Common Stock as is determined by dividing the “Series D Original Issue Price”, which shall initially be $1,000 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting the number of issued and outstanding shares of Series D Preferred Stock), by the “Series D Conversion Price”, which shall initially be $1.20 (subject to customary antidilution adjustments). Each share of Series D Preferred Stock is automatically convertible upon the earlier of (i) the closing of the sale of shares of Common Stock of the Issuer to the public at a price of at least three (3) times the Series D Original Issue Price in an underwritten public offering resulting in at least $50,000,000 of gross proceeds to the Issuer or (ii) the date and time, or the occurrence of an event, specified by vote or written consent of at least a majority in interest of the then outstanding shares of Series D Preferred Stock. If within 180 days after February 9, 2006 the Issuer shall consummate a financing which involves the issuance of certain equity or debt securities in which the aggregate gross proceeds to the Issuer equals or exceeds $10,000,000 (a “Future Financing”), then all outstanding shares of Series D Preferred Stock shall be automatically deemed converted into such securities issued in connection with the Future Financing as is equal to the quotient of (A) the Series D Liquidation Amount (the greater of the Series D Original Issue Price plus all such accrued dividends unpaid thereon or such amount per share as would have been payable had all shares of Series D Preferred Stock been converted to Common Stock) divided by (B) the price per share paid by the investors in the Future Financing.

BOARD OF DIRECTORS

The Common Stock Agreement provides that the size of Artisoft's board of directors be set at seven members, with the board initially consisting of (1) the chief executive officer of Artisoft, (2) one member designated by the former holders of Artisoft's series B preferred stock, (3) one member designated by the former holders of Artisoft's series C preferred stock, (4) two members designated by the M/C Entities and (5) two other directors designated by mutual agreement of the M/C Entities and Artisoft's board of directors. Pursuant to these provisions, the M/C Entities have designated John W. Watkins and Matthew J. Rubins as directors of Artisoft and the M/C Entities and Artisoft's board of directors have mutually agreed to designate Michael P. Downey and Francis E. Girard, each an existing Artisoft director, as Artisoft directors.

Following March 28, 2006, the Common Stock Agreement provides that Artisoft's board of directors will consist of (1) its chief executive officer, (2) one member designated by Special Situations Fund III, L.P., another investor under the Common Stock Agreement, so long as Special Situations Fund III, L.P. and its affiliates continue to beneficially own at least 50% of the shares of Artisoft's common stock acquired upon the conversion of their shares of Artisoft's series B preferred stock, and otherwise, one member designated by the former holders of Artisoft's series B preferred stock and series C preferred stock, (3) two members designated by the M/C Entities and (4) three directors with relevant industry experience designated by the M/C Entities and Artisoft's board of directors.

The investors' designees are entitled to membership on the compensation and nominating committees of the board of directors.
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 9 of 12 Pages
     

 
2
COVENANTS

Artisoft's affirmative covenants under the Common Stock Agreement include obligations related to providing specified significant investors with a right of first refusal on future issuances of securities by Artisoft; seeking a listing of its common stock on the Nasdaq National Market, Nasdaq SmallCap Market or the American Stock Exchange; including the approval of the directors designated by M/C Venture Partners; using a portion of the proceeds from the financing for the acquisition of substantially all of the assets and certain liabilities of Comdial Corporation pursuant to the terms of an asset purchase agreement entered into on September 1, 2005; maintaining insurance; indemnifying and reimbursing the expenses of directors; removing the legends on the certificates representing the shares purchased by the investors (subject to liquidated damages if such removal is delayed); providing information required by Rule 144 under the Securities Act of 1933; and amending Artisoft's certificate of incorporation to the extent necessary to reflect the transactions contemplated by the Common Stock Agreement and the Series D Preferred Stock Agreement, including to increase the amount of authorized but unissued Common Stock to 250,000,000 or such other number as is recommended or approved by Artisoft’s board of directors, such approval to include the approval of the directors designated by M/C Venture Partners.

Artisoft's negative covenants under the Common Stock Agreement relate to obligations not to, without the prior consent of the M/C Entities, enter into a transaction involving a change in control of Artisoft; incur indebtedness in excess of $3.0 million; create any security with an equity component unless that security is junior to the common stock or, subject to specified exceptions, issue any equity securities; transfer its intellectual property; repurchase, redeem or pay dividends on any shares of capital stock (except for dividends or other distributions payable on the common stock solely in the form of additional shares of common stock); grant stock options that are not authorized by a vote of the board of directors or its compensation committee; liquidate or dissolve; change the size of Artisoft's board of directors; amend Artisoft's certificate of incorporation, except as discussed above, or bylaws; change the nature of Artisoft's business; or alter the voting rights of shares of Artisoft's capital stock in a disparate manner.
 
 
REGISTRATION RIGHTS

Artisoft has agreed to register, under the Securities Act of 1933, the shares of Common Stock issued and sold under the Common Stock Agreement and the shares of Common Stock issued upon conversion of Series D Preferred Stock issued and sold under the Series D Preferred Stock Agreement for resale by the investors.
 
Artisoft has agreed to file with the Securities and Exchange Commission registration statements (1) with respect to shares of Common Stock issued pursuant to the Common Stock Agreement on or before December 12, 2005 (the “2005 Registration”) and (2) with respect to shares of Common Stock issued upon conversion of the Series D Preferred Stock pursuant to the Series D Preferred Stock Agreement on or before March 26, 2006 (the “2006 Registration”) (the earlier of the dates such registration statements are actually filed or are required to be filed is a “Filing Date”) and to use its best efforts to cause such registration statements to become effective on or before the respective date that is the earliest of (A) in the event of no review by the staff of the SEC (the “Staff”), within 5 days of being informed by the Staff that the Staff has decided not to review such registration statement, but in no event later than 30 days after the respective Filing Date, (B) in the event of a review by the Staff, within 5 days of being informed by the Staff that the Staff have no further comments on such registration statement, but in no event later than 90 days after the respective Filing Date (the earliest of (A) and (B) thereof with respective to each of the 2005 Registration and the 2006 Registration, each a “Required Effective Date”). If such registration statement i) is not filed on or before the respective Filing Date, ii) is not declared effective by the SEC on or prior to the respective Required Effective Date, or iii) after being declared effective, ceases to be effective and available for any continuous period that exceeds 30 days or for one or more periods that exceed in the aggregate 60 days in any 12-month period, Artisoft will be required, with respect to the 2005 Registration and 2006 Registration, to pay each investor, pursuant to the Common Stock Agreement and the Series D Preferred Stock Agreement, liquidated damages in an amount equal to 1% of the aggregate purchase price paid by such investor under the Common Stock Agreement and the Series D Preferred Stock Agreement (not to exceed 9% of such purchase price, in the aggregate). Artisoft has also made other customary agreements regarding the 2005 Registration and the 2006 Registration, including matters relating to indemnification; maintenance of the registration statement; payment of expenses; and compliance with state "blue sky" laws.

Except as set forth in this Item 4 and Item 6, the Reporting Persons have no plans or proposals that relate to or that would result in any of the actions or transactions described in paragraphs (a) through (j) of Item 4 of the instructions to Schedule 13D. However, the Reporting Persons reserve the right from time to time to formulate plans or proposals regarding the Issuer or any of its securities and to carry out any of the actions or transactions described in paragraphs (a) through (j) of Item 4 of the instructions to Schedule 13D, to the extent it deems advisable.

Item 5.     Interest in Securities of the Issuer.

(a) (b) As of the date of this Statement, M/C Venture Partners V is the record holder of 20,931,572 shares of Common Stock, warrants to purchase 589,918 shares of the Common Stock and 2,831 shares of Series D Preferred Stock (the "M/C Venture Partners V Shares"), M/C Venture Investors is the record holder of is the record holder of 486,595 shares of Common Stock, warrants to purchase 10,989 shares of the Common Stock and 53 shares of Series D Preferred Stock (the "M/C Venture Investors Shares") and Chestnut Venture Partners is the record holder of is the record holder of 758,190 shares of Common Stock, warrants to purchase 24,093 shares of the Common Stock and 116 shares of Series D Preferred Stock (the "Chestnut Venture Partners Shares"). As sole general partner of Chestnut Venture Partners, Chestnut Street Partners may be deemed to beneficially own the Chestnut Venture Partners Shares. By virtue of their relationship as affiliated limited partnerships, whose general partners have overlapping individual general partners, managing members and stockholders, as the case may be, each of M/C Venture Partners V, M/C Venture Investors and Chestnut Venture Partners may be deemed to share the power to direct the disposition and vote of the M/C Venture Partners V Shares, the M/C Venture Investors Shares and the Chestnut Venture Partners Shares, for an aggregate of 23,062,410 shares of Common Stock, 625,000 warrants to purchase shares of Common Stock (which are immediately exercisable for 625,000 shares of Common Stock) and 3,000 shares of Series D Preferred Stock (which are immediately convertible into 2,500,000 shares of Common Stock (the "Record Shares")). The Reporting Persons expressly disclaim
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 10 of 12 Pages
     
 
 
 
membership in a "group" as used in Rule 13d-1(b)(ii)(H). Each Reporting Person also expressly disclaims beneficial ownership of any shares of Common Stock of the Issuer, except for the shares, if any, such Reporting Person holds of record.

The Record Shares represent approximately 60.0% of the Series D Preferred Stock outstanding, based upon (i) 5,000 shares of Series D Preferred Stock reported by the Issuer to be outstanding as of February 9, 2006, (ii) 5,000 shares of Series D Preferred Stock issued pursuant to the Series D Preferred Stock Agreement, and (iii) warrants for the purchase of up to an aggregate of 1,041,667 shares of Common Stock issued pursuant to the Series D Preferred Stock Agreement. The Record Shares (as converted or exercised, as applicable, for shares of Common Stock) represent approximately 47.10% of the Common Stock outstanding, based upon (i) 62,682,086 shares of Common Stock reported by the Issuer to be outstanding as of February 9, 2006.

(c) None of the Reporting Persons has effected any transactions in the shares of Common Stock or Series D Preferred Stock in the past sixty days, other than the transactions described herein.

(d) Not applicable.

(e) Not applicable.


Item 6.     Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer

On September 28, 2005, the Issuer entered into voting agreements (the “Voting Agreements”) with each of the M/C Entities, whereby each of the M/C Entities separately agreed to vote for the approval of the amendment of the Issuer’s certificate of incorporation to reflect the transactions contemplated by the Common Stock Agreement, including to increase the amount of authorized but unissued Common Stock to 250,000,000 or such other number as is recommended or approved by the Issuer’s board of directors, such approval to include the approval of the directors designated by M/C Venture Partners.

On September 28, 2005, the Issuer entered into warrant agreements with each of the M/C Entities, in satisfaction of outstanding liquidated damages arising out of the Issuer’s failure to register shares of Common Stock issued to each of the M/C Entities pursuant to that certain Common Stock Agreement dated as of September 28, 2004.

On February 9, 2006, the Issuer entered into amended voting agreements (the “Amended Voting Agreements”) with each of the M/C Entities, whereby each of the M/C Entities separately agreed to vote for the approval of the amendment of the Issuer’s certificate of incorporation to reflect the transactions contemplated by the Series D Preferred Stock Agreement, including to increase the amount of authorized but unissued Common Stock to 250,000,000 or such other number as is recommended or approved by the Issuer’s board of directors, such approval to include the approval of the directors designated by M/C Venture Partners.

On February 9, 2006, the Issuer entered into warrant agreements (the “Warrants”) with each of the M/C Entities pursuant to that certain Series D Preferred Stock Agreement dated as of February 9, 2006.

Except for the Amended Voting Agreements, the Common Stock Agreement, the Series D Preferred Stock Agreement and the transactions described in this Statement, none of the Reporting Persons have any contract, arrangement, understanding or relationship (legal or otherwise) with any other person with respect to any securities of the Issuer, including but not limited to transfer or voting of any such securities, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss or the giving or withholding of proxies.


Item 7.     Material to be filed as Exhibits
 
Exhibit 1.   Agreement of Joint Filing
     
Exhibit 2.   *Stock Purchase Agreement, dated as of September 28, 2005, by and among Artisoft, Inc. and the investors set forth therein
     
Exhibit 3.   Series D Preferred Stock Agreement, dated as of February 9, 2006, by and among Artisoft, Inc., and the investors set forth therein
     
Exhibit 4.   Certificate of Powers, Designations, Preferences and Rights of the Series D Convertible Preferred Stock of Artisoft, Inc. as filed with the Secretary of State of the State of Delaware on February 9, 2006
     
Exhibit 5.    *Form of Voting Agreement, dated as of September 28, 2005, by and among Artisoft, Inc., and each of the M/C Entities set forth therein
     
Exhibit 6.   Form of Amended Voting Agreement, dated as of February 9, 2006, by and between Artisoft, Inc. and each of the M/C Entities
     
Exhibit 7.   *Form of Warrant, dated as of September 28, 2005, by and between Artisoft, Inc. and each of the M/C Entities and exercisable for the number of shares as set forth below:
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 11 of 12 Pages
     
 
 
 
     
    M/C Venture Partners V - 836,318 shares of Common Stock
    M/C Venture Investors - 15,579 shares of Common Stock
    Chestnut Venture Partners - 34,156 shares of Common Stock
     
Exhibit 8.   Form of Warrant, dated as of February 9, 2006, by and between Artisoft, Inc. and each of the M/C Entities and exercisable for the number of shares as set forth below:
     
 

 
  M/C Venture Partners V — 20,931,572 shares of Common Stock, warrants to purchase 589,918 shares of the Common Stock and 2,831 shares of Series D Preferred Stock
     
  M/C Venture Investors — 486,595 shares of Common Stock, warrants to purchase 10,989 shares of the Common Stock and 53 shares of Series D Preferred Stock
     
  Chestnut Venture Partners — 758,190 shares of Common Stock, warrants to purchase 24,093 shares of the Common Stock and 116 shares of Series D Preferred Stock
 
 
*    Previously filed as an exhibit to Schedule 13D/A on October 17, 2005.

 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
 CUSIP NO.       04314L 20 5
13D
Page 12 of 12 Pages
     
 


SIGNATURE

After reasonable inquiry and to the best of its knowledge and belief, each of the undersigned certifies that the information set forth in this Statement is true, complete and correct.   We also hereby agree to file this statement jointly pursuant to the Agreement listed on Exhibit 1 hereto.
 
 
Date:     March 31, 2006
 
 
M/C VENTURE PARTNERS V, L.P.
 
By: M/C VP V, LLC
   
By: /s/ John W. Watkins
  John W. Watkins, Manager
 
 
 
M/C VP V, LLC
 
By: /s/ John W. Watkins
  John W. Watkins, Manager
 
 

M/C VENTURE INVESTORS, LLC
 
By: /s/ John W. Watkins
  John W. Watkins, Manager
 
 
 
CHESTNUT VENTURE PARTNERS, L.P.
 
By: CHESTNUT STREET PARTNERS, INC.
   
By: /s/ John W. Watkins
  John W. Watkins, as Attorney in Fact
 
 

CHESTNUT STREET PARTNERS, INC.
 
By: /s/ John W. Watkins
  John W. Watkins, as Attorney in Fact
 
 
 
 
 
 
 
Exhibit 1

AGREEMENT OF JOINT FILING

Pursuant to Rule 13d-1(k)(1) under the Securities Exchange Act of 1934, the undersigned hereby agree that only one statement containing the information required by Schedule 13D need be filed with respect to the ownership by each of the undersigned of shares of Common Stock and Series D Preferred Stock of Artisoft, Inc.
 
 
EXECUTED this 31st day of March, 2006.
 
 
M/C VENTURE PARTNERS V, L.P.
 
By: M/C VP V, LLC
   
By: /s/ John W. Watkins
  John W. Watkins, Manager
 
 
 
M/C VP V, LLC
 
By: /s/ John W. Watkins
  John W. Watkins, Manager
 
 

M/C VENTURE INVESTORS, LLC
 
By: /s/ John W. Watkins
  John W. Watkins, Manager
 
 
 
CHESTNUT VENTURE PARTNERS, L.P.
 
By: CHESTNUT STREET PARTNERS, INC.
   
By: /s/ John W. Watkins
  John W. Watkins, as Attorney in Fact
 
 

CHESTNUT STREET PARTNERS, INC.
 
By: /s/ John W. Watkins
  John W. Watkins, as Attorney in Fact
 
 EX-3 2 exhibit3_14263.txt SECURITIES PURCHASE AGREEMENT EXHIBIT 3 --------- SECURITIES PURCHASE AGREEMENT ----------------------------- THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made as of February 9, 2006 by and among Artisoft, Inc., a Delaware corporation (the "Company"), and the investors set forth on Exhibit A hereto (individually, an "Investor" and collectively, the "Investors"). WITNESSETH: WHEREAS, the Company desires to sell to the Investors, and the Investors desire to purchase from the Company (the "Offering"): (i) 5,000 shares (the "Shares") of Series D Convertible Preferred Stock, par value $1.00 per share, of the Company (the "Series D Preferred Stock") at a price per share of $1,000.00 and (ii) warrants (the "Warrants") to purchase an aggregate of 1,041,667 shares of common stock, par value $0.01 per share, of the Company (the "Common Stock"), for a total purchase price of $5,000,000.00 pursuant to the terms of this Agreement; and WHEREAS, the parties hereto desire to enter into this Agreement for the purpose of setting forth certain representations, warranties and covenants made by each to the other as an inducement to the execution and delivery of this Agreement and the conditions precedent to the consummation of the transactions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual provisions, agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF THE SHARES AND WARRANTS 1.1 Authorization and Sale of the Shares and Warrants. Subject to the terms and conditions set forth in this Agreement, the Company has authorized the sale of up to 5,000 Shares. The shares of Common Stock issuable upon conversion of the Shares are referred to as "Preferred Conversion Shares", the shares of the Company's Common Stock issuable upon the exercise of the Warrants are referred to the "Warrant Shares" and the Preferred Conversion Shares and the Warrant Shares are collectively referred to as the "Conversion Shares". 1.2 Agreement to Sell and Purchase the Shares and Warrants. Subject to the terms and conditions of this Agreement, each Investor, severally and not jointly, agrees to purchase at the Closing (as such term is defined in Section 1.3), and the Company agrees to issue and sell to such Investor at the Closing, for the purchase price set forth opposite such Investor's name on Exhibit A, that number of Shares and Warrants set forth opposite such Investor's name on Exhibit A. 1.3 Delivery of the Shares and Warrants at Closing. (a) Except as set forth in this Section 1.3, the completion of the purchase and sale of the Shares and the Warrants (the "Closing") shall occur on the date hereof (the "Closing Date"), at the offices of Goodwin Procter LLP, 53 State Street, Boston, MA 02109 at 10:00 AM Eastern time, or at such other time and place as may be mutually agreed upon by the Company and the Investors. At the Closing, the Company shall (1) either (x) deliver to the Investors one or more stock certificates representing the number of Shares set forth on Exhibit A, each such certificate to be registered in the Securities Purchase Agreement - Page 2 name of each Investor or, if so indicated on the signature page of this Agreement, in the name of a nominee designated by such Investor or (y) direct its transfer agent to deliver such certificates to the Investors (at the address of each Investor set forth on the signature pages hereto) within three (3) business days after the Closing Date; and (2) deliver to each Investor a Warrant substantially in the form attached hereto as Exhibit B to purchase the number of shares of Common Stock set forth opposite such Investor's name on Exhibit A or, if so indicated on the signature page of this Agreement, in the name of a nominee designated by such Investor. (b) The Company's obligation to issue the Shares and the Warrants to the Investors shall be subject to the following conditions, any one or more of which may be waived by the Company: (1) receipt by the Company of a wire transfer of funds to an account designated by the Company in the full amount of the purchase price for all of the Shares and Warrants being purchased hereunder as set forth on Exhibit A; and (2) the accuracy of the representations and warranties made by the Investors and the satisfaction of the undertakings of the Investors to be fulfilled prior to the Closing. (c) The Investors' obligations to purchase the Shares and the Warrants shall be subject to the following conditions, any one or more of which may be waived by any Investor hereunder as to itself only: (1) the Company having authorized, unissued and unreserved shares sufficient to permit issuance of all of the Shares proposed to be sold hereunder; (2) the representations and warranties of the Company set forth herein shall be true, correct and complete as of the Closing Date in all respects (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true, correct and complete as of such date); (3) performance and compliance by the Company with all covenants, agreements obligations and conditions required to be performed on or before the date hereof; (4) the execution of the Consent and Waiver, in the form attached hereto as Exhibit C (the "Consent and Waiver") providing for, among other things, the consent and waiver of certain rights and obligations, by the Company and the parties thereto; (5) the execution of the individual Voting Agreements in the form attached hereto as Exhibit D-1 by and between the Company and certain of the Investors (collectively, the "Voting Agreements") or Amendment No. 1 to Voting Agreement in the form attached hereto as Exhibit D-2 by and between and certain of the Investors (collectively, the "Amended Voting Agreements"); (6) the Investors shall have received such documents as the Investors shall reasonably have requested, including, a standard opinion of Company counsel as to the matters set forth in the form attached as Exhibit E hereto and as to exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), of the sale of the Shares and the Warrants; (7) the Company shall have caused the Certificate of Powers, Designations, Preferences and Rights of the Series D Preferred Stock in the form attached hereto as Exhibit F (the "Certificate of Designations") to be duly adopted and approved by the Company's Board of Directors (the "Board of Directors") and to be duly filed with the Secretary of State of the State of Delaware (and the Investors shall have received written confirmation of the same certified by the Secretary of State of the State of Delaware); and (8) the Company and Silicon Valley Bank ("SVB") shall have executed all necessary amendments, waivers and/or consents relating to certain loan documents and related documentation between the Company and SVB evidencing SVB's consent and approval of the transactions contemplated hereby (such amendments, waivers and/or consents are collectively as the "SVB Documents"), all in form and substance acceptable to the Investors and the Investors shall have received copies of all executed SVB Documents. The Warrants, the Consent and Waiver, the Voting Agreements, the Amended Voting Agreements and the SVB Documents shall collectively be referred to herein as the "Ancillary Agreements." Securities Purchase Agreement - Page 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as disclosed by the Company in a written Disclosure Schedule provided by the Company to the Investors (the "Disclosure Schedule"), the Company hereby represents, warrants and covenants to the Investors, as follows: 2.1 Organization. The Company is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization. Each of the Company and its Subsidiaries (as defined in Rule 405 under the Securities Act) has all requisite corporate power and authority to own, operate and occupy its properties and to conduct its business as presently conducted and as described in the documents filed by the Company under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), since June 30, 2004 through the date hereof, including, without limitation, its most recent report on Form 10-K (the "Exchange Act Documents") and is registered or qualified to do business and in good standing in each jurisdiction in which the nature of the business conducted by it or the location of the properties owned or leased by it requires such qualification and where the failure to be so qualified would have a material adverse effect upon the condition (financial or otherwise), results of operations, business or business prospects, properties or operations of the Company and its Subsidiaries, considered as one enterprise (a "Material Adverse Effect"), and no proceeding to which the Company or any Subsidiary is a party has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. 2.2 Due Authorization and Valid Issuance. The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Ancillary Agreements, and this Agreement and the Ancillary Agreements have been duly authorized and validly executed and delivered by the Company and constitutes the legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Shares and the Warrants being purchased by the Investors hereunder will, and the and the Preferred Conversion Shares and the Warrant Shares, upon issuance and payment therefor pursuant to the terms hereof or thereof, as applicable, be duly authorized, validly issued, fully-paid and nonassessable. 2.3 Non-Contravention. Except as set forth on Schedule 2.3, the execution and delivery of this Agreement and the Ancillary Agreements, the issuance and sale of the Shares under this Agreement, the issuance of the Preferred Conversion Shares upon conversion of the Share, the issuance of the Warrants, the issuance of the Warrant Shares upon exercise of the Warrants, the fulfillment of the terms of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby do not and will not (A) conflict with or constitute a violation of, or default (with the passage of time or otherwise) under, (i) any bond, debenture, note or other evidence of indebtedness, lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or any Subsidiary is a party or by which it or any of its Subsidiaries or their respective properties are bound, (ii) the charter, by-laws or other organizational documents of the Company or any Subsidiary, or (iii) any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company or any Subsidiary or their Securities Purchase Agreement - Page 4 respective properties, except in the case of clauses (i) and (iii) for any such conflicts, violations or defaults which are not reasonably likely to have a Material Adverse Effect or (B) result in the creation or imposition of any lien, encumbrance, claim, security interest or restriction whatsoever upon any of the material properties or assets of the Company or any Subsidiary or an acceleration of indebtedness pursuant to any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or any indenture, mortgage, deed of trust or any other agreement or instrument to which the Company or any Subsidiary is a party or by which any of them is bound or to which any of the material property or assets of the Company or any Subsidiary is subject. No consent, approval, authorization or other order of, or registration, qualification or filing with, any regulatory body, administrative agency, or other governmental body or any other person is required for the execution and delivery of this Agreement or the Ancillary Agreements by the Company, the valid issuance and sale of the Shares to be sold pursuant to this Agreement, the issuance of the Preferred Conversion Shares upon conversion of the Shares, the issuance of the Warrants to be sold pursuant to this Agreement, the issuance of the Warrant Shares upon exercise of the Warrants and the performance by the Company of its other obligations hereunder and thereunder, other than such as have been made or obtained, and except for any post-closing securities filings or notifications required to be made under federal or state securities laws. 2.4 Capitalization. The capitalization of the Company as of January 31, 2006 is as set forth on Schedule 2.4, increased as set forth in the next sentence. The Company has not issued any capital stock since that date other than pursuant to (i) employee benefit plans disclosed in the Exchange Act Documents, or (ii) outstanding warrants, options or other securities disclosed in the Exchange Act Documents. The Company has authorized, unissued, unreserved and undesignated shares of preferred stock sufficient to sell all Shares proposed to be issued under this Agreement. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of the Series D Preferred Stock are as set forth in the Certificate of Designations, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. The Shares to be sold pursuant to this Agreement, the Preferred Conversion Shares to be issued upon conversion of the Shares, the Warrants and the Warrant Shares to be issued upon exercise of the Warrants have all been duly authorized, and when issued and paid for in accordance with the terms of this Agreement or upon conversion of the Shares or upon exercise of the Warrants, as applicable, will be duly and validly issued, fully paid and nonassessable. The Shares and the Warrants shall represent approximately 8.4% of the outstanding capital stock of the Company immediately following the Closing (calculated on a fully diluted basis). The outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and were not issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. Except as set forth in or contemplated by the Exchange Act Documents, there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any unissued shares of capital stock or other equity interest in the Company or any Subsidiary, or any contract, commitment, agreement, understanding or arrangement of any kind to which the Company is a party or of which the Company has knowledge and relating to the issuance or sale of any capital stock of the Company or any Subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options. Except as set forth on Schedule 2.4, without limiting the foregoing and except as provided herein, no preemptive right, co-sale right, right of first refusal, registration right, or other similar right exists with respect to the Shares or the Warrants or the issuance and sale thereof or the issuance of the Preferred Conversion Shares upon conversion of the Shares or the Warrant Shares upon exercise of the Warrants. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the Shares and the Warrants. The Company owns the entire equity interest in each of its Subsidiaries, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable Securities Purchase Agreement - Page 5 interest, other than as described in the Exchange Act Documents. Except as disclosed in the Exchange Act Documents, there are no stockholders agreements, voting agreements or other similar agreements with respect to the Common Stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company's stockholders. 2.5 Legal Proceedings; Disagreements with Advisors. Except as set forth on Schedule 2.5, there is no material legal or governmental proceeding pending or, to the knowledge of the Company, threatened to which the Company or any Subsidiary is or may be a party or of which the business or property of the Company or any Subsidiary is subject that is not disclosed in the Exchange Act Documents. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers. 2.6 No Violations. Neither the Company nor any Subsidiary is in violation of (i) its charter, bylaws, or other organizational document; (ii) in violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company or any Subsidiary, which violation, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect; or (iii) is in default (and there exists no condition which, with the passage of time or otherwise, would constitute a default) in the performance of any bond, debenture, note or any other evidence of indebtedness in any indenture, mortgage, deed of trust or any other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound or by which the properties of the Company or any Subsidiary are bound, which would be reasonably likely to have a Material Adverse Effect. 2.7 Governmental Permits, Etc. With the exception of the matters which are dealt with separately in Sections 2.1, 2.12, 2.13, and 2.14, each of the Company and its Subsidiaries has all necessary franchises, licenses, certificates and other authorizations from any foreign, federal, state or local government or governmental agency, department, or body that are currently necessary for the operation of the business of the Company and its Subsidiaries as currently conducted and as described in the Exchange Act Documents except where the failure to currently possess could not reasonably be expected to have a Material Adverse Effect. 2.8 Intellectual Property. Except as specifically disclosed in the Exchange Act Documents or on Schedule 2.8, (i) each of the Company and its Subsidiaries owns or possesses sufficient rights to use all patents, patent rights, trademarks, copyrights, licenses, inventions, trade secrets, trade names and know-how (collectively, "Intellectual Property") described or referred to in the Exchange Act Documents as owned or possessed by it or that are necessary for the conduct of its business as now conducted or as proposed to be conducted as described in the Exchange Act Documents, except where the failure to currently own or possess would not have a Material Adverse Effect, (ii) neither the Company nor any of its Subsidiaries is infringing, or has received any notice of, or has any knowledge of, any asserted infringement by the Company or any of its Subsidiaries of, any rights of a third party with respect to any Intellectual Property that, individually or in the aggregate, would have a Material Adverse Effect and (iii) neither the Company nor any of its Subsidiaries has received any notice of, or has any knowledge of, infringement by a third party with respect to any Intellectual Property rights of the Company or of any Subsidiary that, individually or in the aggregate, would have a Material Adverse Effect. Except as specifically disclosed in the Exchange Act Documents, all software applications and portions of applications, including, without limitation, interfaces, functions, and class definitions included in whole or in part in any Company Software are either: (i) owned by the Company, (ii) currently in the public domain or otherwise available for use, modification and distribution by the Company without a license from or the approval or consent of any third party, or (iii) licensed or otherwise used by the Company Securities Purchase Agreement - Page 6 pursuant to the terms of valid, binding written agreements ("Software Contract"). Except as specifically disclosed in the Exchange Act Documents, no Software Contract creates, or purports to create, obligations or immunities with respect to any intellectual property rights of the Company enforceable in any jurisdiction of the world, including but not limited to, obligations requiring the disclosure or distribution of all or a portion of the source code for any Company Software. For purposes of this Agreement, "Company Software" means any and all computer programs or portions thereof owned, licensed, distributed, copied, modified, displayed, sublicensed or otherwise used by the Company in connection with the operation of its business as now conducted or as now proposed to be conducted as described in the Exchange Act Documents. 2.9 Financial Statements; Solvency; Obligations to Related Parties. (a) The financial statements of the Company and the related notes contained in the Exchange Act Documents present fairly, in accordance with U.S. generally accepted accounting principles ("GAAP"), the financial position of the Company and its Subsidiaries as of the dates indicated, and the results of its operations and cash flows for the periods therein specified consistent with the books and records of the Company and its Subsidiaries except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which are not expected to be material in amount except as otherwise described in the Exchange Act Documents. Such financial statements (including the related notes) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods therein specified, except as may be disclosed in the notes to such financial statements, or in the case of unaudited statements, as may be permitted by the Securities and Exchange Commission (the "SEC") on Form 10-Q under the Exchange Act and except as disclosed in the Exchange Act Documents. The other financial information contained in the Exchange Act Documents has been prepared on a basis consistent with the financial statements of the Company. (b) The (i) fair saleable value of the Company's assets exceeds the amount that will be required to be paid on or in respect of the Company's existing liabilities and other obligations as such matures or is otherwise payable; (ii) Company's assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted taking into account the current and projected capital requirements of the business conducted by the Company and projected capital availability; and (iii) current cash flow of the Company, together with the proceeds the Company would receive upon liquidation of its assets, after taking into account all anticipated uses of such amounts, would be sufficient to pay all such liabilities and obligations when such is required to be paid. The Company does not intend to incur liabilities and other obligations beyond its ability to pay such as they mature or are required to be paid. The Company has no knowledge of any facts or circumstances which lead it to believe that it will be required to file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction, and has no present intention to so file. (c) Except as set forth in any Exchange Act Documents, there are no obligations of the Company to officers, directors, stockholders or employees of the Company other than: (i) for payment of salary for services rendered and for bonus payments; (ii) reimbursements for reasonable expenses incurred on behalf of the Company; (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors); Securities Purchase Agreement - Page 7 (iv) obligations listed in Company's financial statements; and (v) under applicable laws. (d) Except as described above or in any Exchange Act Filings, (i) none of the officers, directors or, to the best of the Company's knowledge, key employees or stockholders of the Company or any members of their immediate families, are indebted to the Company, individually or in the aggregate, in excess of $60,000; and (ii) none of the officers, directors or, to the best of the Company's knowledge, key employees have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which Company has a business relationship, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than one percent (1%) of such company) which may compete with the Company. Except as described above, no officer, director, or any member of their immediate families, is, directly or indirectly, interested in any material contract with Company and no agreements, understandings or proposed transactions are contemplated between the Company and any such person. Except as set forth in any Exchange Act Documents, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.10 No Material Adverse Change. Except as disclosed in the Exchange Act Documents or on Schedule 2.10, since March 31, 2004, there has not been (i) any material adverse change in the financial condition or results of operations of the Company and its Subsidiaries considered as one enterprise, (ii) any material adverse event affecting the Company or its Subsidiaries, (iii) any obligation, direct or contingent, that is material to the Company and its Subsidiaries considered as one enterprise, incurred by the Company, except obligations incurred in the ordinary course of business or with respect to the transactions contemplated by this Agreement, (iv) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its Subsidiaries, or (v) any loss or damage (whether or not insured) to the physical property of the Company or any of its Subsidiaries which has been sustained which has a Material Adverse Effect. 2.11 Disclosure. The representations and warranties of the Company contained in this Article II as of the date hereof and as of the Closing Date, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company understands and confirms that the Investors will rely on the foregoing representations in effecting transactions in the securities of the Company. 2.12 34 Act and OTCBB Compliance. The Company's Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is quoted on The Nasdaq Stock Market, Inc.'s OTC Bulletin Board quotation service (the "OTCBB"), and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or removal from quotation of the Common Stock from the OTCBB, nor has the Company received any notification that the SEC, the OTCBB or the National Association of Securities Dealers, Inc. ("NASD") is contemplating terminating such registration or quotation. 2.13 Reporting Status. Except as set forth on Schedule 2.13, the Company has filed in a timely manner all documents that the Company was required to file under the Exchange Act during the 12 months preceding the date of this Agreement. The following documents complied as to form in all material respects with the SEC's requirements as of their respective filing dates, and the information contained therein as of the date thereof did not contain an untrue statement of a material fact or omit to Securities Purchase Agreement - Page 8 state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading: (a) all Forms 10-K, 10-Q, 8-K (including any and all amendments thereto) and all Definitive Proxy Statements on Schedule 14A and additional Definitive Proxy Materials filed with the SEC since June 30, 2004; and (b) all other documents, if any, filed by the Company with the SEC since June 30, 2004. 2.14 Issuance and Quotation. The Company shall comply with all requirements of the NASD and the SEC with respect to the issuance of the Shares and the OTCBB with respect to the quotation of the Shares on the OTCBB. 2.15 No Manipulation of Stock. The Company has not taken and will not, in violation of applicable law, take, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. 2.16 Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and immediately after receipt of payment for the Shares and the Warrants will not be, an "investment company" within the meaning of the Investment Company Act and shall conduct its business in a manner so that it will not become subject to the Investment Company Act. 2.17 Foreign Corrupt Practices; Embargoed Person. (a) Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, corruptly used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose to the extent required by law any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended. (b) None of the funds or other assets of the Company constitute or shall constitute property of, or shall be beneficially owned, directly or indirectly, by any person with whom U.S. persons are restricted from engaging in financial or other transactions under United States law, including, but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. ss. 1701 ET SEQ., The Trading with the Enemy Act, 50 U.S.C. App. 1 ET SEQ., and any executive orders or regulations promulgated under any such United States laws (each, an "Embargoed Person"), with the result that the investments evidenced by the Shares are or would be in violation of law and (i) no Embargoed Person has or shall have any interest of any nature whatsoever in the Company with the result that the investments evidenced by the Shares are or would be in violation of law; and (ii) none of the funds of the Company are or shall be derived from any unlawful activity with the result that the investments evidenced by the Shares are or would be in violation of law; provided, that with respect to the covenants contained in this Section 2.17(b), the Company may assume that the Investors are not Securities Purchase Agreement - Page 9 Embargoed Persons. The Company certifies that, to the Company's knowledge, the Company has not been designated, and is not owned or controlled, by an Embargoed Person. 2.18 Accountants. To the Company's knowledge, the Company's auditors (both KPMG LLP and Vitale, Caturano & Company, Ltd.), who the Company expect will express their respective opinions with respect to the financial statements to be incorporated by reference from the Company's Annual Report on Form 10-K for the year ended June 30, 2004, 2005 or 2006, as applicable, into the Registration Statement (as defined below) and the prospectus which forms a part thereof, are independent accountants as required by the Securities Act and the rules and regulations promulgated thereunder and are registered with the Public Company Accounting Oversight Board. 2.19 Contracts. The contracts filed as exhibits to the Exchange Act Documents are in full force and effect on the date hereof, and neither the Company nor, to the Company's knowledge, any other party to such contracts is in breach of or default under any of such contracts which would have a Material Adverse Effect. The Company has filed with the SEC all contracts and agreements required to be filed by the Exchange Act. 2.20 Taxes. The Company has filed all necessary federal, state and foreign income and franchise tax returns due to be filed as of the date hereof and has paid or accrued all taxes shown as due thereon, and the Company has no knowledge of a tax deficiency which has been or might be asserted or threatened against it which would have a Material Adverse Effect. 2.21 Transfer Taxes. On the Closing Date, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Shares to be sold to the Investor hereunder will be, or will have been, fully paid or provided for by the Company and all laws imposing such taxes will be or will have been fully complied with. 2.22 Private Offering. Assuming the correctness of the representations and warranties of the Investors set forth in Article V hereof, the offer and sale of Shares and Warrants hereunder is exempt from registration under the Securities Act. The Company has not in the past nor will it hereafter take any action to sell, offer for sale or solicit offers to buy any securities of the Company which would bring the offer, issuance or sale of the Shares and the Warrants as contemplated by this Agreement, within the provisions of Section 5 of the Securities Act, unless such offer, issuance or sale was or shall be within the exemptions of Section 4 of the Securities Act. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Shares and/or the Warrants by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act). The Company has offered the Shares and the Warrants for sale only to the Investors and certain other "accredited investors" within the meaning of Rule 501 under the Securities Act. 2.23 Controls and Procedures. The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date. The Company has established and maintains an effective system of internal control over financial reporting (as such term is defined in the Exchange Act ) regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with GAAP and includes policies and procedures that (i) pertain to maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer's assets that could have a Securities Purchase Agreement - Page 10 Material Adverse Effect on the financial statements. Except as set forth in the Exchange Act Documents, the Company has established and maintains disclosure controls and procedures (as defined in Exchange Act) that are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, including, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company's certifying officers have evaluated the effectiveness of the Company's disclosure controls and procedures and presented in the applicable Exchange Act Documents their conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by such Exchange Act Documents based on such evaluation. Since the last such evaluation date, there has been no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, and no significant deficiencies or material weaknesses in internal controls over financial reporting, or other factors that could significantly affect the Company's internal control over financial reporting, have been identified. ARTICLE III AFFIRMATIVE COVENANTS OF THE COMPANY The Company hereby covenants (i) with respect to Section 3.3, with all of the Investors for so long as such Investors beneficially own any Shares and/or Conversion Shares, (ii) with respect to Section 3.1, with each of (1) Greenway (as defined in Exhibit A) for so long as Greenway owns at least 50% of the Shares initially purchased by it hereunder and (2) those Investors who, after the issuance and sale of the Shares and the Warrants pursuant to this Agreement, will beneficially own at least 20% of the Common Stock (calculated on a fully-diluted basis) (the "20% Investors") for so long as such Investors beneficially own at least 20% of the Common Stock (calculated on a fully-diluted basis); (iii) in addition to and not in lieu of the foregoing (it being understood that immediately following the Closing, M/C Venture Partners (as defined in Exhibit A) shall also qualify as a 20% Investor), with respect to Sections 3.1-3.2 and Sections 3.4-3.7, M/C Venture Partners for so long as M/C Venture Partners owns at least 50% of the Shares initially purchased by it hereunder, as follows: 3.1 Right of First Refusal. (a) Right of First Refusal. The Company shall not issue, sell or exchange, agree or obligate itself to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, in a transaction not involving a public offering, any (i) shares of Common Stock, (ii) any other equity security of the Company, including without limitation, preferred shares, (iii) any debt security of the Company (other than debt with no equity feature) including without limitation, any debt security which by its terms is convertible into or exchangeable for any equity security of the Company, (iv) any security of the Company that is a combination of debt and equity, or (v) any option, warrant or other right to subscribe for, purchase or otherwise acquire any such equity security or any such debt security of the Company, unless in each case the Company shall have first offered to sell such securities (the "Offered Securities") to the 20% Investors and each other person or entity that has such a right (including, without limitation, Greenway for as long as Greenway meets the requirements set forth in clause (ii)(1) of the first paragraph of this Article III) (each an "Offeree" and collectively, the "Offerees") as follows: Each Offeree shall have the right to purchase (x) that portion of the Offered Securities as the number of shares of Common Stock then held (including shares then issuable upon the exercise or conversion of outstanding securities) Securities Purchase Agreement - Page 11 by such Offeree bears to the total number of shares of issued and outstanding Common Stock of the Company calculated on a fully diluted basis to include (i) the total number of shares of Common Stock subject to outstanding awards granted under stock plans of the Company and (ii) the total number of shares that could be issued upon the exercise or conversion of outstanding securities (the "Basic Amount"), and (y) such additional portion of the Offered Securities as such Offeree shall indicate it will purchase should the other Offerees subscribe for less than their Basic Amounts (the "Undersubscription Amount"), at a price and on such other terms as shall have been specified by the Company in writing delivered to such Offeree (the "Offer"), which Offer by its terms shall remain open and irrevocable for a period of twenty (20) days from receipt of the offer. (b) Notice of Acceptance. Notice of each Offeree's intention to accept, in whole or in part, any Offer made shall be evidenced by a writing signed by such Offeree and delivered to the Company prior to the end of the 20-day period of such offer, setting forth such of the Offeree's Basic Amount as such Offeree elects to purchase and, if such Offeree shall elect to purchase all of its Basic Amount, such Undersubscription Amount as such Offeree shall elect to purchase (the "Notice of Acceptance"). If the Basic Amounts subscribed for by all Offerees are less than the total Offered Securities, then each Offeree who has set forth Undersubscription Amounts in its Notice of Acceptance shall be entitled to purchase, in addition to the Basic Amounts subscribed for, all Undersubscription Amounts it has subscribed for; provided, however, that should the Undersubscription Amounts subscribed for exceed the difference between the Offered Securities and the Basic Amounts subscribed for (the "Available Undersubscription Amount"), each Offeree who has subscribed for any Undersubscription Amount shall be entitled to purchase only that portion of the Available Undersubscription Amount as the Undersubscription Amount subscribed for by such Offeree bears to the total Undersubscription Amounts subscribed for by all Offerees, subject to rounding by the Board of Directors to the extent it reasonably deems necessary. (c) Conditions to Acceptances and Purchase. (i) Permitted Sales of Refused Securities. In the event that Notices of Acceptance are not given by the Offerees in respect of all the Offered Securities, the Company shall have ninety (90) days from the expiration of the period set forth above to close the sale of all or any part of such Offered Securities as to which a Notice of Acceptance has not been given by the Offerees (the "Refused Securities") to the Person or Persons specified in the Offer, but only for cash and otherwise in all respects upon terms and conditions, including, without limitation, unit price and interest rates, which are no more favorable, in the aggregate, to such other person or persons or less favorable to the Company than those set forth in the Offer. (ii) Reduction in Amount of Offered Securities. In the event the Company shall propose to sell less than all the Refused Securities (any such sale to be in the manner and on the terms specified above), then each Offeree may, at its sole option and in its sole discretion, reduce the number of, or other units of the Offered Securities specified in its respective Notices of Acceptance to an amount which shall be not less than the amount of the Offered Securities which the Offeree elected to purchase pursuant to (b) above multiplied by a fraction, (i) the numerator of which shall be the amount of Offered Securities which the Company actually proposes to sell, and (ii) the denominator of which shall be the amount of all Offered Securities the Company proposed to sell in its writing delivered pursuant to Section 3.1(a) above. In the event that any Offeree so elects to reduce the number or amount of Offered Securities specified in its respective Notices of Acceptance, the Company may not sell or otherwise dispose of more than the reduced amount of the Offered Securities until such securities have again been offered to the Offerees in accordance with Section 3.1(a). Securities Purchase Agreement - Page 12 (iii) Closing. Upon the closing, which shall include full payment to the Company, of the sale to such other person or persons of all or less than all the Refused Securities, the Offerees shall purchase from the Company, and the Company shall sell to the Offerees, the number of Offered Securities specified in the Notices of Acceptance, as reduced pursuant to Section 3.1(b) above if the Offerees have so elected, upon the terms and conditions specified in the Offer. The purchase by the Offerees of any Offered Securities is subject in all cases to the preparation, execution and delivery by the Company and the Offerees of a purchase agreement relating to such Offered Securities reasonably satisfactory in form and substance to the Company and the Offerees and their respective counsel. (d) Further Sale. In each case, any Offered Securities not purchased by the Offerees or other person or persons in accordance with Section 3.1(c)(iii) above may not be sold or otherwise disposed of until they are again offered to the Offerees under the procedures specified in Section 3.1(c)(i)-(iii) above. (e) Exceptions. The rights of the Investors under this Section 3.1 shall not apply to: (i) Common Stock issued as a stock dividend to holders of Common Stock or upon any subdivision or combination of shares of Common Stock, (ii) any capital stock or derivative thereof granted to an employee, director or consultant under a stock plan approved by the Board of Directors and the Company's stockholders, (iii) any securities issued as consideration for the acquisition of another entity by the Company by merger or share exchange (whereby the Company owns no less than 51% of the voting power of the surviving entity) or purchase of substantially all of such entity's stock or assets, if such acquisition is approved by the Board of Directors, (iv) any securities issued in connection with a strategic partnership, joint venture or other similar agreement, provided that the purpose of such arrangement is not primarily the raising of capital and that such arrangement is approved unanimously by the Board of Directors, (v) any securities issued to a financial institution in connection with a bank loan or lease with such financial institution provided that such is approved unanimously by the Board of Directors; (vi) securities issuable upon the exercise or conversion of securities outstanding on the Closing Date; (vii) the Shares, the Warrants, the Preferred Conversion Shares issued upon conversion of the Shares and the Warrant Shares issued upon the exercise of the Warrants; and (viii) the Additional Warrants (as defined below) and the shares of Common Stock issued or issuable upon the exercise of the Additional Warrants. (f) Additional Greenway Rights with Respect to the Future Financing Transaction. (i) Notwithstanding anything to the contrary set forth in Section 3.1(a), and subject to the provisions of this Section 3.1(f), with respect to the Future Financing Transaction (as defined in Section 3.6(b)) only, Greenway's Basic Amount of the Offered Securities proposed to be issued in such Future Financing Transaction shall be equal to the lesser of (x) 20% of such Offered Securities Purchase Agreement - Page 13 Securities or (y) $3 million of such Offered Securities. All other provisions of this Section 3.1 shall apply to Greenway in connection with such Future Financing Transaction. For the avoidance of doubt, (1) the calculation of Greenway's Basic Amount pursuant to this Section 3.1(f) shall apply to the Future Financing Transaction only and shall not apply in connection with any other proposed issuance of Offered Securities (and the calculation of Greenway's Basic Amount of such other Offered Securities shall be made in accordance with Section 3.1(a)); and (2) the provisions of this Section 3.1(f) shall be null and void and without any further force or effect from and after the consummation of such Future Financing Transaction. (ii) The Company hereby represents and warrants to Greenway that, based on the facts known to the Company as of the date hereof, the rights granted to Greenway in Section 3.1(f)(i), if exercised on the date hereof, would not conflict with or violate any contract, agreement or instrument to which the Company is a party or by which it may be bound. So long as Greenway retains the rights provided in Section 3(f)(i), (1) the Company shall not enter into or amend any contract, agreement or instrument that would conflict with or limit in any manner the rights granted to Greenway pursuant to this Section 3.1(f); and (2) in the event that the terms of any contract, agreement or instrument existing on the date of this Agreement to which the Company is a party or by which it is bound conflicts with or would limit in any manner the rights granted to Greenway under Section 3.1(f)(i), the Company shall use its commercially reasonable efforts to obtain an amendment or waiver of the provisions of such other contract, agreement or instrument to the extent necessary to permit Greenway to fully exercise its rights under this Section 3.1(f)(i). If the Company fails to obtain any such amendments or waivers, then Greenway's Basic Amount (as calculated in accordance with Section 3.1(f)(i)) of the Offered Securities in the Future Financing Transaction shall be limited to the extent, but only to the extent, that the rights granted to Greenway under Section 3.1(f)(i) do not conflict with the terms of such other contract, agreement or instrument; provided, however, that no such limitation shall affect Greenway's right to invest up to its Basic Amount (calculated without regard to Section 3.1(f)(i)). 3.2 Restated Charter; Further Assurances. The Company hereby agrees to seek stockholder approval at the Annual Meeting (as defined below) to amend and restate its certificate of incorporation (the "Restated Charter") to implement any and all terms of the transactions contemplated by this Agreement, including, without limitation, (i) eliminating all authorized shares of Series B Preferred Stock, par value $1.00 per share, and Series C Preferred Stock, par value $1.00 per share, of the Company, (ii) to increase the amount of authorized but unissued capital and Common Stock to 250,000,000 or such other number as is recommended or approved by the Board of Directors including the directors designated by M/C Venture Partners, (iii) to increase the amount of authorized but unissued and undesignated shares of preferred stock to 30,000,000 or such other number as is recommended or approved by the Board of Directors including the directors designated by M/C Venture Partners, and (iv) to incorporate the powers, designations, preferences and rights of the Series D Preferred Stock as the same that are set forth in the Certificate of Designations. In connection with the foregoing, the Company shall (i) take all further actions, execute all further documents and perform all further things necessary to give effect to the provisions of this Agreement and (ii) consult with and keep informed, and shall cause the appropriate officers, directors and legal counsel to consult with and keep informed, legal counsel to the Investors (including, without limitation, legal counsel to M/C Venture Partners). 3.3 Registration of the Conversion Shares; Compliance with the Securities Act. (a) Registration Procedures and Other Matters. The Company shall: (i) subject to receipt of necessary information from the Investors after prompt request from the Company to the Investors to provide such information, prepare and file with the Securities Purchase Agreement - Page 14 SEC as promptly as possible after the Closing and in no event later than 45 days after the Closing (the "Target Date"; the earlier of the date such registration statement is actually filed with the SEC and the Target Date is the "Filing Date"), a registration statement on Form S-3, Form S-2, or Form S-1 (the "Registration Statement") to enable the resale of the Conversion Shares by the Investors from time to time through any quotation system on which the Common Stock is quoted or listed, if applicable, or in privately-negotiated transactions (as used in this Section 3.3 and in Section 3.7 only, the term "Conversion Shares" shall include any securities into which the Conversion Shares are reclassified after the date hereof); (ii) use its best efforts, subject to receipt of necessary information from the Investors after prompt request from the Company to the Investors to provide such information (provided that failure on the part of one Investor shall not relieve the Company from its obligation to use best efforts with respect to complying Investors), to cause the Registration Statement to become effective on or before the date that is the earliest of (1) in the event of no review by the staff of the SEC (the "Staff"), within 5 days of being informed by the Staff that the Staff has decided not to review the Registration Statement, but in no event later than 30 days after the Filing Date, (2) in the event of a review by the Staff, within 5 days of being informed by the Staff that the Staff have no further comments on such Registration Statement, but in no event later than 90 days after the Closing Date (the earliest of (1) and (2) thereof, the "Required Effective Date" and the date the Registration Statement is initially declared effective by the SEC, the "Effective Date"), such efforts to include, without limiting the generality of the foregoing, preparing and filing with the SEC in such period any financial statements that are required to be filed prior to the effectiveness of such Registration Statement; and, in the event that the filing referred to in Section 3.3(a)(i) above is on a form other than Form S-3, the Company shall use its best efforts, subject to receipt of necessary information from the Investors after prompt request from the Company to the Investors to provide such information (provided that failure on the part of one Investor shall not relieve the Company from its obligation to use best efforts with respect to complying Investors), to prepare and file with the SEC, within 10 days after the Company first becomes eligible to file a registration statement on Form S-3, a registration statement on Form S-3 (the "S-3 Registration Statement") to enable the resale of the Conversion Shares by the Investors from time to time through any quotation system on which the Common Stock is quoted or listed or in privately-negotiated transactions; and to use its best efforts to cause the S-3 Registration Statement to become effective as soon as practicable thereafter, such efforts to include, without limiting the generality of the foregoing, preparing and filing with the SEC as promptly as practicable any financial statements that are required to be filed prior to the effectiveness of such S-3 Registration Statement (the term "Registration Statement" shall mean the S-1 or S-2 Registration Statement until the S-3 Registration Statement is declared effective by the SEC, after which time it shall mean the S-3 Registration Statement); (iii) use its best efforts to prepare and file with the SEC such amendments and supplements to the Registration Statement and the Prospectus (as used herein, the term "Prospectus" shall mean (1) the prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Conversion Shares covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus, and (2) any "free writing prospectus" as defined in Rule 163 under the Securities Act) used in connection therewith as may be necessary to keep the Registration Statement current, effective and free from any material misstatement or omission to state a material fact for a period not exceeding, with respect to each Investor's Conversion Shares purchased hereunder, the earlier of (x) the date on which such Investor may sell all Conversion Shares then held by the Investor without restriction by the volume limitations of Rule 144(e) of the Securities Act and (y) such time as all Conversion Shares held by such Investor have been sold pursuant to a registration statement; Securities Purchase Agreement - Page 15 (iv) comply with Rule 172 of the Securities Act and (x) advise the Investors promptly of any failure by the Company to satisfy the conditions of such Rule 172 and (y) promptly furnish to the Investors with respect to the Conversion Shares registered under the Registration Statement such number of copies of the Registration Statement, Prospectuses and Preliminary Prospectuses in conformity with the requirements of the Securities Act and such other documents as the Investors may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Conversion Shares by the Investors; (v) file documents required of the Company for blue sky clearance in states specified in writing by any Investor and use its best efforts to maintain such blue sky qualifications during the period the Company is required to maintain the effectiveness of the Registration Statement pursuant to Section 3.3(a)(iii); provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; (vi) bear all expenses in connection with the procedures in paragraph (i) through (v), (viii) and the last paragraph of this Section 3.3(a) and the registration of the Conversion Shares pursuant to the Registration Statement; (vii) advise the Investors, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the SEC delaying or suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued; and (viii) provide a "Plan of Distribution" section of the Registration Statement substantially in the form attached hereto as Exhibit H hereto (subject to the comments of the SEC). Notwithstanding anything to the contrary herein, the Registration Statement shall cover only the Conversion Shares and any other securities with respect to which the Company has registration obligations as of the date hereof. In no event at any time before the Registration Statement becomes effective with respect to the Conversion Shares shall the Company publicly announce or file any other registration statement, other than registrations on Form S-8, without the prior written of a majority-in-interest of the Shares to be purchased by the Investors hereunder (the "Majority Investors' Consent"). The Company understands that the Investors disclaim being underwriters, but any Investor being deemed an underwriter by the SEC shall not relieve the Company of any obligations it has hereunder; provided, however that if the Company receives notification from the SEC that an Investor is deemed an underwriter, then the period by which the Company is obligated to submit an acceleration request to the SEC shall be extended to the earlier of (x) the 90th day after such SEC notification, or (y) 120 days after the initial filing of the Registration Statement with the SEC. Within three business days of the Effective Date, the Company shall advise its transfer agent that the shares are subject to an effective registration statement and can be reissued free of restrictive legend upon notice of a sale by an Investor and confirmation by such Investor that it has complied with the prospectus delivery requirements, provided that the Company has not advised the transfer agent orally or in writing that the registration statement has been suspended; provided, however, in the event the Company's transfer agent requires an opinion of counsel to the Company for an such reissuance, within Securities Purchase Agreement - Page 16 three business days of any such request for an opinion by the transfer agent, the Company shall cause its counsel to issue a blanket opinion to the transfer agent stating the foregoing. (b) Transfer of Conversion Shares After Registration; Suspension. (i) Each Investor, severally and not jointly, agrees that it will not effect any disposition of the Conversion Shares or its right to purchase the Conversion Shares that would constitute a sale within the meaning of the Securities Act except as contemplated in the Registration Statement referred to in Section 3.3(a) and as described below or as otherwise permitted by law, and that it will promptly notify the Company of any material changes in the information set forth in the Registration Statement regarding the Investor or its plan of distribution. (ii) Except in the event that paragraph (iii) below applies, the Company shall (x) if deemed necessary by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (y) provide the Investors copies of any documents filed pursuant to Section 3.3(b)(ii)(x); and (z) inform each Investor that the Company has complied with its obligations in Section 3.3(b)(ii)(x) (or that, if the Company has filed a post-effective amendment to the Registration Statement which has not yet been declared effective, the Company will notify the Investor to that effect, will use its best efforts to secure the effectiveness of such post-effective amendment as promptly as possible and will promptly notify the Investor pursuant to Section 3.3(b)(ii)(x) hereof when the amendment has become effective). (iii) Subject to paragraph (iv) below, in the event (w) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to a Registration Statement or related Prospectus or for additional information; (x) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (y) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Conversion Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; or (z) of any event or circumstance which, upon the advice of its counsel, necessitates the making of any changes in the Registration Statement or Prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; then the Company shall deliver a notice in writing to each Investor (the "Suspension Notice") to the effect of the foregoing and, upon receipt of such Suspension Notice, the Investor will refrain from selling any Conversion Shares pursuant to the Registration Statement (a "Suspension") until the Investor is advised in writing by the Company that the Suspension is no longer effective. In the event of any Suspension, the Company will use its best efforts to cause the Suspension to be terminated as soon as reasonably practicable within 20 business days after the delivery of a Suspension Notice to the Investors. In addition to and without limiting any other remedies (including, Securities Purchase Agreement - Page 17 without limitation, at law or at equity) available to the Investors, each Investor shall be entitled to specific performance in the event that the Company fails to comply with the provisions of this Section 3.3(b)(iii). (iv) Notwithstanding the foregoing paragraphs of this Section 3.3(b), the Investors shall not be prohibited from selling Conversion Shares under the Registration Statement as a result of Suspensions on more than two occasions of not more than 30 days each in any twelve month period, unless, in the good faith judgment of the Company's Board of Directors, upon the advice of counsel, the sale of Conversion Shares under the Registration Statement in reliance on this Section 3.3(b)(iv) would be reasonably likely to cause a violation of the Securities Act or the Exchange Act and result in liability to the Company. (v) Provided that a Suspension is not then in effect, any Investor may sell Conversion Shares under the Registration Statement upon compliance with its obligations under this Section 3.3. (vi) In the event of a sale of Conversion Shares by an Investor pursuant to the Registration Statement, the Investor must also deliver to the Company's transfer agent, with a copy to the Company, a Certificate of Subsequent Sale substantially in the form attached hereto as Exhibit G, so that the Conversion Shares may be properly transferred. (c) Indemnification. For the purpose of this Section 3.3(c): (x) the term "Selling Stockholder" shall include each Investor and any affiliate of such Investor; (y) the term "Registration Statement" shall include the Prospectus in the form first filed with the SEC pursuant to Rule 424(b) of the Securities Act or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is required, exhibit, supplement or amendment included in or relating to the Registration Statement referred to in Section 3.3(a); and (z) the term "untrue statement" shall include any untrue statement or alleged untrue statement, or any omission or alleged omission to state in the Registration Statement a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (i) The Company agrees to indemnify and hold harmless each Selling Stockholder from and against any losses, claims, damages or liabilities to which such Selling Stockholder may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon (x) any breach of the representations or warranties of the Company contained in this Section 3.3 or failure to comply with the covenants and agreements of the Company contained in this Section 3.3, (y) any untrue statement of a material fact contained in the Registration Statement as amended at the time of effectiveness or any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, or (z) any failure by the Company to fulfill any undertaking included in the Registration Statement as amended at the time of effectiveness, and the Company will reimburse such Selling Stockholder for any reasonable legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim, or preparing to defend any such action, proceeding or claim, provided, however, that the Company shall not be liable in any such case to Securities Purchase Agreement - Page 18 the extent that such loss, claim, damage or liability arises out of, or is based upon, an untrue statement made in such Registration Statement or any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder specifically for use in preparation of the Registration Statement or the failure of such Selling Stockholder to comply with its covenants and agreements contained in Section 3.3(b) hereof respecting sale of the Conversion Shares or, in the event the Company has advised the Investors in writing that the Company does not meet the conditions for using Rule 172 of the Securities Act and has provided the Investors with a copy of a current Prospectus, any statement or omission in any earlier Prospectus that is corrected in the Prospectus so delivered to the Investors and delivered to the Selling Stockholder prior to the pertinent sale or sales by the Selling Stockholder. The Company shall reimburse each Selling Stockholder for the amounts provided for herein on demand as such expenses are incurred. (ii) Each Investor, severally but not jointly, agrees to indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each officer of the Company who signs the Registration Statement and each director of the Company) from and against any losses, claims, damages or liabilities to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, (x) any failure to comply with the covenants and agreements contained in Section 3.3(b) hereof respecting sale of the Conversion Shares, or (y) any untrue statement of a material fact contained in the Registration Statement or any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading if such untrue statement or omission was made in reliance upon and in conformity with written information furnished by or on behalf of such Investor specifically for use in preparation of the Registration Statement, and such Investor will reimburse the Company (or such officer, director or controlling person), as the case may be, for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided that such Investor's obligation to indemnify the Company shall be limited to the net amount received by such Investor from the sale of the Conversion Shares giving rise to such obligation. (iii) Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 3.3(c), such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, but the omission to so notify the indemnifying person will not relieve it from any liability which it may have to any indemnified person under this Section 3.3(c) (except to the extent that such omission materially and adversely affects the indemnifying person's ability to defend such action) or from any liability otherwise than under this Section 3.3(c). Subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall elect by written notice delivered to the indemnified person promptly after receiving the aforesaid notice from such indemnified person, shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of its election to assume the defense thereof, such indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof, provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate, in the opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the reasonable expense of such indemnifying person; provided, however, that no Securities Purchase Agreement - Page 19 indemnifying person shall be responsible for the fees and expenses of more than one separate counsel (together with appropriate local counsel) for all indemnified parties. In no event shall any indemnifying person be liable in respect of any amounts paid in settlement of any action unless the indemnifying person shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld. No indemnifying person shall, without the prior written consent of the indemnified person, effect any settlement of any pending or threatened proceeding in respect of which any indemnified person is or could have been a party and indemnification could have been sought hereunder by such indemnified person, unless such settlement includes an unconditional release of such indemnified person from all liability on claims that are the subject matter of such proceeding. (iv) If the indemnification provided for in this Section 3.3(c) is unavailable to or insufficient to hold harmless an indemnified person under subsection (i) or (ii) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying person shall contribute to the amount paid or payable by such indemnified person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the applicable Investor, as well as any other Selling Shareholders under such registration statement on the other in connection with the statements or omissions or other matters which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, in the case of an untrue statement, whether the untrue statement relates to information supplied by the Company on the one hand or an Investor or other Selling Shareholder on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement. The Company and each Investor, severally but not jointly, agree that it would not be just and equitable if contribution pursuant to this subsection (iv) were determined by pro rata allocation (even if the Investor and other Selling Shareholders were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (iv). The amount paid or payable by an indemnified person as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (iv) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (iv), each Investor shall not be required to contribute any amount in excess of the amount by which the net amount received by such Investor from the sale of the Conversion Shares to which such loss relates exceeds the amount of any damages which such Investor has otherwise been required to pay by reason of such untrue statement. 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. Each Investor's obligations in this subsection to contribute shall be in proportion to its sale of Conversion Shares to which such loss relates and shall not be joint with any other Selling Shareholders. (v) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 3.3(c), and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 3.3(c) fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement as required by the Act and the Exchange Act. The parties are advised that federal or state public policy as interpreted by the courts in certain jurisdictions may be contrary to certain of the provisions of this Section 3.3(c), and the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under this Section 3.3(c) and further agree not to attempt to assert any such defense. Securities Purchase Agreement - Page 20 (d) Delayed Effectiveness. The Company and each Investor, severally but not jointly, agree that such Investor will suffer damages if the Company fails to fulfill its obligations pursuant to Sections 3.3(a) and 3.3(b) hereof and that it would not be possible to ascertain the extent of such damages with precision. Accordingly, the Company hereby agrees to liquidated damages ("Liquidated Damages") to each Investor under the following circumstances: (i) if the Registration Statement is not filed on or before the Target Date (such an event, a "Filing Default"); (ii) if the Registration Statement is not declared effective by the SEC on or prior to Required Effective Date (the "Effectiveness Deadline") (such an event, an "Effectiveness Default"); or (iii) if the Registration Statement (after its effectiveness date) ceases to be effective and available to such Investor for any continuous period that exceeds 30 days or for one or more periods that exceed in the aggregate 60 days in any 12-month period (such an event, a "Suspension Default" and together with a Filing Default and an Effectiveness Default, a "Registration Default"). In the event of a Registration Default, the Company shall as Liquidated Damages pay to such Investor, for each 30-day period of a Registration Default, an amount in cash equal to 1% of the aggregate purchase price paid by the Investor pursuant to this Agreement; provided that in no event shall the aggregate amount of cash to be paid as Liquidated Damages pursuant to this Section 3.3(d) exceed 9% of the aggregate purchase price paid by such Investor. The Company shall pay the Liquidated Damages as follows: (i) in connection with a Filing Default, on the business day following the Filing Default, and each 30th day thereafter until the Registration Statement has been filed with the SEC; (ii) in connection with an Effectiveness Default, on the business day following the Effectiveness Deadline, and each 30th day thereafter until the Registration Statement is declared effective by the SEC; or (ii) in connection with a Suspension Default, on either (x) the 31st consecutive day of any Suspension or (y) the 61st day (in the aggregate) of any Suspensions in any 12-month period, and each 30th day thereafter until the Suspension is terminated in accordance with Section 3.3(b). Notwithstanding the foregoing, all periods shall be tolled during delays directly caused by the action or inaction of any Investor, and the Company shall have no liability to any Investor in respect of any such delay. The Liquidated Damages payable herein shall apply on a pro rata basis for any portion of a 30-day period of a Registration Default. (e) Termination of Conditions and Obligations. The conditions precedent imposed by Section 5.5 or this Section 3.3 upon the transferability of the Conversion Shares shall cease and terminate as to any particular number of the Conversion Shares when such Conversion Shares shall have been effectively registered under the Securities Act and sold or otherwise disposed of in accordance with the intended method of disposition set forth in the Registration Statement covering such Conversion Shares, at the time such Conversion Shares are eligible for sale pursuant to Rule 144(k) (and the Investor provides the Company with such reasonable and appropriate customary representations as may be reasonably requested by the Company) or at such time as an opinion of counsel reasonably satisfactory to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act. (f) Information Available. So long as the Registration Statement is effective covering the resale of Conversion Shares owned by any Investor, the Company will furnish to such Investors, upon the reasonable request of an Investor, an adequate number of copies of the Prospectuses to supply to any other party requiring such Prospectuses; and upon the reasonable request of such Investor, the President or the Chief Financial Officer of the Company (or an appropriate designee thereof) will meet with such Investor or a representative thereof at the Company's headquarters to discuss all information relevant for disclosure in the Registration Statement covering the Conversion Shares and will otherwise cooperate with any Investor conducting an investigation for the purpose of reducing or eliminating such Investor's exposure to liability under the Securities Act, including the reasonable production of information at the Company's headquarters; provided, that the Company shall Securities Purchase Agreement - Page 21 not be required to disclose any confidential information to or meet at its headquarters with any Investor until and unless the Investor shall have entered into a confidentiality agreement in form and substance reasonably satisfactory to the Company with the Company with respect thereto. 3.4 Annual Meeting; Liquidated Damages. (a) The Company shall, in accordance with applicable law and the Company's certificate of incorporation and by-laws, duly call, give notice of, convene and hold its annual meeting of the Company's stockholders (the "Annual Meeting") as soon as possible after the date hereof for, among other purposes, the purpose of considering the approval of the Restated Charter described in Section 3.2. In connection with the definitive proxy statement or information statement, as the case may be, for the Annual Meeting, the Company shall use its best efforts to obtain a unanimous recommendation of the Board of Directors for inclusion in such proxy statement, recommending that the Company's stockholders approve such amendment to the Company's certificate of incorporation. Furthermore, in connection with the preparation of such definitive proxy statement or information statement, as the case may be, and other matters relating to the Annual Meeting, the Company shall consult with and keep informed, and shall cause the appropriate officers, directors and legal counsel to consult with and keep informed, legal counsel to the Investors (including, without limitation, legal counsel to M/C Venture Partners). (b) The Company shall file promptly (and not later than 25 days after the SEC has indicated to the Company that the SEC has no comments or no additional comments are forthcoming on the Company's preliminary proxy or information statement, as the case may be, relating to the Restated Charter and the Annual Meeting) the Restated Charter with the Secretary of State of the State of Delaware, and the Company shall deliver to the Investors a copy of the Restated Charter duly certified by the Secretary of State of the State of Delaware. (c) The Company and each Investor, severally but not jointly, agree that such Investor will suffer damages if the Company fails to fulfill its obligations pursuant to Sections 1.3 and 3.4(b) hereof and that it would not be possible to ascertain the extent of such damages with precision. Accordingly, the Company hereby agrees to pay Liquidated Damages to each Investor under the following circumstances: (i) if the Company fails to deliver to the Investors the certificates evidencing the Shares and the Warrants being purchased by the Investors hereunder within three (3) business days after the date hereof (such an event, a "Delivery Default"); and (ii) if the Restated Charter is not filed with the Secretary of State of the State of Delaware within the time period set forth in Section 3.4(b) (such an event, a "Charter Filing Default" and together with a Delivery Default, a "Covenant Default"). In the event of a Covenant Default, the Company shall as Liquidated Damages pay to such Investor, for each 30-day period of a Covenant Default, an amount in cash equal to 1% of the aggregate purchase price paid by the Investor pursuant to this Agreement. The Company shall pay the Liquidated Damages as follows: (i) in connection with a Delivery Default, on the business day following the Delivery Default, and each 30th day thereafter until the certificates evidencing the Shares and the Warrants purchased by the Investors hereunder have been delivered to the Investors; and (ii) in connection with an Charter Filing Default, on the business day following the expiration of the 25-day period set forth in Section 3.4(b), and each 30th day thereafter until the Restated Charter is filed with the Secretary of State of the State of Delaware. Notwithstanding the foregoing, all periods shall be tolled during delays directly caused by the action or inaction of any Investor, and the Company shall have no liability to any Investor in respect of any such delay. The Liquidated Damages payable herein shall apply on a pro rata basis for any portion of a 30-day period of a Covenant Default. Securities Purchase Agreement - Page 22 3.5 Reservation of Shares of Common Stock. From and after the filing of the Restated Charter, the Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Shares and exercise of the Warrants and the Additional Warrants (if any), all Common Stock issuable from time to time upon such conversion and exercise. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Shares and/or exercise of the Warrants and the Additional Warrants (if any) without limitation of any remedies available to any Investor, the Company will forthwith take such corporate action (and shall use its best efforts to cause the Company's stockholders to take such action) as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. The Company shall obtain any authorization, consent, approval or other action by, or make any filing with, any court or administrative body that may be required under applicable state securities laws in connection with the issuance of shares of Common Stock upon conversion of the Shares and exercise of the Warrants and the Additional Warrants (if any). 3.6 Issuance of Additional Warrants. (a) If in connection with a Future Financing Transaction, the conversion price per share of the Future Financing Security (as defined below) issued in such transaction is equal to or greater than the Series D Conversion Price (as defined in the Certificate of Designations or the Restated Charter, as the case may be), then the Company shall issue to each Investor (whether or not such Investor is participating in such Future Financing Transaction) a warrant (an "Additional Warrant") to purchase a number of shares of Common Stock equal to the difference (not to be less than zero) between (A) the number of shares of Common Stock issuable upon conversion of the Shares held by such Investor (calculated in accordance with the terms of the Certificate of Designations or the Restated Charter, as the case may be, immediately prior to the consummation of such Future Financing Transaction) and (B) assuming (i) such Investor purchased a number of Future Financing Securities issued in such transaction (including, without limitation, purchase price per share or unit paid by all other investors in such transaction) for an aggregate purchase price equal to the amount set forth opposite such Investor's name on Exhibit A under the heading "Purchase Price" and (ii) the Future Financing Securities purchased by such Investor in such transaction (calculated in accordance with clause (i) hereof) were converted into shares of Common Stock in accordance with their terms immediately after consummation of such transaction, the number of shares of Common Stock issuable upon such conversion of such shares of Future Financing Securities. The Additional Warrants shall be in form and substance substantially similar to the form of Warrant attached hereto as Exhibit B and shall have an initial exercise price of $0.01 per share of Common Stock. All Additional Warrants shall be issued and delivered to the Investors at the closing of such Future Financing Transaction. For the avoidance of doubt, the Investors acknowledge and agree that the Company shall have no obligation under this Section 3.6 to issue Additional Warrants if a Future Financing Transaction is not consummated within the time period specified in the Certificate of Designations (i.e., 180 days after the date hereof). The Additional Warrants and the shares of Common Stock to be issued upon exercise of the Additional Warrants will all be duly authorized, and when issued in accordance with the terms hereof and upon exercise of the Additional Warrants, will be duly and validly issued, fully paid and nonassessable. (b) For purposes hereof, the following terms shall have the following meanings: (i) "Future Financing Transaction" shall mean any financing (or series of related financings) of the Company (other than in connection the purchase and sale of the Shares and Warrants contemplated hereby) that closes within 180 days after the date hereof and involves the issuance of any securities or instruments (other than debt securities with no equity feature) of the Company in which the aggregate gross proceeds to the Company equals or exceeds $10 million. Securities Purchase Agreement - Page 23 (ii) "Future Financing Security" shall mean the class and type of any security, instrument or indebtedness (but not debt securities with no equity feature) of the Company issued to investors at the closing of a Future Financing Transaction (but excluding the conversion of the Shares and the issuance of the Additional Warrants). 3.7 Removal of Legends. Upon the earlier of (i) registration of the Conversion Shares for sale pursuant to Section 3.3 or (ii) Rule 144(k) becoming available with respect to an Investor's Conversion Shares, the Company shall, (A) deliver to the transfer agent for the Common Stock (the "Transfer Agent") irrevocable instructions that the Transfer Agent shall reissue a certificate representing shares of Common Stock without legends upon receipt by such Transfer Agent of the legended certificates for such shares, together with either (1) a customary representation by such Investor that Rule 144(k) of the Securities Act applies to the shares of Common Stock represented thereby or (2) the Certificate of Subsequent Sale in substantially the form of Exhibit G hereto, and (B) cause its counsel to deliver to the Transfer Agent one or more blanket opinions to the effect that the removal of such legends in such circumstances may be effected under the Securities Act. From and after the earlier of such dates, upon an Investor's written request, the Company shall promptly cause certificates evidencing such Investor's securities to be replaced with certificates which do not bear such restrictive legends, and Conversion Shares subsequently issued upon conversion of the Shares or the due exercise of the Warrants shall not bear such restrictive legends. When the Company is required to cause unlegended certificates to replace previously issued legended certificates, if unlegended certificates are not delivered to an Investor within three (3) business days of submission by that Investor of legended certificate(s) to the Transfer Agent as provided above (or to the Company, in the case of the Warrants), the Company shall be liable to such Investor for a penalty equal to 1% of the aggregate purchase price of the Conversion Shares evidenced by such certificate(s) for each thirty (30) day period (or portion thereof) beyond such three (3) business day period that the unlegended certificates have not been so delivered; provided that in no event shall the aggregate amount of cash to be paid to such Investor pursuant to this Section 3.7 exceed 9% of such aggregate purchase price. ARTICLE IV NEGATIVE COVENANTS OF THE COMPANY For so long as at least 2,500 Shares are issued and outstanding, the Company hereby covenants with (i) M/C Venture Partners that so long as M/C Venture Partners owns at least 50% of the Shares initially purchased by it hereunder and (ii) with respect to Sections 4.6 and 4.11, with all of the 20% Investors for so long as such Investors beneficially own at least 20% of the Common Stock (calculated on a fully diluted basis), in addition to any other vote required by law or the Company's certificate of incorporation, without the prior written consent of M/C Venture Partners, the Company will not: 4.1 Change in Control; Sale of Assets; Merger. Enter into any transaction, or series of related transactions, constituting a Change of Control (or agree to enter into any such transaction or series of related transactions, or permit any Subsidiary to do so). For purposes of this Section 4.1, "Change of Control" shall mean the existence or occurrence of any of the following: (a) the sale, conveyance or disposition of all or substantially all of the assets of the Company; (b) the effectuation of a transaction or series or related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of (other than as a direct result of normal, uncoordinated trading activities in the Common Stock generally); (c) the consolidation, merger or other business combination of the Company with or into any other entity, immediately following which the prior stockholders of the Company fail to own, directly or indirectly, at least fifty percent (50%) of the voting equity of the Securities Purchase Agreement - Page 24 surviving entity; and (d) a transaction or series of related transactions in which any person or group, other than the Investors and their affiliates, acquires more than fifty percent (50%) of the voting equity of the Company, provided, that the Company shall not be deemed to have violated this Section 4.1(d) in the event the Investors sell, convey or transfer more than 50% of the outstanding equity securities of the Company to an unaffiliated third party. 4.2 Creation of Senior or Pari Passu Equity; Issuance of Equity Securities. Create or authorize the creation of any additional class or series of shares of stock (or any debt security which by its terms is convertible into or exchangeable for any equity security of the Company and any security which is a combination of debt and equity) unless the same ranks junior to the Common Stock as to dividends and the distribution of assets on the liquidation, dissolution or winding up of the Company; or issue, or agree to issue, any equity security (or any security convertible, exercisable or exchangeable for or into any equity security) of the Company other than securities set forth in Section 3.1(e). 4.3 Repurchases, Redemptions, Dividends. Purchase or redeem, or set aside any sums for the purchase or redemption of, or pay any dividend or make any distribution on, any shares of capital stock of the Company or permit any Subsidiary to do any of the foregoing, except for (1) dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock; (2) redemption of the Shares as contemplated by the Certificate of Designations and/or the Company's certificate of incorporation; (3) the dividends and/or distributions with respect to the Shares contemplated by the Certificate of Designations and/or the Company's certificate of incorporation; and (4) the repurchase of shares of Common Stock from employees or consultants at the original purchase price thereof pursuant to awards granted prior to the date hereof under a stock plan approved by the Board of Directors. 4.4 Transfers of Intellectual Property. Transfer any ownership or interest in, or material rights relating to, or the granting of any liens or encumbrances on, any of the Intellectual Property to any person or entity which is not a member of the consolidated group of the Company and its Subsidiaries; provided, however, that this restriction shall not apply to transfers of Intellectual Property accomplished in the ordinary course of business (such as pursuant to software license agreements in the ordinary course of business). 4.5 Liquidation or Dissolution. Consent to or effect any liquidation, dissolution or winding up of the Company or any recapitalization or reorganization of the Company, or permit any Subsidiary to do any of the foregoing. 4.6 Change in Size of Board. Increase or decrease the number of directors constituting the size of the Board of Directors from seven (7) members. 4.7 Change to Charter/By-laws. Amend, alter or repeal any provision of the certificate of incorporation or by-laws of the Company. 4.8 Change in Nature of Business. Make, or permit any Subsidiary to make, any change in the nature of its business from that contemplated in the Exchange Act Documents existing on the date hereof. 4.9 Restrictions on Indebtedness. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any liability with respect to indebtedness for money borrowed which exceeds, in the aggregate, $3,000,000, provided that indebtedness for borrowed money assumed, guaranteed, endorsed or upon which the Company or any Subsidiary has otherwise become Securities Purchase Agreement - Page 25 directly or contingently liable on, shall count as indebtedness for money borrowed for the purpose of this restriction. 4.10 Change in Authorized Capital Stock. Increase or decrease in the authorized amount of any shares of capital stock of the Company, whether any such change shall be by means of amendment to the Company's certificate of incorporation or by merger, consolidation or otherwise other than as required pursuant to Section 3.2. 4.11 No Disparate Voting Rights. Take any action, including, without limitation, amendments to the Certificate of Incorporation, that would enable any holder of a share of capital stock of the Company to vote such shares on any matter at a rate exceeding the number of votes that such share would be entitled to had it been purchased at a purchase price equal to one share of Common Stock of the Company on the date of its purchase (and the Company shall not use indebtedness to evade this covenant). 4.12 Issuance of Compensatory Equity Awards. Grant any options or other rights to purchase capital stock except to employees, directors and consultants as authorized by vote of the Board of Directors or its Compensation Committee, if such committee has been formed. 4.13 Adjustments to Warrants. Take any action which would cause any adjustment under Section 8 of the Warrants. ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTORS Each Investor, severally and not jointly, represents and warrants to, and covenants with, the Company that: 5.1 Authorization. The Investor has all requisite power and authority to execute, deliver and perform its obligations under this Agreement. The execution of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of such Investor and this Agreement has been duly executed and delivered and constitutes the valid and binding obligation of the Investor enforceable in accordance with its terms, except as rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.2 Purchase Entirely for Own Account. The Shares and Warrants to be purchased by the Investor will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, and such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. Such Investor does not have any contract, undertaking, agreement, or arrangement with any person to sell, transfer, or grant participation to any person with respect to any of the Shares or the Warrants. Nothing contained herein shall be deemed a representation or warranty by such Investor to hold the Shares, the Warrants or any Conversion Shares for any period of time. Securities Purchase Agreement - Page 26 5.3 Disclosure of Information. The Investor acknowledges that it has received all the information that it has requested relating to the Company and the purchase of the Shares and the Warrants. The Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the Warrants. The foregoing, however, does not limit or modify the representations and warranties of the Company in this Agreement or the right of the Investor to rely thereon. 5.4 Accredited Investor. The Investor is an "accredited investor" within the meaning of Rule 501 of Regulation D of the SEC, as presently in effect and the Investor is also knowledgeable, sophisticated and experienced in making, and is qualified to make decisions with respect to the transactions contemplated hereby. 5.5 Restricted Securities. Investor understands that the Shares and the Warrants are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering, and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act, only in certain limited circumstances. In this connection, the Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. 5.6 Legends. It is understood that the certificates evidencing the Shares shall bear a legend, reading substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AS SET FORTH IN THIS CERTIFICATE. THE SECURITIES REPRESENTED HEREBY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS EXCEPT PURSUANT TO RULE 144(K) OR PURSUANT TO AN OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO COUNSEL FOR THE COMPANY, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER, OR DISPOSITION MAY BE EFFECTUATED WITHOUT REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS." 5.7 Investor Questionnaire. The Investor covenants to execute and deliver to the Company at or promptly following the Closing an investor questionnaire supplied by the Company to facilitate the registration of the Shares pursuant to the registration rights set forth herein and the information contained therein shall be true and correct. 5.8 Prohibited Transactions. During the last thirty (30) days prior to the date hereof, neither such Investor nor any Affiliate of such Investor which (x) had knowledge of the transactions contemplated hereby, (y) has or shares discretion relating to such Investor's investments or trading or information concerning such Investor's investments, including in respect of the Securities, or (z) is subject to such Investor's review or input concerning such Affiliate's investments or trading (collectively, "Trading Affiliates") has, directly or indirectly, effected or agreed to effect any short sale, whether or not against the box, established any "put equivalent position" (as defined in Rule 16a-1(h) under the Exchange Act) with respect to the Common Stock, granted any other right (including, Securities Purchase Agreement - Page 27 without limitation, any put or call option) with respect to the Common Stock or with respect to any security that includes, relates to or derived any significant part of its value from the Common Stock or otherwise sought to hedge its position in the Securities (each, a "Prohibited Transaction"). Prior to the earliest to occur of (i) the termination of this Agreement, (ii) the Effective Date or (iii) the Effectiveness Deadline, such Investor shall not, and shall cause its Trading Affiliates not to, engage, directly or indirectly, in a Prohibited Transaction. Such Investor acknowledges that the representations, warranties and covenants contained in this Section 5.8 are being made for the benefit of the Investors as well as the Company and that each of the other Investors shall have an independent right to assert any claims against such Investor arising out of any breach or violation of the provisions of this Section 5.8. 5.9 Restrictions on Certain Payments. The Investor acknowledges and agrees that, pursuant to the provisions of the Loan and Security Agreement dated as of September 28, 2005 (as amended, and as hereafter amended from time to time, the "SVB Loan Agreement") among the Company, Vertical Communications Acquisition Corp. and SVB, the Company will be prohibited from (a) paying or declaring any dividends on or with respect to the Conversion Shares (except for dividends payable solely in stock of the Company) or (b) redeeming, retiring, purchasing or otherwise acquiring any of the Conversion Shares until such time as all indebtedness under the SVB Loan Agreement, and any extensions, renewals or refinancings thereof, has been repaid in full, without, in any case, obtaining the prior written consent of SVB. ARTICLE VI SURVIVAL; INDEMNITY 6.1 Survival of Representations, Warranties and Agreements. Notwithstanding any investigation made by any party to this Agreement, all covenants, agreements, representations and warranties made by the Company herein shall survive the execution of this Agreement, the delivery to the Investors of the Shares and the Warrants being purchased and the payment therefor; provided, that the representations and warranties of the parties hereunder shall only survive for a period of one year following the Closing Date. 6.2 Indemnity. Company agrees to indemnify and hold each Investor, and its respective directors, managers, officers, shareholders, members, partners, affiliates, employees, attorneys and agents (each, an "Indemnified Person"), harmless from and against any and all suits, actions, proceedings, claims, damages, losses, liabilities and expenses of any kind or nature whatsoever (including attorneys' fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) which may be instituted or asserted against or incurred by any such Indemnified Person as the result of their investment in the Shares and the Warrants under this Agreement or with respect to any breach (or alleged breach) of any representation, warranty or covenant of the Company contained in this Agreement or with respect to the execution, delivery, enforcement, performance and administration of, or in any other way arising out of or relating to, this Agreement or transactions contemplated by or referred to herein and any actions or failures to act with respect to any of the foregoing, except to the extent that any such indemnified liability is finally determined by a court of competent jurisdiction to have resulted from such Indemnified Person's gross negligence or willful misconduct. The Company shall reimburse each Investor for amounts provided for herein on demand as such expenses are incurred. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO THE COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR Securities Purchase Agreement - Page 28 INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF THEIR INVESTMENT IN THE SHARES UNDER THIS AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER. THE COMPANY SHALL NOT BE RESPONSIBLE OR LIABLE TO ANY INDEMNIFIED PERSON OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY, CONSEQUENTIAL OR SPECIAL DAMAGES WHETHER OR NOT SUCH DAMAGES WERE REASONABLY FORESEEABLE. ARTICLE VII MISCELLANEOUS 7.1 Notices. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed (A) if within the United States by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if delivered from outside the United States, by International Federal Express or facsimile, and shall be deemed given and received (i) if delivered by first-class registered or certified mail, three business days after so mailed, (ii) if delivered by nationally recognized overnight carrier, one business day after so mailed, (iii) if delivered by International Federal Express, two business days after so mailed, (iv) if delivered by facsimile, upon electronic confirmation of receipt and shall be delivered as addressed as follows: (a) if to the Company, to: Artisoft, Inc. 5 Cambridge Center Cambridge, MA 02142 Attn: Chief Executive Officer (b) with a copy to: Andrews Kurth LLP 1717 Main Street, Suite 3700 Dallas, TX 75201 Attn: Victor B. Zanetti, Esq. (c) if to the Investors, at their respective addresses on the signature page hereto, or at such other address or addresses as may have been furnished to the Company in writing, with a copy to counsel to M/C Venture Partners: Goodwin | Procter LLP Exchange Place 53 State Street Boston, MA 02109 Attn: Jocelyn M. Arel, Esq. 7.2 Changes. This Agreement may not be modified, waived or amended except pursuant to an instrument in writing signed by the Company and with Investors constituting the Majority Investors' Securities Purchase Agreement - Page 29 Consent (provided, that, if such modification, waiver or amendment does not equally affect all Investors to whom such modification, waiver or amendment is applicable (taking into account the relative ownership interests of such Investors), such modification, waiver or amendment must be signed by all Investors). 7.3 Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 7.4 Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 7.5 Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the courts of the State of New York located in New York County and the United States District Court for the Southern District of New York for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Agreement and the transactions contemplated hereby. Service of process in connection with any such suit, action or proceeding may be served on each party hereto anywhere in the world by the same methods as are specified for the giving of notices under this Agreement. Each of the parties hereto irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding and to the laying of venue in such court. Each party hereto irrevocably waives any objection to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER. 7.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. 7.7 Press Release. The Company shall on the Closing Date issue a press release disclosing the material terms of the transactions contemplated hereby (including at least the number of Shares sold and proceeds therefrom). 7.8 Prior Agreements. This Agreement constitutes the entire agreement between the parties and supersedes any prior understandings or agreements (including without limitation oral agreements) concerning the purchase and sale of the Shares. 7.9 Costs, Expenses and Taxes. The Company agrees to pay the reasonable out-of-pocket costs and expenses of M/C Venture Partners incurred in connection with the transactions contemplated by this Agreement, including the reasonable fees and expenses of Goodwin Procter LLP, special counsel for M/C Venture Partners, as well as the reasonable fees and out-of-pocket expenses of legal counsel, independent public accountants, technical professionals and other outside experts retained by M/C Venture Partners in connection with the transactions contemplated by this Agreement and the amendment or enforcement of this Agreement. Securities Purchase Agreement - Page 30 7.10 Transfer of Rights. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, transferees of any Shares, Warrants, Preferred Conversion Shares and/or Warrant Shares), whether so expressed or not. 7.11 Independent Nature of Investors' Obligations and Rights. The obligations of each Investor under this Agreement are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under this Agreement. Nothing contained herein or in any other document, and no action taken by any Investor pursuant thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Agreement. Each Investor shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Agreement or out of the other related documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such purpose. Each Investor has been represented by its own separate legal counsel in their review and negotiation of this Agreement. The Company has elected to provide all Investors with the same terms and documents for the convenience of the Company and not because it was required or requested to do so by the Investors. Signature Page to Securities Purchase Agreement IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ARTISOFT, INC. Investor: M/C Venture Partners V, L.P. By: M/C VP V, LLC, its General Partner By: /s/ Ken Clinebell By: /s/ John W. Watkins Name: Ken Clinebell Print Name: John W.Watkins Title: CFO - Interim Title: General Partner Address: 75 State Street, Suite 2500, Boston, MA 02109 Tax ID No.: Contact name: Telephone: (617) 345-7200 Name in which shares should be registered (if different): Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Signature Page to Securities Purchase Agreement Investor: M/C Venture Investors, LLC By: /s/ John W. Watkins Print Name: John W. Watkins Title: General Partner Address: 75 State Street, Suite 2500, Boston, MA 02109 Tax ID No.: Contact name: Telephone: (617) 345-7200 Name in which shares should be registered (if different): Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Signature Page to Securities Purchase Agreement Investor: Chestnut Venture Partners, L.P. By: Chestnut Street Partners, Inc., its General Partner By: /s/ John W. Watkins Print Name: John W. Watkins Title: General Partner Address: 75 State Street, Suite 2500, Boston, MA 02109 Tax ID No.: Contact name: Telephone: (617) 345-7200 Name in which shares should be registered (if different): Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Signature Page to Securities Purchase Agreement Investor: Pathfinder Ventures III, L.L.C. By: RRS Investments II, L.L.C., an Arizona limited liability company By: Stolworthy Revocable Trust, its Manager By: R. Randy Stolworthy, its Trustee By: /s/ R. Randy Stolworthy R. Randy Stolworthy Address: Pathfinder Ventures III, L.L.C._ c/o RRS & Company 4131 N. 24th Street, Suite C-207 Phoenix, AZ 85016 Tax ID No.: 72-1601431 Contact name: R. Randy Stolworthy Telephone: 602-553-4565 Name in which shares should be registered (if different): Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Signature Page to Securities Purchase Agreement SRB Greenway Capital, L.P. By: SRB Management, L.P., General Partner By: BC Advisors, L.L.C., General Partner By: /s/ Steven R. Becker Steven R. Becker, Member SRB Greenway Capital, L.P. 300 Crescent Court, Suite 1111 Dallas, TX 75201 214-756-6073 (telephone) 214-756-6079 (fax) Attn: Joe Worsham (joe@walkersmith.com) Tax ID#: 20-1718174 Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Signature Page to Securities Purchase Agreement SRB Greenway Capital (Q.P.), L.P. By: SRB Management, L.P., General Partner By: BC Advisors, L.L.C., General Partner By: /s/ Steven R. Becker Steven R. Becker, Member SRB Greenway Capital (Q.P.), L.P. 300 Crescent Court, Suite 1111 Dallas, TX 75201 214-756-6073 (telephone) 214-756-6079 (fax) Attn: Joe Worsham (joe@walkersmith.com) Tax ID#: 20-1939469 Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Signature Page to Securities Purchase Agreement SRB Greenway Offshore Operating Fund, L.P By: SRB Management, L.P., General Partner By: BC Advisors, L.L.C., General Partner By: /s/ Steven Becker Steven Becker, Member SRB Greenway Offshore Operating Fund, L.P 300 Crescent Court, Suite 1111 Dallas, TX 75201 214-756-6073 (telephone) 214-756-6079 (fax) Attn: Joe Worsham (joe@walkersmith.com) Tax ID#: n/a - offshore entity Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Signature Page to Securities Purchase Agreement Walker Smith Capital, L.P. By: WS Capital Management, L.P., General Partner By: WS Capital, L.L.C., General Partner By: /s/ Reid S. Walker Reid S. Walker, Member Walker Smith Capital, L.P. 300 Crescent Court, Suite 1111 Dallas, TX 75201 214-756-6073 (telephone) 214-756-6079 (fax) Attn: Joe Worsham (joe@walkersmith.com) Tax ID#: 75-2681597 Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Signature Page to Securities Purchase Agreement Walker Smith Capital (Q.P.), L.P. By: WS Capital Management, L.P., General Partner By: WS Capital, L.L.C., General Partner By: /s/ Reid S. Walker Reid S. Walker, Member Walker Smith Capital (Q.P.), L.P. 300 Crescent Court, Suite 1111 Dallas, TX 75201 214-756-6073 (telephone) 214-756-6079 (fax) Attn: Joe Worsham (joe@walkersmith.com) Tax ID#: 75-2951420 Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Signature Page to Securities Purchase Agreement Walker Smith International Fund, Ltd. By: WS Capital Management, L.P., as agent and attorney-in-fact By: WS Capital, L.L.C., General Partner By: /s/ Reid S. Walker Reid S. Walker, Member Walker Smith International Fund, Ltd. 300 Crescent Court, Suite 1111 Dallas, TX 75201 214-756-6073 (telephone) 214-756-6079 (fax) Attn: Joe Worsham (joe@walkersmith.com) Tax ID#: n/a - offshore entity Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Signature Page to Securities Purchase Agreement HHMI Investments, L.P. By: WS Capital Management, L.P., Investment Manager By: WS Capital, L.L.C., General Partner By: /s/ Reid S. Walker Reid S. Walker, Member Walker Smith International Fund, Ltd. 300 Crescent Court, Suite 1111 Dallas, TX 75201 214-756-6073 (telephone) 214-756-6079 (fax) Attn: Joe Worsham (joe@walkersmith.com) Tax ID#: 20-3752378 Investor: By: By: Print Name: Title: Address: Tax ID No.: Contact name: Telephone: Name in which shares should be registered (if different): Exhibit A --------- SCHEDULE OF INVESTORS --------------------- - -------------------------------------------------------------------------------- Investor Shares Warrants Purchase Price - ------------------------------------------- -------- ---------- ---------------- M/C VENTURE PARTNERS(1) M/C Venture Partners V, L.P. 2,831 589,918 $ 2,831,607 Chestnut Venture Partners, L.P. 116 24,093 115,644 M/C Venture Investors, LLC 53 10,989 52,749 ------ -------- ----------- TOTAL M/C VENTURE PARTNERS 3,000 625,000 $ 3,000,000 - -------------------------------------------------------------------------------- PATHFINDER VENTURES III, L.L.C. 500 104,167 $ 500,000 - -------------------------------------------------------------------------------- GREENWAY(2) SRB Greenway Capital, L.P. 80 16,750 $ 80,400 SRB Greenway Capital (Q.P.), L.P. 631 131,417 630,800 SRB Greenway Offshore Operating Fund, L.P. 39 8,083 38,800 Walker Smith Capital, L.P. 41 8,438 40,500 Walker Smith Capital (Q.P.), L.P. 231 48,125 231,000 Walker Smith International Fund, Ltd. 348 72,583 348,400 HHMI Investments, L.P. 130 27,104 130,100 ------ -------- ----------- TOTAL GREENWAY 1,500 312,500 $ 1,500,000 ------ -------- ----------- TOTALS 5,000 1,041,667 $ 5,000,000 - -------------------------------------------------------------------------------- (1) For the purposes of the Agreement, the entities listed below are collectively referred to as "M/C Venture Partners." (2) For the purposes of the Agreement, the entitles listed below are collectively referred to as "Greenway" Exhibit B --------- Form of Warrant --------------- See attached. Exhibit C --------- Form of ROFR Waiver ------------------- See attached. Exhibit D-1 ----------- Form of Voting Agreement ------------------------ See attached. Exhibit D-2 ----------- Form of Amended Voting Agreement -------------------------------- See attached. Exhibit E --------- Form of Company Counsel Legal Opinion ------------------------------------- See attached. Exhibit F --------- Form of Certificate of Designations ----------------------------------- See attached. Exhibit G --------- CERTIFICATE OF SUBSEQUENT SALE ------------------------------ [Name and Address of Transfer Agent] RE: Sale of Shares of Common Stock of Artisoft, Inc. (the "Company") pursuant to the Company's Prospectus dated _____________, ____ (the "Prospectus") Dear Sir/Madam: The undersigned hereby certifies, in connection with the sale of shares of Common Stock of the Company included in the table of Selling Shareholders in the Prospectus, that the undersigned has sold the shares pursuant to the Prospectus and in a manner described under the caption "Plan of Distribution" in the Prospectus and that such sale complies with all securities laws applicable to the undersigned. Selling Shareholder (the beneficial owner): Record Holder (e.g., if held in name of nominee): Restricted Stock Certificate No.(s): Number of Shares Sold: Date of Sale: In the event that you receive a stock certificate(s) representing more shares of Common Stock than have been sold by the undersigned, then you should return to the undersigned a newly issued certificate for such excess shares in the name of the Record Holder and BEARING A RESTRICTIVE LEGEND. Further, you should place a stop transfer on your records with regard to such certificate. Very truly yours, Dated: By: Print Name: Title: cc: [Company Name and Address] Exhibit H --------- Plan of Distribution -------------------- The selling stockholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein: - ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; - block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; - purchases by a broker-dealer as principal and resale by the broker-dealer for its account; - an exchange distribution in accordance with the rules of the applicable exchange; - privately negotiated transactions; - short sales effected after the date the registration statement of which this Prospectus is a part is declared effective by the SEC; - through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; - broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; - a combination of any such methods of sale; and - any other method permitted pursuant to applicable law. The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants. The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule. The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be "underwriters" within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders who are "underwriters" within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act. To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus. In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with. We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act. We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus. We have agreed with the selling stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which the shares may be sold pursuant to Rule 144(k) of the Securities Act. EX-4 3 exhibit4_14263.txt CERTIFICATE OF POWERS EXHIBIT 4 --------- CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCES AND RIGHTS OF THE SERIES D CONVERTIBLE PREFERRED STOCK OF ARTISOFT, INC. PURSUANT TO SECTION 151(G) OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE THE UNDERSIGNED, being the Secretary of Artisoft, Inc., a Delaware corporation (the "Corporation"), DOES HEREBY CERTIFY that, pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware (the "General Corporation Law"), the following resolutions were duly adopted by the Board of Directors of the Corporation (the "Board of Directors"), and, pursuant to authority conferred upon the Board of Directors by the provisions of the Corporation's certificate of incorporation, as amended and in effect (the "Certificate of Incorporation"), in accordance with Section 141 of the General Corporation Law by express resolution of the Board of Directors, the Board of Directors adopted resolutions fixing the designation and the relative powers, preferences, rights, qualifications, limitations and restrictions of such stock. These composite resolutions are as follows: "RESOLVED, that pursuant to authority expressed granted to and vested in the Board of Directors by the provisions of the Certificate of Incorporation, the issuance of a series of preferred stock, par value $1.00 per share, which shall consist of 5,000 of the 11,433,600 shares of preferred stock which the Corporation now has authority to issue, be, and the same hereby is, authorized and designated as "Series D Convertible Preferred Stock" (the "Series D Preferred Stock"). The shares of Series D Preferred Stock shall have the powers, designations, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the preferred stock of this series) as follows: 1. Dividends. From and after the date of the issuance of any shares of Series D Preferred Stock, dividends at the rate per annum of $80.00 per share shall accrue on such shares of Series D Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) (the "Accruing Dividends"). Accruing Dividends shall accrue from day to day, whether or not earned or declared, shall be cumulative, shall compound annually, and shall be payable when and as declared by the Board of Directors or, if any Accruing Dividends have not been declared by the Board of Directors, upon the earliest to occur of (i) a liquidation, dissolution or winding up of the Corporation as contemplated by Section 2; (ii) in connection with the conversion of shares of Series D Preferred Stock pursuant to Section 4, Section 5 and Section 6; or (iii) a redemption as contemplated by Section 7 and Section 8. The Corporation shall not declare, pay or set aside any dividends on any other shares of capital stock of the Corporation (other than dividends on shares of Common Stock payable solely in shares of Common Stock) unless the holders of the Series D Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series D Preferred Stock in an amount at least equal to (i) the amount of the aggregate Accruing Dividends then accrued on such share of Series D Preferred Stock and not previously paid plus (ii) (A) in the case of a dividend on Common Stock or any class or series that is convertible into Certificate of Powers, Designations, Preferences and Rights - Page 2 Common Stock, that dividend per share of Series D Preferred Stock as would equal the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all such shares of such class or series had been converted into Common Stock and (2) the number of shares of Common Stock issuable upon conversion of a share of Series D Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (B) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Series D Preferred Stock determined by dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock and multiplying such fraction by an amount equal to $1,000 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting the number of issued and outstanding shares of Series D Preferred Stock) (such amount, as so adjusted from time to time, being hereinafter referred to as the "Series D Original Issue Price"). 2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales. (a) Preferential Payments to Holders of Series D Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series D Preferred Stock then outstanding shall be entitled to be paid out of the assets available for distribution to its stockholders, before any payment shall be made to the holders of Common Stock or any other class or series of capital stock ranking on liquidation junior to the Series D Preferred Stock by reason of their ownership thereof, an amount per share equal to the greater of (1) the Series D Original Issue Price plus an amount equal to all Accruing Dividends unpaid thereon (whether or not declared) plus any dividends declared but unpaid thereon and (2) such amount per share as would have been payable had all shares of Series D Convertible Preferred Stock been converted into shares of Common Stock pursuant to the applicable provisions of Section 4 immediately prior to such liquidation, dissolution or winding-up. The aggregate amount which a holder of a share of Series D Preferred Stock is entitled to receive under this Section 2(a) is hereinafter referred to as the "Series D Liquidation Amount". If upon any such liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series D Preferred Stock the full amount to which they shall be entitled under this Section 2(a), then the holders of shares of Series D Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) Distribution of Remaining Assets. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, after the payment of all preferential amounts required to be paid to the holders of shares of Series D Preferred Stock under Section 2(a) (and any other series of preferred stock of the Corporation ranking on liquidation senior to the Common Stock), the remaining assets of the Corporation available for distribution to the Corporation's stockholders shall be distributed among the holders of the shares of Common Stock, pro rata based on the number of shares held by each such holder. (c) Deemed Liquidation Events. (i) The following events shall be deemed to be a liquidation of the Corporation for purposes of this Section 2, unless the holders of at least a majority in interest of the Series D Preferred Stock elect otherwise by written notice given to the Corporation at least 10 days prior to the effective date of any such event (any such event, unless such an election is made, is referred to as a "Deemed Liquidation Event"): Certificate of Powers, Designations, Preferences and Rights - Page 3 (A) a merger or consolidation in which (I) the Corporation is a constituent party or (II) a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation (provided that, for the purpose of this Section 2(c)(i), all shares of Common Stock issuable upon exercise of Options (as defined below) outstanding immediately prior to such merger or consolidation or upon conversion of Convertible Securities (as defined below) outstanding immediately prior to such merger or consolidation shall be deemed to be outstanding immediately prior to such merger or consolidation and, if applicable, converted or exchanged in such merger or consolidation on the same terms as the actual outstanding shares of Common Stock are converted or exchanged); (B) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole or the sale of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation; or (C) a transaction or series of related transactions in which a person or a group of persons (as defined in Rule 13d-5(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) acquires beneficial ownership (as determined in accordance with Rule 13d-3 under the Exchange Act) of a majority of voting power of the voting shares of the Corporation (such an acquisition of voting control is referred to as a "Voting Change"). (ii) The Corporation shall not have the power to effect a Deemed Liquidation Event pursuant to Section 2(c)(i)(A)(I) above unless the agreement or plan of merger or consolidation provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2(a) and 2(b) above. (iii) In the event of a Deemed Liquidation Event pursuant to Section 2(c)(i)(A)(II) or Section 2(c)(i)(B) above, if the Corporation does not effect a dissolution of the Corporation under the General Corporation Law within 30 days after such Deemed Liquidation Event, then (A) the Corporation shall deliver a written notice to each holder of Series D Preferred Stock no later than the 30th day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause (B) to require the redemption of such shares of Series D Preferred Stock, and (B) if the holders of at least a majority of the then outstanding shares of Series D Preferred Stock so request in a written instrument delivered to the Corporation not later than 45 days after such Deemed Liquidation Event, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained Certificate of Powers, Designations, Preferences and Rights - Page 4 liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board of Directors) (the "Net Proceeds"), to the extent legally available therefor, on the 45th day after such Deemed Liquidation Event (the "Liquidation Redemption Date"), to redeem all outstanding shares of Series D Preferred Stock at a price per share equal to the Series D Liquidation Amount. In the event of a redemption pursuant to the preceding sentence, if the Net Proceeds are not sufficient to redeem all outstanding shares of Series D Preferred Stock and of any other series of preferred stock ranking on redemption on parity with the Series D Preferred Stock that is required to be redeemed, or if the Corporation does not have sufficient lawfully available funds to effect such redemption, the Corporation shall redeem a pro rata portion of each holder's shares of Series D Preferred Stock to the fullest extent of such Net Proceeds or such lawfully available funds, as the case may be, and, where such redemption is limited by the amount of lawfully available funds, the Corporation shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor. Prior to the distribution or redemption provided for in this Section 2(c)(iii), the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in connection with such Deemed Liquidation Event or in the ordinary course of business. (iv) If, in connection with a Voting Change, the acquirer(s) in such transaction (or series of related transactions) does not pay in full the entire Series D Liquidation Amount in accordance with Section 2(a) to the holders of the Series D Preferred Stock in preference to any payments to the Corporation and/or the sellers of capital stock in such transaction (or series of related transaction), then the holders of at least a majority of the then outstanding shares of Series D Preferred Stock may cause the Corporation to redeem all outstanding shares of Series D Preferred Stock at a price per share equal to the Series D Liquidation Amount. In the event of a redemption pursuant to the preceding sentence, if the assets of the Corporation are not sufficient to redeem all outstanding shares of Series D Preferred Stock and of any other series of preferred stock ranking on redemption on parity with the Series D Preferred Stock that is required to be redeemed, or if the Corporation does not have sufficient lawfully available funds to effect such redemption, the Corporation shall redeem a pro rata portion of each holder's shares of Series D Preferred Stock to the fullest extent of such lawfully available funds and the Corporation shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor. Prior to the distribution or redemption provided for in this Section 2(c)(iv), the Corporation shall not expend or dissipate the consideration received in connection with a Voting Change, except in the ordinary course of business. (v) The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such merger, consolidation, sale, transfer, exclusive license, other disposition or redemption shall be the cash or the value of the property, rights or securities paid or distributed to such holders by the Corporation or the acquiring person, firm or other entity. If the amount deemed paid or distributed under this Section 2(c)(v) is made in property other than in cash, the value of such distribution shall be the fair market value of such property, determined as follows: (A) For securities not subject to investment letters or other similar restrictions on free marketability, (1) if traded on a securities exchange or the NASDAQ Stock Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or market over the thirty-day (30) period ending three (3) days prior to the closing of such transaction resulting in a Deemed Liquidation Event; Certificate of Powers, Designations, Preferences and Rights - Page 5 (2) if actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the thirty-day (30) day period ending three (3) days prior to the closing of such transaction resulting in a Deemed Liquidation Event; or (3) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors. (B) The method of valuation of securities subject to investment letters or other similar restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall take into account an appropriate discount (as determined in good faith by the Board of Directors) from the market value as determined pursuant to clause (A) above so as to reflect the approximate fair market value thereof. 3. Voting; Certain Actions. (a) General. On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series D Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Series D Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. (b) Certain Actions. For as long as at least 2,500 shares of the Series D Preferred Stock issued pursuant to that certain Securities Purchase Agreement dated on or about February 9, 2006 by and among the Corporation and the other parties thereto (as such agreement is amended and in effect from time to time, the "2006 Purchase Agreement") are issued and outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Corporation's certificate of incorporation) the written consent or affirmative vote of the holders of at least a majority in interest of the then issued and outstanding shares of Series D Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class: (i) (1) alter or change the rights, preferences or privileges of the Series D Preferred Stock or (2) amend, alter or repeal any provision of the certificate of incorporation or bylaws of the Corporation; (ii) create or authorize the creation of any additional class or series of shares of stock (or any debt security which by its terms is convertible into or exchangeable for any equity security of the Corporation and any security which is a combination of debt and equity) unless the same ranks junior to the Common Stock as to dividends and the distribution of assets on the liquidation, dissolution or winding up of the Corporation; or issue, or agree to issue, any equity security (or any security convertible, exercisable or exchangeable for or into any equity security); (iii) issue, or obligate itself to issue, any shares of the Corporation's capital stock (or any debt security which by its terms is convertible into or exchangeable for any equity security of the Corporation and any security which is a combination of debt and equity), including, without limitation, shares of Series D Preferred Stock and shares of Common Stock, except (1) the issuance of shares of Common Stock in connection with the conversion of shares of Series D Preferred Stock; and (2) the issuance of the shares of Common Stock described in Section 4(d)(i)(D)(II); Certificate of Powers, Designations, Preferences and Rights - Page 6 (iv) change the number of shares of capital stock of the Corporation reserved for grants or issuance to employees, directors, contractors or consultants under the Corporation's equity incentive plans; (v) approve or engage in any transaction (or series of related transactions) for the acquisition of any other Person (other than a direct or indirect subsidiary of the Corporation) or business or all or substantially all of the assets of another Person (other than a direct or indirect subsidiary of the Corporation) (for purposes hereof, the term "Person" shall mean an individual, corporation, trust, partnership, limited liability company, joint venture, unincorporated organization, government body or any agency or political subdivision thereof, or any other entity); (vi) liquidate, dissolve or wind-up the business and affairs of the Corporation, effect any Deemed Liquidation Event, or consent to any of the foregoing; (vii) purchase or redeem, or set aside any sums for the purchase or redemption of, or pay any dividend or make any distribution on, any shares of capital stock of the Corporation or permit any subsidiary to do any of the foregoing except for (1) dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock; (2) redemption of shares of Series D Preferred Stock contemplated by Section 2 and Section 7 hereof; (3) the dividends and/or distributions with respect to shares of Series D Preferred Stock contemplated by Sections 2, 4, 5, 6, and 7; and (4) the repurchase of shares of Common Stock from employees or consultants at the original purchase price thereof pursuant to awards granted prior to the date hereof under a stock plan approved by the Board of Directors; and (viii) increase or decrease the number of directors constituting the size of the Board of Directors from seven (7) members. 4. Optional Conversion. The holders of the Series D Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series D Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series D Original Issue Price by the Series D Conversion Price (as defined below) in effect at the time of conversion. The "Series D Conversion Price" shall initially be equal to $1.20. Such initial Series D Conversion Price, and the rate at which shares of Series D Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. In the event of a Notice of Redemption of any shares of Series D Preferred Stock pursuant to Section 7, the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the last full day preceding the date fixed for redemption, unless the Series D Redemption Price is not fully paid on such Redemption Date, in which case the Conversion Rights for such shares shall continue until such price is paid in full. (b) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Series D Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total Certificate of Powers, Designations, Preferences and Rights - Page 7 number of shares of Series D Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion. (c) Mechanics of Conversion. (i) In order for a holder of Series D Preferred Stock to voluntarily convert shares of Series D Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Series D Preferred Stock (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate), at the office of the transfer agent for the Series D Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Series D Preferred Stock represented by such certificate or certificates and, if applicable, any event on which such conversion is contingent. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing. The close of business on the date of receipt by the transfer agent (or the Corporation if the Corporation serves as its own transfer agent) of such certificates (or lost certificate affidavit and agreement) and notice shall be the time of conversion (the "Conversion Time"), and the shares of Common Stock issuable upon conversion of the shares represented by such certificate shall be deemed to be outstanding of record as of such date. The Corporation shall, as soon as practicable after the Conversion Time, issue and deliver to such holder of Series D Preferred Stock, or to his, her or its nominees, (1) a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share and (2) a certificate or certificates for the number of shares of Common Stock determined pursuant to Section 4(c)(vi). (ii) The Corporation shall at all times when the Series D Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Series D Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series D Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series D Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Corporation's certificate of incorporation. Before taking any action which would cause an adjustment reducing the Series D Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series D Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Series D Conversion Price. (iii) All shares of Series D Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor. Any shares of Series D Preferred Stock so converted shall be retired and cancelled and shall not be reissued as shares of such series, and the Corporation (without the Certificate of Powers, Designations, Preferences and Rights - Page 8 need for stockholder action) may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Series D Preferred Stock accordingly. (iv) Upon any such conversion, no adjustment to the Series D Conversion Price shall be made for any declared but unpaid dividends on the Series D Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion. (v) The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Series D Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series D Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (vi) Notwithstanding anything to the contrary set forth herein, at the time of conversion of any shares of Series D Preferred Stock into shares of Common Stock, any dividends that are payable on such shares of Series D Preferred Stock (including, without any limitation, any Accruing Dividends) shall be payable to the holder of such shares of Series D Preferred Stock in shares of Common Stock at a per share price equal to the Series D Conversion Price then in effect. (d) Adjustments to Series D Conversion Price for Diluting Issues. (i) Special Definitions. The following terms have the following meanings: (A) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities. (B) "Series D Original Issue Date" shall mean the date on which the first share of Series D Preferred Stock was issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii) below, deemed to be issued) by the Corporation after the Series D Original Issue Date, other than the following shares of Common Stock, and shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (collectively, "Exempted Securities"): (I) shares of Common Stock, Options or Convertible Securities issued or deemed issued as a dividend or distribution on Series D Preferred Stock; (II) shares of Common Stock, Options or Convertible Securities issued or deemed issued as a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Section 4(e), Section 4(f), Section 4(g) and Section 4(h) below; Certificate of Powers, Designations, Preferences and Rights - Page 9 (III) up to an aggregate of 7,088,006 shares of Common Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combinations or other similar recapitalization affecting such shares), including Options therefor, authorized under the Corporation's various stock option plans in effect as of the Series D Original Issue Date, of which no shares of Common Stock have been issued as restricted stock as of the Series D Original Issue Date or are issuable upon the exercise of Options outstanding as of the Series D Original Issue Date and 7,088,006 shares of Common Stock are issuable to employees, consultants or directors pursuant to stock option, stock grant, stock purchase or similar plans or arrangements approved by the Board of Directors or a committee thereof; (IV) shares of Common Stock or Convertible Securities actually issued upon the exercise of Options or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security; and (IV) the issuance of the Additional Warrants (as defined in the 2006 Purchase Agreement) and the shares of Common Stock issued or issuable in connection with the exercise thereof. (ii) No Adjustment of Series D Conversion Price. No adjustment in the Series D Conversion Price shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if: (a) the consideration per share (determined pursuant to Section 4(d)(v)) for such Additional Shares of Common Stock issued or deemed to be issued by the Corporation is equal to or greater than the applicable Series D Conversion Price in effect immediately prior to the issuance or deemed issuance of such Additional Shares of Common Stock, or (b) prior to such issuance or deemed issuance, the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series D Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock. (iii) Deemed Issue of Additional Shares of Common Stock. (A) If the Corporation at any time or from time to time after the Series D Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities and excluding Convertible Securities issued upon the exercise of Options) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time the Option is granted or the Convertible Security is issued or, in case such a record date shall have been fixed, as of the close of business on such record date. (B) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Series D Conversion Price pursuant to the terms of Section 4(d)(iv) below, are revised (either automatically pursuant to the provisions contained therein or as a result of an amendment to such terms) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security and/or (2) any increase or decrease in the consideration payable to the Corporation upon such Certificate of Powers, Designations, Preferences and Rights - Page 10 exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, the Series D Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Series D Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (B) shall have the effect of increasing the Series D Conversion Price to an amount which exceeds the lower of (i) the Series D Conversion Price on the original adjustment date, or (ii) the Series D Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date. (C) If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities and excluding Convertible Securities issued upon the exercise of Options), the issuance of which did not result in an adjustment to the Series D Conversion Price pursuant to the terms of Section 4(d)(iv) below (either because the consideration per share (determined pursuant to Section 4(d)(v) hereof) of the Additional Shares of Common Stock subject thereto was equal to or greater than the Series D Conversion Price then in effect, or because such Option or Convertible Security was issued before the Series D Original Issue Date), are revised after the Series D Original Issue Date (either automatically pursuant to the provisions contained therein or as a result of an amendment to such terms) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Section 4(d)(iii)(A) above) shall be deemed to have been issued effective upon such increase or decrease becoming effective. (iv) Adjustment of Series D Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall at any time after the Series D Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(iii)), without consideration or for a consideration per share less than the applicable Series D Conversion Price in effect immediately prior to such issue, then the Series D Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula: CP2 = CP1 multiplied by (A + B) / (A + C) For purposes of the foregoing formula, the following definitions shall apply: (I) "CP2" shall mean the Series D Conversion Price in effect immediately after such issue of Additional Shares of Common Stock; (II) "CP1" shall mean the Series D Conversion Price in effect immediately prior to such issue of Additional Shares of Common Stock; (III) "A" shall mean the number of (i) shares of Common Stock and (ii) shares of Common Stock issuable upon conversion or exercise of Convertible Securities, in each case outstanding immediately prior to such issue of Additional Shares of Common Stock; Certificate of Powers, Designations, Preferences and Rights - Page 11 (IV) "B" shall mean the number of shares of Common Stock that would have been issued if such Additional Shares of Common Stock had been issued at a price per share equal to CP1 (determined by dividing the aggregate consideration received by the Corporation in respect of the issuance of such Additional Shares of Common Stock by CP1); and (V) "C" shall mean the number of Additional Shares of Common Stock issued in such transaction. (v) Determination of Consideration. For purposes of this Section 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (I) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (I) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by Certificate of Powers, Designations, Preferences and Rights - Page 12 (II) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options and Convertible Securities and the conversion or exchange of such Convertible Securities. (vi) Multiple Closing Dates. In the event the Corporation shall issue on more than one date Additional Shares of Common Stock that are a part of one transaction or a series of related transactions and that would result in an adjustment to the Series D Conversion Price pursuant to the terms of Section 4(d)(iv) above, and such issuance dates occur within a period of no more than 30 days from the first such issuance to the final such issuance, then, upon the final such issuance, the Series D Conversion Price shall be readjusted to give effect to all such issuances as if they occurred on the date of the first such issuance (and without giving effect to any additional adjustments as a result of any such subsequent issuances within such period). (e) Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the Series D Original Issue Date effect a subdivision of the outstanding Common Stock, the Series D Conversion Price in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding. If the Corporation shall at any time or from time to time after the Series D Original Issue Date combine the outstanding shares of Common Stock, the Series D Conversion Price in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding. Any adjustment under this Section 4(e) shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) Adjustment for Certain Dividends and Distributions. In the event the Corporation at any time or from time to time after the Series D Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the Series D Conversion Price in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Series D Conversion Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series D Conversion Price shall be Certificate of Powers, Designations, Preferences and Rights - Page 13 recomputed accordingly as of the close of business on such record date and thereafter the Series D Conversion Price shall be adjusted pursuant to this Section 4(f) as of the time of actual payment of such dividends or distributions; and provided further, however, that no such adjustment shall be made if the holders of Series D Preferred Stock simultaneously receive (i) a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series D Preferred Stock had been converted into Common Stock on the date of such event or (ii) a dividend or other distribution of shares of Series D Preferred Stock which are convertible, as of the date of such event, into such number of shares of Common Stock as is equal to the number of additional shares of Common Stock being issued with respect to each share of Common Stock in such dividend or distribution. (g) Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after the Series D Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in other property and the provisions of Section (1) do not apply to such dividend or distribution, then and in each such event the holders of Series D Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Series D Preferred Stock had been converted into Common Stock on the date of such event. (h) Adjustment for Merger or Reorganization, etc. Subject to the provisions of Section 2(c), if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but not the Series D Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Sections 4(e), 4(f) or 4(g), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of Series D Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of Series D Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of the Series D Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Series D Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of the Series D Preferred Stock. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Series D Conversion Price pursuant to this Section 4, the Corporation at its expense shall, as promptly as reasonably practicable but in any event not later than 10 days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series D Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which the Series D Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of Series D Preferred Stock (but in any event not later than 10 days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the Series D Conversion Price then in effect, and (ii) the number Certificate of Powers, Designations, Preferences and Rights - Page 14 of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of Series D Preferred Stock. (j) Notice of Record Date. In the event: (i) the Corporation shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon conversion of the Series D Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or (ii) of any capital reorganization of the Corporation, any reclassification of the Common Stock of the Corporation, or any Deemed Liquidation Event; or (iii) of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, then, and in each such case, the Corporation will send or cause to be sent to the holders of the Series D Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon the conversion of the Series D Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Series D Preferred Stock and the Common Stock. Such notice shall be sent at least 20 days prior to the record date or effective date for the event specified in such notice. Any notice required by the provisions hereof to be given to a holder of shares of Preferred Stock shall be deemed sent to such holder if deposited in the United States mail, postage prepaid, and addressed to such holder at his, her or its address appearing on the books of the Corporation. 5. Mandatory Conversion. (a) Upon the earlier of (A) the closing of the sale of shares of Common Stock to the public at a price of at least three (3) times the Series D Original Issue Price (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $50,000,000 of gross proceeds to the Corporation ("Triggering IPO") or (B) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at a majority in interest of the then outstanding shares of Series D Preferred Stock (a "Triggering Election") (the time of such closing of a Triggering IPO, or the date and time specified or the time of the event specified in such vote or written consent relating to a Triggering Election is referred to herein as the "Mandatory Conversion Time"), except as otherwise provided in Section 8, (i) all outstanding shares of Series D Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate (and any dividends that are payable on the shares of Series D Preferred Stock (including, without any limitation, any Accruing Dividends) shall be payable to the holder(s) thereof in shares of Common Stock at a per share price equal to the Series D Conversion Price then in effect) and (ii) such shares may not be reissued by the Corporation. Notwithstanding anything to the contrary set forth herein, the holders of Series D Certificate of Powers, Designations, Preferences and Rights - Page 15 Preferred Stock that made a Triggering Election may revoke or otherwise suspend such election at any time on or before the Mandatory Conversion Time relating to such Triggering Election. (b) All holders of record of shares of Series D Preferred Stock shall be given written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all such shares of Series D Preferred Stock pursuant to this Section 5. In connection with a Triggering Election, the Corporation shall give such notice at least 10 days before the date and time of the Mandatory Conversion Time relating to such Triggering Election (such notice is referred to as the "Triggering Election Notice"). In connection with a Triggering IPO, such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time relating to such Triggering IPO. Such notice shall be sent by first class or registered mail, postage prepaid, or given by electronic communication in compliance with the provisions of the General Corporation Law, to each record holder of Series D Preferred Stock. Upon receipt of such notice, each holder of shares of Series D Preferred Stock shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5. At the Mandatory Conversion Time, all outstanding shares of Series D Preferred Stock shall be deemed to have been converted into shares of Common Stock, which shall be deemed to be outstanding of record, and all rights with respect to the Series D Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the last sentence of this Section 5(b). If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. As soon as practicable after the Mandatory Conversion Time and the surrender of the certificate or certificates (or lost certificate affidavit and agreement) for Series D Preferred Stock, the Corporation shall issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions of this Section 5 together with (1) cash as provided in Section 4(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion and (2) an additional number of shares Common Stock determined in accordance with Section 4(c)(iv). (c) All certificates evidencing shares of Series D Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the Mandatory Conversion Time, be deemed to have been retired and cancelled and the shares of Series D Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. Such converted Series D Preferred Stock may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series D Preferred Stock accordingly. 6. Special Conversion. (a) If within 180 days after the Series D Original Issue Date, the Corporation consummates a Future Financing Transaction (as defined below) (the timing of such closing of such Future Financing Transaction is referred to as the "Special Conversion Time"), then all outstanding shares of Series D Preferred Stock shall automatically be deemed converted into the right to receive a number of Certificate of Powers, Designations, Preferences and Rights - Page 16 full shares of the Future Financing Securities (as defined below) equal to the quotient of (i) the Series D Liquidation Amount (calculated as of Special Closing Time) divided by (ii) the price per share paid by the investors for the Future Financing Securities issued in such Future Financing Transaction. No fractional shares of Future Financing Securities shall be issued upon conversion of the Series D Preferred Stock pursuant to this Section 6. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the price per share of one (1) share of the Future Financing Securities sold in the Future Financing Transaction. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series D Preferred Stock the holder is at the time converting into shares of Future Financing Securities and the aggregate number of shares of Future Financing Securities issuable upon such conversion. All shares of Series D Preferred Stock converted pursuant to this Section 6 may not be reissued by the Corporation. (b) The holders of Series D Preferred Stock shall, upon conversion of such shares pursuant to this Section 6, be entitled to all rights granted to any purchaser of Future Financing Securities in the Future Financing Transaction. Any conversion pursuant to this Section 6 shall be deemed for all purposes to have been effected immediately prior to consummation of the Future Financing Transaction. The Corporation shall pay all documentary, stamp or other transactional taxes attributable to the issuance of the Future Financing Securities. All shares of Future Financing Securities deliverable upon conversion of shares of Series D Preferred Stock pursuant to this Section 6 shall be duly authorized, validly issued and fully paid and non-assessable. (c) All holders of record of shares of Series D Preferred Stock shall be given written notice of the Special Conversion Time and the place designated for mandatory conversion of all such shares of Series D Preferred Stock pursuant to this Section 6. Such notice need not be sent in advance of the occurrence of the Special Conversion Time. Such notice shall be sent by first class or registered mail, postage prepaid, or given by electronic communication in compliance with the provisions of the General Corporation Law, to each record holder of Series D Preferred Stock. Upon receipt of such notice, each holder of shares of Series D Preferred Stock shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Future Financing Securities to which such holder is entitled pursuant to this Section 6. At the Special Conversion Time, all outstanding shares of Series D Preferred Stock shall be deemed to have been converted into shares of the Future Financing Securities, which shall be deemed to be outstanding of record, and all rights with respect to the Series D Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Future Financing Securities), will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the last sentence of this Section 6(c). If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. As soon as practicable after the Special Conversion Time and the surrender of the certificate or certificates (or lost certificate affidavit and agreement) for Series D Preferred Stock, the Corporation shall issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Future Financing Securities issuable on such conversion in accordance with the provisions of this Section 6 together with cash as provided in Section 6(a) in respect of any fraction of a share of Future Financing Securities otherwise issuable upon such conversion. Certificate of Powers, Designations, Preferences and Rights - Page 17 (d) All certificates evidencing shares of Series D Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the Special Conversion Time, be deemed to have been retired and cancelled and the shares of Series D Preferred Stock represented thereby converted into shares of Future Financing Securities for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. Such converted Series D Preferred Stock may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series D Preferred Stock accordingly. (e) The following terms have the following meanings: (i) "Future Financing Transaction" shall mean any financing (or series of related financings) of the Corporation (other than in connection with the Corporation's sale of Series D Preferred Stock and warrants to purchase shares of Common Stock pursuant to the 2006 Purchase Agreement) that closes within 180 days after the Series D Original Issue Date and involves the issuance of any securities or instruments (other than debt securities with no equity feature) of the Corporation in which the aggregate gross proceeds to the Corporation equals or exceeds $10 million; and (ii) "Future Financing Security" shall mean the class and type of any security, instrument or indebtedness (but not indebtedness with no equity feature) of the Corporation issued to investors at the closing of a Future Financing Transaction (but excluding the conversion of the shares of Series D Preferred Stock pursuant to this Section 6 and the issuance of Additional Warrants (as defined in the 2006 Purchase Agreement) pursuant to the terms of the 2006 Purchase Agreement). 7. Redemption. (a) Redemption. Shares of Series D Preferred Stock shall be redeemed by the Corporation out of funds lawfully available therefor at a price equal to, for each share of Series D Preferred Stock, the Series D Original Issue Price, plus all declared and unpaid dividends thereon, including, without limitation, the Accrued Dividends, whether or not declared (the "Series D Redemption Price"). Shares of Series D Preferred Stock shall be redeemed in three (3) equal annual installments commencing 30 days after receipt by the Corporation at any time on or after February 9, 2009, from the holders of at least a majority of the issued and outstanding shares of Series D Preferred Stock, consenting or voting (as the case may be) as a separate class, of written notice requesting redemption of all shares of Series D Preferred Stock (the date of each such installment being referred to as a "Redemption Date"). On each Redemption Date, the Corporation shall redeem, on a pro rata basis in accordance with the number of shares of Series D Preferred Stock owned by each holder, that number of outstanding shares of Series D Preferred Stock determined by dividing (i) the total number of shares of Series D Preferred Stock outstanding immediately prior to such Redemption Date by (ii) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies). If the Corporation does not have sufficient funds legally available to redeem on any Redemption Date all shares of Series D Preferred Stock, the Corporation shall redeem a pro rata portion of each holder's redeemable shares of Series D Preferred Stock out of funds legally available therefor, based on the respective amounts which would otherwise be payable in respect of the shares to be redeemed if the legally available funds were sufficient to redeem all such shares, and shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor. (b) Redemption Notice. Not less than 15 days prior to each Redemption Date, written notice of the mandatory redemption (the "Redemption Notice") shall be mailed, postage prepaid, to each holder of record of Series D Preferred Stock to be redeemed such date, at its post office address Certificate of Powers, Designations, Preferences and Rights - Page 18 last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the General Corporation Law. Each Redemption Notice shall state: (I) the number of shares of Series D Preferred Stock held by the holder that the Corporation shall redeem on the Redemption Date; (II) the Redemption Date and the Series D Redemption Price; (III) the date upon which the holder's right to convert such shares terminates (as determined in accordance with Section 4(a)); and (IV) that the holder is to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares of Series D Preferred Stock to be redeemed on such date. (c) Surrender of Certificates, Payment. On or before the applicable Redemption Date, each holder of shares of Series D Preferred Stock to be redeemed on such Redemption Date, unless such holder has exercised his, her or its right to convert such shares as provided in Section 4 hereof, shall surrender the certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Series D Redemption Notice, and thereupon the Series D Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event less than all of the shares of Series D Preferred Stock represented by a certificate are redeemed, a new certificate representing the unredeemed shares of Series D Preferred Stock shall promptly be issued to such holder. (d) Rights Subsequent to Redemption. If the Redemption Notice shall have been duly given, and if on the applicable Redemption Date, the Series D Redemption Price payable upon redemption of the shares of Series D Preferred Stock to be redeemed on such Redemption Date is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor, then notwithstanding that the certificates evidencing any of the shares of Series D Preferred Stock so called for redemption shall not have been surrendered, dividends with respect to such shares of Series D Preferred Stock shall cease to accrue after such Redemption Date and all rights with respect to such shares shall forthwith after the Redemption Date terminate, except only the right of the holders to receive the Series D Redemption Price without interest upon surrender of their certificate or certificates therefor. (e) Redeemed or Otherwise Reacquired Stock. Any shares of Series D Preferred Stock which are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately canceled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted to the holders of Series D Preferred Stock following redemption. (f) Failure to Redeem. If the Corporation fails, for any reason or for no reason, to redeem within 30 days of a Redemption Date any or all of the then outstanding shares of Series D Preferred Stock entitled to be redeemed on such date in accordance with the terms and conditions of this Section 7 , then interest shall accrue cumulatively on any unpaid amount at a rate of 1% per each 30-day period or portion thereof that such amounts remain outstanding up through and until such date as the Corporation satisfies its redemption obligation. Certificate of Powers, Designations, Preferences and Rights - Page 19 8. Special Redemption. (a) Special Redemption. If within five (5) days after the date on which the Corporation delivers a Triggering Election Notice to the holders of Series D Preferred Stock in accordance with Section 5(b), any holder of Series D Preferred Stock delivers a written notice (a "Special Redemption Notice") to the Corporation stating that such holder elects to have the Corporation redeem all (but not less than all) of such holder's shares of Series D Preferred Stock (instead of such shares being converted into shares of Common Stock pursuant to Section 5) (all shares of Series D Preferred Stock subject to such notices so delivered to the Corporation are referred to as the "Special Redemption Shares"), then such shares shall be redeemed by the Corporation out of funds lawfully available therefor at a price equal to, for each such share of Series D Preferred Stock to be redeemed pursuant to this Section 8, the Series D Original Issue Price, plus all declared and unpaid dividends thereon, including, without limitation, the Accrued Dividends, whether or not declared, in each case, as of the date that is the expiration of such 5-day period (the "Special Redemption Price"). The Special Redemption Shares shall be redeemed on the date specified in the Triggering Election Notice (the date of such redemption being referred to as a "Special Redemption Date"). On the Special Redemption Date, the Corporation shall redeem all Special Redemption Shares. (b) Surrender of Certificates, Payment. On or before the Special Redemption Date, each holder of Special Redemption Shares shall surrender the certificate or certificates representing such shares to the Corporation, and thereupon the Special Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. (c) Rights Subsequent to Redemption. If on the Special Redemption Date, the Special Redemption Price payable upon redemption of the Special Redemption Shares paid or tendered for payment or deposited with an independent payment agent so as to be available therefor, then notwithstanding that the certificates evidencing any of the Special Redemption Shares so called for redemption shall not have been surrendered, dividends with respect to such Special Redemption Shares shall cease to accrue after the Special Redemption Date and all rights with respect to such shares shall forthwith after the Special Redemption Date terminate, except only the right of the holders to receive the Special Redemption Price without interest upon surrender of their certificate or certificates therefor. (d) Redeemed or Otherwise Reacquired Stock. Any Special Redemption Shares which are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately canceled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted to the holders of the Special Redemption Shares following redemption. (e) Failure to Redeem; Effects. If the Corporation fails, for any reason or for no reason, to redeem all Special Redemption Shares on the Special Redemption Date, then the holders of the Special Redemption Shares shall sell such shares to any person(s) that the Corporation designates, and such holders and such designee(s) shall effect the purchase and sale of such Special Redemption Shares at the Special Redemption Price. If for whatever reason such purchase and sale does not occur, then, notwithstanding anything to the contrary set forth herein, the Special Redemption Shares shall not be converted pursuant to Section 5 and shall remain outstanding. 9. Waiver. Any of the rights, powers preferences and other terms of the Series D Preferred Stock set forth herein may be waived on behalf of all holders of Series D Preferred Stock by the affirmative consent or vote of the holders of at least a majority of the shares of Series D Preferred Stock then outstanding." Signature Page to Certificate of Powers, Designations, Preferences and Rights IN WITNESS WHEREOF, this Certificate of Powers, Designations, Preferences and Rights of has been executed by a duly authorized officer of the Corporation on this 9th day of February, 2006. By: /s/ KEN CLINEBELL ----------------------- Name: Ken Clinebell Title: CFO - Interim EX-99.6 4 exh6_14263.txt VOTING AGREEMENT EXHIBIT 6 --------- AMENDMENT NO. 1 TO VOTING AGREEMENT ----------------------------------- This AMENDMENT NO. 1 TO VOTING AGREEMENT (this "Amendment"), is made and entered as of February __, 2006, by and between Artisoft, Inc., a Delaware corporation (the "Company") and the undersigned stockholders (collectively, the "Stockholders"). Terms used but not otherwise defined in this Amendment shall have the meanings ascribed to such terms in the Voting Agreement (as hereinafter defined). W I T N E S S E T H ------------------- WHEREAS, the Company desires to enter into a Securities Purchase Agreement, dated as of the date hereof, with certain investors (the "2006 Purchase Agreement"), relating to the issuance and sale of the Company's Series D Convertible Preferred Stock (the "Series D Preferred Stock") and warrants to purchase shares of the Company's Common Stock; WHEREAS, the Series D Preferred Stock, in accordance with the Certificate of Designations of the Series D Preferred Stock, shall be entitled to vote on any matter presented to the stockholders of the Corporation; WHEREAS, pursuant to the 2006 Purchase Agreement, the Company has agreed to seek stockholder approval to amend and restate its certificate of incorporation, as amended and in effect, as provided in Section 3.5 of the 2006 Purchase Agreement (the "2006 Proposal"); WHEREAS, the Company and the Stockholders previously entered into that certain Voting Agreement, dated as of September 28, 2005 (the "Voting Agreement"); WHEREAS, the Company and the Stockholders each desire to amend the Voting Agreement as set forth herein; and WHEREAS, the Majority Investors, as such term is defined in the Voting Agreement have consented to this Amendment pursuant to that Consent and Waiver Agreement, dated as of even date herewith, and attached hereto as Exhibit A. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Company and the Stockholders, with the consent of the Majority Investors, hereby agree as follows: SECTION 1.1. Amendment. (a) The second Recital of the Voting Agreement is hereby amended to amend "Proposal" to mean the 2006 Proposal; and (b) The third Recital of the Voting Agreement is hereby amended to amend "Shares" to include the Series D Preferred Stock (if the Stockholders acquired any of such shares) and any other shares of capital stock of the Company, owned now or hereafter acquired, entitled to vote on any matter presented to the stockholders of the Company. SECTION 1.2. No Further Amendments. The remaining provisions of the Voting Agreement shall remain in full force and effect, except to the extent amended as provided in this Amendment. In the event of a conflict between the provisions contained in this Amendment and the provisions contained in the Voting Agreement, the provisions contained in the Amendment shall be deemed controlling. SECTION 1.3. Entire Agreement. This Agreement constitutes the entire agreement and supersedes any and all other prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. SECTION 1.4. Counterparts. This Agreement may be executed (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which shall constitute one and the same agreement. [SIGNATURE PAGE FOLLOWS] -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above. ARTISOFT, INC. By: /s/ Ken Clinebell ------------------------------- Name: Ken Clinebell ----------------------------- Title: CFO - Interim ---------------------------- -3- SCHEDULE OF STOCKHOLDERS TO AMENDMENT NO. 1 TO VOTING AGREEMENT M/C Ventures Partners V, L.P. M/C Venture Investors, LLC Chestnut Venture Partners, L.P. Special Situations Fund III, L.P. Special Situations Private Equity Fund, L.P. Special Situations Technology Fund II, L.P. Special Situations Cayman Fund, L.P. Special Situations Technology Fund, L.P. Pathfinder Ventures III, L.L.C. Coral's Momentum Fund, Limited Partnership -4- EX-8 5 exhibit8_14263.txt FORM OF WARRANT EXHIBIT 8 --------- THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. THIS WARRANT SHALL BE VOID AFTER 5:00 P.M. EASTERN TIME ON FEBRUARY 9, 2016 (the "EXPIRATION DATE"). No. 2006-[ ] ARTISOFT, INC. WARRANT TO PURCHASE SHARES OF COMMON STOCK FOR VALUE RECEIVED, [WARRANTHOLDER] ("Warrantholder"), is entitled to purchase, subject to the provisions of this Warrant To Purchase Shares of Common Stock (the "Warrant"), from Artisoft, Inc., a Delaware corporation ("Company"), at any time not later than 5:00 P.M., Eastern time, on the Expiration Date (as defined above), at an initial exercise price per share equal to $0.01 (such price and such other price as shall result, from time to time, from the adjustments specified in Section 8 hereof is herein referred to as the "Warrant Price"), initially [NUMBER OF SHARES] shares (such number and such other number as shall result, from time to time, from the adjustments specified in Section 8 hereof is herein referred to as the "Warrant Shares") of Common Stock (as defined below). The number of Warrant Shares purchasable upon exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time as described herein. As used herein, "Common Stock" means the common stock, $0.01 par value per share, of the Company, and any capital stock of any class of the Company hereafter authorized that shall not be entitled to a fixed sum in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. This Warrant is one of the several warrants (collectively, the "February 2006 Warrants") evidencing the right to purchase shares of Common Stock issued pursuant to that certain Securities Purchase Agreement dated as of February 9, 2006 by and among the Company, the Warrantholder and the other parties thereto (as such agreement is amended and/or restated and in effect from time to time, the "2006 Purchase Agreement"). Section 1. Registration. The Company shall maintain books for the transfer and registration of the Warrant. Upon the initial issuance of the Warrant, the Company shall issue and register the Warrant in the name of the Warrantholder. Section 2. Transfers. As provided herein, this Warrant may be transferred only pursuant to a registration statement filed under the Securities Act of 1933, as amended ("Securities Act"), or an exemption from such registration. Subject to such restrictions, the Company shall transfer this Warrant from time to time upon the books to be maintained by the Company for that purpose, upon surrender thereof for transfer properly endorsed or accompanied by appropriate instructions for transfer and such other documents as may be reasonably required by the Company to establish that such transfer is being made in accordance with the terms hereof, and a new Warrant shall be issued to the transferee and the surrendered Warrant shall be canceled by the Company. Section 3. Exercise of Warrant. Warrant - Page 2 (a) Subject to the provisions hereof, the Warrantholder may exercise this Warrant in whole or in part at any time upon surrender of the Warrant, together with delivery of the duly executed Warrant exercise form attached hereto as Appendix A (the "Exercise Agreement") and payment by cash, certified check or wire transfer of funds (or by cash-less exercise as provided in Section 17) for the Warrant Price for that number of Warrant Shares then being purchased, to the Company during normal business hours on any business day at the Company's principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof). The Warrant Shares so purchased shall be deemed to be issued to the holder hereof or such holder's designee, as the record owner of such shares, as of the close of business on the date on which this Warrant shall have been surrendered (or evidence of loss, theft or destruction thereof and security or indemnity reasonably satisfactory to the Company), the Warrant Price shall have been paid, the completed Exercise Agreement shall have been delivered and, in the case of any transfer of Warrant Shares effected at the time of such exercise, an appropriately executed stock power and a certificate containing such reasonable and appropriate customary representations as may be reasonably requested by the Company shall have been delivered to the Company. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding three (3) business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of such holder or, subject to compliance with applicable law, such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such certificates, deliver to the holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. (b) Each exercise hereof shall constitute the re-affirmation by the Warrantholder that the representations and warranties contained in Sections 5.2, 5.3 and 5.4 of the 2006 Purchase Agreement are true and correct in all material respects with respect to the Warrantholder as of the time of such exercise. Section 4. Compliance with the Securities Act. The Company may cause the legend set forth on the first page of this Warrant to be set forth on each Warrant or similar legend on any security issued or issuable upon exercise of this Warrant, unless counsel for the Company is of the opinion as to any such security that such legend is unnecessary. Section 5. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the initial issuance of Warrant Shares issuable upon the exercise of the Warrant; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificates for Warrant Shares in a name other than that of the registered holder of this Warrant in respect of which such shares are issued, and in such case, the Company shall not be required to issue or deliver any certificate for Warrant Shares or any Warrant until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's reasonable satisfaction that such tax has been paid. The holder shall be responsible for income and gift taxes due under federal, state or other law, if any such tax is due. Section 6. Mutilated or Missing Warrants. In case this Warrant shall be mutilated, lost, stolen, or destroyed, the Company shall issue in exchange and substitution of and upon cancellation of the mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and for the purchase of a like number of Warrant Shares, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of the Warrant, and with respect to a lost, stolen or destroyed Warrant, reasonable indemnity or bond with respect thereto, if requested by the Company. Warrant - Page 3 Section 7. Reservation of Common Stock. The Company shall use its best efforts to, as soon as practicable, amend its certificate of incorporation to increase the number of shares of Common Stock authorized but unissued sufficient to allow reservation of all shares required to be reserved under the Warrant, and the Company shall thereafter at all applicable times keep reserved until issued (if necessary) as contemplated by this Section 7, out of the authorized and unissued Common Stock, sufficient shares to provide for the exercise of the rights of purchase represented by the Warrant in compliance with its terms. The Company agrees that all Warrant Shares issued upon exercise of the Warrant shall be, at the time of delivery of the certificates for such Warrant Shares upon payment in full of the Warrant Price therefor in accordance with the terms of this Warrant (or by cash-less exercise as provided below), duly authorized, validly issued, fully paid and non-assessable shares of Common Stock of the Company. Section 8. Adjustments to Warrant Price and Warrant Shares. Subject and pursuant to the provisions of this Section 8, the Warrant Price and number of Warrant Shares subject to this Warrant shall be subject to adjustment from time to time as set forth hereinafter. (a) If and whenever after the Original Issue Date (as defined below) the Company shall issue Additional Shares of Common Stock (as defined below) or is otherwise deemed to issue Additional Shares of Common Stock (including, without limitation, the issuance or deemed issuance of Options (as defined below) and Convertible Securities (as defined below)), in either case, without consideration or for a consideration per share less than the Conversion Price (as defined below) (such transaction is referred to as a "Triggering Transaction"), then forthwith upon such Triggering Transaction, the number of Warrant Shares shall, subject to and in accordance with the applicable provisions of this Section 8, be increased to the number of Warrant Shares (calculated to the nearest whole share of Common Stock) determined as follows: W' = W + [N - (T x N / E)] x W / [O + (T x N / E)] ----------------------------------------- 1 - {W / [O + (T x N / E)]} Where: "O" shall mean the number of (i) shares of Common Stock and (ii) shares of Common Stock issuable upon conversion or exercise of Convertible Securities, in each case, outstanding immediately prior to the Triggering Transaction. "E" shall mean the Conversion Price. "W" shall mean the number of Warrant Shares immediately prior to the Triggering Transaction. "N" shall mean the number of new shares of Common Stock issued and/or deemed to be issued in connection with the Triggering Transaction. "T" shall mean the aggregate consideration and/or deemed consideration paid per share of Common Stock issued or issuable as a result of the Triggering Transaction. "W'" shall mean the adjusted number of Warrant Shares pursuant to this Section 8. By way of example only, if (i) the Company has 1,000,000 shares of Common Stock and shares of Common Stock issuable upon conversion or exercise of Convertible Securities outstanding Warrant - Page 4 immediately prior to a Triggering Transaction (O=1,000,000); (ii) the number of Warrant Shares immediately prior to such Triggering Transaction is 30,000 (W=30,000); (iii) the Conversion Price is $1.00 (E=$1.00); (iv) the price per share paid for the newly issued shares of Common Stock is $0.50 (T=$0.50); and (v) the number of new shares to be issued by the Company in connection with the Triggering Transaction is 100,000 (N=100,000), the adjusted number of Warrant Shares would be calculated as follows: W' = 30,000 + [100,000 - (0.5 x 100,000 / 1.00)] x 30,000 / [1,000,000 + (0.5 x 100,000 / 1.00)] = 31,470.59 --------------------------------------------------- 1 - {30,000 / [1,000,000 + (0.5 x 100,000 / 1.00)]} (b) For purposes of determining the number of Warrant Shares, the following subsections Section 8(b)(i) to Section 8(b)(ix), inclusive, shall be applicable: (i) If the Company at any time or from to time after the Original Issue Date shall issue any Options, whether directly or by assumption in a merger or otherwise, whether or not such Options are immediately exercisable, the purchase price with respect to such Options shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (y) the maximum number of shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) If the Company at any time or from to time after the Original Issue Date shall issue any Convertible Securities, whether directly or by assumption in a merger or otherwise, whether or not such Convertible Securities are immediately exercisable, the purchase price with respect to such Convertible Securities shall be determined by dividing (x) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration), if any, payable to the Company upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. (iii) If the purchase price provided for in any Options referred to in Section 8(b)(i), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in Sections 8(b)(i) or 8(b)(ii), or the rate at which any Convertible Securities referred to in Sections 8(b)(i) or 8(b)(ii) are convertible into or exchangeable for shares of Common Stock shall change at any time, including by reason of provisions with respect thereto designed to protect against dilution, the number of Warrant Shares in effect at the time of such change shall forthwith be adjusted to the number of Warrant Shares which would have been in effect at such time had such Options or Convertible Securities outstanding at the time of such adjustment provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. (iv) In case any Options shall be issued in connection with the issue or sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. Warrant - Page 5 (v) In case any shares of Additional Shares of Common Stock, Options or Convertible Securities shall be issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor. In case any Additional Shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be the fair value of such consideration as determined in good faith by the Company's Board of Directors (the "Board of Directors") which will be provided in writing to the Warrantholder as soon as possible after the transaction. In case any shares of Common Stock, Options or Convertible Securities shall be issued in connection with any merger in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as shall be attributed by the Board of Directors in good faith to such Common Stock, Options or Convertible Securities, as the case may be, which attribution will be provided in writing to the Warrantholder as soon as possible after the transaction. (vi) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock for the purpose of this Section 8. (vii) In case the Company shall declare a dividend or make any other distribution upon the stock of the Company payable in Options or Convertible Securities, then in such case any Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (viii) For purposes of this Section 8, in case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (x) to receive a dividend or other distribution payable in Additional Shares of Common Stock, Options or in Convertible Securities, or (y) to subscribe for or purchase Additional Shares of Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right or subscription or purchase, as the case may be. (ix) Notwithstanding anything to the contrary set forth in this Warrant, if the Company shall issue any Options and/or Convertible Securities, or otherwise agrees to issue any Options and/or Convertible Securities, then the Company shall be deemed to have issued Additional Shares of Common Stock and the applicable provisions of this Section 8 shall apply to such issuance or deemed issuance. (c) If the Company shall at any time or from time to time while this Warrant is outstanding, pay a dividend or make a distribution on its Common Stock in shares of Common Stock, subdivide its outstanding shares of Common Stock into a greater number of shares or combine its outstanding shares of Common Stock into a smaller number of shares or issue by reclassification of its outstanding shares of Common Stock any shares of its capital stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the number of Warrant Shares purchasable upon exercise of the Warrant and the Warrant Price in effect immediately prior to the date upon which such change shall become effective, shall be adjusted by the Company so that the Warrantholder thereafter exercising the Warrant shall be entitled to receive the number of shares of Common Stock or other capital stock which the Warrantholder would have received if the Warrant had been exercised immediately prior to such event upon payment of a Warrant Price that has been adjusted to reflect a fair allocation of the economics of such event to the Warrantholder. Such adjustments shall be made successively whenever any event listed above shall occur. Warrant - Page 6 (d) If any capital reorganization, reclassification of the capital stock of the Company, consolidation or merger of the Company with another corporation in which the Company is not the survivor, or sale, transfer or other disposition of all or substantially all of the Company's assets to another corporation shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby each Warrantholder shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the Warrant Shares immediately theretofore issuable upon exercise of the Warrant, such shares of stock, securities or assets as would have been issuable or payable with respect to or in exchange for a number of Warrant Shares equal to the number of Warrant Shares immediately theretofore issuable upon exercise of the Warrant, had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of each Warrantholder to the end that the provisions hereof (including, without limitation, provision for adjustment of the Warrant Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or properties thereafter deliverable upon the exercise thereof. The Company shall not effect any such consolidation, merger, sale, transfer or other disposition without the consent of the Warrantholder unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing or otherwise acquiring such assets or other appropriate corporation or entity shall assume the obligation to deliver to the holder of the Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase, and the other obligations under this Warrant. The provisions of this Section 8(d) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. (e) In case the Company shall fix a payment date for the making of a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends or distributions referred to in Section 8(d)), or subscription rights or warrants, the Warrant Price to be in effect after such payment date shall be determined by multiplying the Warrant Price in effect immediately prior to such payment date by a fraction, (i) the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the Market Price per share of Common Stock (as defined below), less the fair market value (as determined by the Board of Directors in good faith) of said assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such Market Price per share of Common Stock. "Market Price" as of a particular date (the "Valuation Date") shall mean the following: (1) if the Common Stock is then listed on a national stock exchange, the closing sale price of one share of Common Stock on such exchange on the last trading day prior to the Valuation Date; (2) if the Common Stock is then quoted on Nasdaq, the closing sale price of one share of Common Stock on Nasdaq on the last trading day prior to the Valuation Date or, if no such closing sale price is available, the average of the high bid and the low sales price quoted on Nasdaq on the last trading day prior to the Valuation Date; or (3) if the Common Stock is not then listed on a national stock exchange or quoted on Nasdaq, the Fair Market Value of one share of Common Stock as of the Valuation Date, shall be determined in good faith by the Board of Directors and the Warrantholder. The Board of Directors shall respond promptly, in writing, to an inquiry by the Warrantholder prior to the exercise hereunder as to the Market Value of a share of Common Stock as determined by the Board of Directors. In the event that the Board of Directors and the Warrantholder are unable to agree upon the Market Value in respect of Section 8(e)(3) hereof, the Company and the Warrantholder shall jointly select an appraiser, who is experienced in such matters. The decision of such appraiser shall be final and conclusive, and the cost of such appraiser shall be borne evenly by the Company and the Warrantholder. Such adjustment shall be made successively whenever such a payment date is fixed. Warrant - Page 7 (f) In the event that, as a result of an adjustment made pursuant to this Section 8, the holder of this Warrant shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, the number of such other shares so receivable upon exercise of this Warrant shall be subject thereafter to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in this Warrant. (g) The following terms shall have the following meanings: (i) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to the terms of this Section 8, deemed to be issued) by the Company after the Original Issue Date, other than the following shares of Common Stock, and shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (collectively, "Exempted Securities"): (1) shares of Common Stock, Options or Convertible Securities issued or deemed issued as a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by this Section 8; (2) up to an aggregate of 7,088,006 shares of Common Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combinations or other similar recapitalization affecting such shares), including Options therefor, authorized under the Company's various stock option plans in effect as of the Original Issue Date, of which no shares of Common Stock have been issued as restricted stock as of the Original Issue Date or are issuable upon the exercise of Options outstanding as of the Original Issue Date and 7,088,006 shares of Common Stock are issuable to employees, consultants or directors pursuant to stock option, stock grant, stock purchase or similar plans or arrangements approved by the Board of Directors or a committee thereof; (3) shares of Common Stock or Convertible Securities actually issued upon the exercise of Options or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security; and (4) the issuance of the Additional Warrants (as defined in the 2006 Purchase Agreement) and the shares of Common Stock issued or issuable upon the exercise thereof. (ii) "Conversion Price" shall mean either (i) the conversion price per share in effect from time to time with respect to shares of the Company's Series D Convertible Preferred Stock, par value $1.00 per share (the "Series D Preferred Stock"), or (ii) if no shares of Series D Preferred Stock are outstanding, then the conversion price per share of Series D Preferred Stock that was in effect immediately prior to the date on which the last share of Series D Preferred Stock was outstanding (as appropriately adjusted for any stock split, reverse stock split, stock dividend or other reclassification or combination of the Common Stock occurring on or after such date). (iii) "Convertible Securities" shall mean any evidences of indebtedness, shares of capital stock or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options. Warrant - Page 8 (iv) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire shares of Common Stock or Convertible Securities. (v) "Original Issue Date" shall mean February 9, 2006. Section 9. Fractional Interest. The Company shall not be required to issue fractions of Warrant Shares upon the exercise of the Warrant. If any fractional share of Common Stock would, except for the provisions of the first sentence of this Section 9, be delivered upon such exercise, the Company, in lieu of delivering such fractional share, shall pay to the exercising holder of this Warrant an amount in cash equal to the current Market Price of such fractional share of Common Stock. Section 10. Benefits. Nothing in this Warrant shall be construed to give any person, firm or corporation (other than the Company and the Warrantholder) any legal or equitable right, remedy or claim, it being agreed that this Warrant shall be for the sole and exclusive benefit of the Company and the Warrantholder. Section 11. Notices to Warrantholder. Upon the happening of any event requiring an adjustment of the Conversion Price, the Warrant Price or the number of Warrant Shares, the Company shall promptly give written notice thereof to the Warrantholder at the address appearing in the records of the Company, stating the adjusted Conversion Price, Warrant Price and the adjusted number of Warrant Shares resulting from such event and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Failure to give such notice to the Warrantholder or any defect therein shall not affect the legality or validity of the subject adjustment. Section 12. Identity of Transfer Agent. The Transfer Agent for the Common Stock is ComputerShare Investor Services. Upon the appointment of any subsequent transfer agent for the Common Stock or other shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrant, the Company will mail to the Warrantholder a statement setting forth the name and address of such transfer agent. Section 13. Notices. Unless otherwise provided, any notice required or permitted under this Warrant shall be given in writing and shall be deemed effectively given as hereinafter described (i) if given by personal delivery, then such notice shall be deemed given upon such delivery, (ii) if given by telex or telecopier, then such notice shall be deemed given upon receipt of confirmation of complete transmittal, (iii) if given by mail, then such notice shall be deemed given upon the earlier of (A) receipt of such notice by the recipient or (B) three days after such notice is deposited in first class mail, postage prepaid, and (iv) if given by an internationally recognized overnight air courier, then such notice shall be deemed given one day after delivery to such carrier. All notices shall be addressed as follows: (i) if to the Warrantholder, at its address as set forth in the Company's books and records and, if to the Company, at the address as follows, or at such other address as the Warrantholder or the Company may designate by ten days' advance written notice to the other: If to the Company: Artisoft, Inc. 5 Cambridge Center Cambridge, Massachusetts 02142 Attn: President Fax: (617) 354-3564 Warrant - Page 9 With a copy to: Andrews Kurth LLP 1717 Main Street, Suite 3700 Dallas, Texas 75201 Attn: Victor B. Zanetti Fax: (214) 659-4400 Section 14. Registration Rights. The initial holder of this Warrant may be entitled to the benefit of certain registration rights in respect of the Warrant Shares as provided in the 2006 Purchase Agreement, and any subsequent holder hereof may be entitled to such rights. Section 15. Successors. All the covenants and provisions hereof by or for the benefit of the Warrantholder shall bind and inure to the benefit of its respective successors and assigns hereunder. Section 16. Governing Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of New York. Section 17. Net Issue Election. Notwithstanding any other provision contained herein to the contrary, if the Warrant Shares may not be freely sold to the public for any reason (including, but not limited to, the failure of the Company to have effected the registration of the Warrant Shares or to have a current prospectus available for delivery or otherwise, but excluding the inability of the Warrantholder to sell the Warrant Shares due to market conditions), the Warrantholder may elect to receive, without the payment by the Warrantholder of the aggregate Warrant Price in respect of the shares of Common Stock to be acquired, shares of Common Stock equal to the value of this Warrant or any portion hereof by the surrender of this Warrant (or such portion of this Warrant being so exercised) together with the Net Issue Election Notice annexed hereto as Appendix B duly executed, at the office of the Company. Thereupon, the Company shall issue to the Warrantholder such number of fully paid, validly issued and nonassessable shares of Common Stock as is computed using the following formula: X = Y (A - B) --------- A where X = the number of Warrant Shares which the Warrantholder has then requested be issued to the Warrantholder; Y = the total number of Warrant Shares which the Warrantholder has surrendered at such time for cash-less exercise (including both shares to be issued to the Warrantholder and shares to be canceled as payment therefor); A = the Market Price of a share of Common Stock; and B = the Warrant Price in effect under this Warrant at the time the net issue election is made. Section 18. No Rights as Stockholder. Prior to the exercise of this Warrant, the Warrantholder shall not have or exercise any rights as a stockholder of the Company by virtue of its ownership of this Warrant. Warrant - Page 10 Section 19. Amendment; Waiver. Any term of this Warrant may be amended or waived (including the adjustment provisions included in Section 8 of this Warrant) upon the written consent of the Company and the holders of at least a majority in interest of the Warrant Shares (assuming, for purposes of this Section 19 only, that all February 2006 Warrants had been exercised in full in accordance with their respective terms). Section 20. Section Headings. The section heading in this Warrant are for the convenience of the Company and the Warrantholder and in no way alter, modify, amend, limit or restrict the provisions hereof. Section 21. No Dilution or Impairment. The Company will not, by amendment of its certificate of incorporation or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrantholder set forth herein. Without limiting the generality of the foregoing, the Company will not increase the par value of any shares of stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise, and at all times will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable stock upon the exercise of this Warrant. [Remainder of Page Intentionally Left Blank] Signature Page to Warrant IN WITNESS WHEREOF, Artisoft, Inc. has caused this Warrant to be duly executed, as of the 9th day of February, 2006. ARTISOFT, INC. By: /s/ Ken Clinebell ---------------------- Name: Ken Clinebell Title: CFO - Interim APPENDIX A WARRANT EXERCISE FORM To: Artisoft, Inc. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant ("Warrant") for, and to purchase thereunder by the payment of the Warrant Price and surrender of the Warrant, _________ shares of Common Stock ("Warrant Shares") provided for therein, and requests that certificates for the Warrant Shares be issued as follows: Address Federal Tax ID or Social Security No. and delivered by [ ] certified mail to the above address, or [ ] electronically (provide DWAC Instructions: _________), or [ ] other (specify: _______________________________________). and, if the number of Warrant Shares shall not be all the Warrant Shares purchasable upon exercise of the Warrant, that a new Warrant for the balance of the Warrant Shares purchasable upon exercise of this Warrant be registered in the name of the undersigned Warrantholder or the undersigned's Assignee as below indicated and delivered to the address stated below. By exercising the rights represented by this Warrant, the undersigned hereby certifies that, as of the date of exercise of this Warrant, the representations and warranties contained in Sections 5.2, 5.3 and 5.4 of the 2006 Purchase Agreement are true and correct in all material respects with respect to the undersigned. Dated: ______________,_____ Signature:________________________ Note: The signature must correspond with __________________________________ the name of the registered holder as Name (please print) written on the first page of the Warrant in every particular, without alteration __________________________________ or enlargement or any change whatever, __________________________________ unless the Warrant has been assigned. Address __________________________________ Federal Identification or Social Security No. Assignee: APPENDIX B NET ISSUE ELECTION NOTICE To: Artisoft, Inc. Date: ________________ The undersigned hereby elects under Section 17 of this Warrant to surrender the right to purchase __________ shares of Common Stock pursuant to this Warrant and hereby requests the issuance of __________ shares of Common Stock. The certificate(s) for the shares issuable upon such net issue election shall be issued in the name of the undersigned or as otherwise indicated below. __________________________________ Signature __________________________________ Name for Registration __________________________________ Mailing Address SCHEDULE OF WARRANT HOLDERS WARRANTHOLDER NUMBER OF SHARES - ------------- ---------------- M/C Venture Partners V, L.P. 589,918 Chestnut Venture Partners, L.P. 24,093 M/C Venture Investors, LLC 10,989 Pathfinder Ventures III, L.L.C. 104,167 SRB Greenway Capital, L.P. 16,750 SRB Greenway Capital (Q.P.), L.P. 131,417 SRB Greenway Offshore Operating Fund, L.P. 8,083 Walker Smith Capital, L.P. 8,438 Walker Smith Capital (Q.P.), L.P. 48,125 Walker Smith International Fund, Ltd. 72,583 HHMI Investments, L.P. 27,104 -----END PRIVACY-ENHANCED MESSAGE-----