Document:

SECURITIES PURCHASE AGREEMENT
 

This Securities Purchase Agreement (this “Agreement”) is dated as of March __, 2006, among Ortec International, Inc., a Delaware corporation (the “Company”), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “Purchaser” and collectively the “Purchasers”).

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agree as follows:

ARTICLE I

DEFINITIONS

1.1        Definitions.  In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Certificate of Designation (as defined herein), and (b) the following terms have the meanings indicated in this Section 1.1:

“Action” shall have the meaning ascribed to such term in Section 3.1(j).

“Actual Minimum” means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise or conversion in full of all Warrants and shares of Preferred Stock, ignoring any conversion or exercise limits set forth therein, and assuming that any previously unconverted shares of Preferred Stock are held until the third anniversary of the Closing Date and all dividends are paid in shares of Common Stock until such third anniversary.

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act.  With respect to a Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of such Purchaser.

“Authorized Share Approval” means (i) the vote by the shareholders of the company to approve an amendment to the Company’s articles or certificate of incorporation that retains the number of authorized shares of Common Stock at 200,000,000 and authorizing the board of directors of the Company to effect the Reverse 

 

Split (the “Amendment”) and (ii) the filing by the Company of the Amendment with the Secretary of State of the State of Delaware and the acceptance of the Amendment by the Secretary of State of the State of Delaware.

“Business Day” means any day except Saturday, Sunday, any day which shall be a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

“Certificate of Designation” means the Certificate of Designation to be filed prior to the Closing by the Company with the Secretary of State of Delaware, in the form of Exhibit A attached hereto.

“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 2.1.

“Closing Date” means the Trading Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) the Purchasers’ obligations to pay the Subscription Amount and (ii) the Company’s obligations to deliver the Securities have been satisfied or waived.

“Commission” means the Securities and Exchange Commission.

“Common Stock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed into.

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

“Company Counsel” means Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine, LLP.

“Conversion Price” shall have the meaning ascribed to such term in the Certificate of Designation.

“Disclosure Schedules” shall have the meaning ascribed to such term in Section 3.1.

“Effective Date” means the date that the initial Registration Statement filed by the Company pursuant to the Registration Rights Agreement is first declared effective by the Commission.

“Escrow Agent” means Signature Bank, a New York State chartered bank, having an office at 261 Madison Avenue, New York, New York 10016.

 

 

“Escrow Agreement” means the Escrow Deposit Agreement, dated March __, 2006, between the Company, Rodman & Renshaw, LLC and the Escrow Agent, in the form of Exhibit F hereto.

“Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(r). 

 

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

 

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan duly adopted by (i) a majority of the non-employee members of the Board of Directors of the Company or (ii) a majority of the members of a committee of non-employee directors established for such purpose or (iii) an affirmative vote of the shareholders of the Company pursuant to Delaware law, (b) securities upon the exercise or exchange of or conversion of any Securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such
securities or to decrease the exercise, exchange or conversion price of any such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors, provided any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.

 

“FW” means Feldman Weinstein LLP with offices located at 420 Lexington Avenue, Suite 2620, New York, New York 10170-0002.

 

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Hapto Merger” means the merger between the Company and Hapto Biotech, Inc. pursuant to the Hapto Merger Agreement and the timely submission of all applicable filings with state and regulatory authorities in connection with such purchase.

 

“Hapto Merger Agreement” means the Agreement among Ortec International, Inc., ORTN Acquisition Corp., Hapto Biotech, Inc. and certain shareholders and option holders of Hapto Biotech, Inc. for the merger of Hapto Biotech, Inc. with and into ORTN Acquisition Corp., dated on or about March 29, 2006, and documents referred to therein and related thereto.

 

“Intellectual Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).

 

 

 

“Legend Removal Date” shall have the meaning ascribed to such term in Section 4.1(c). 

 

“Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

 

“Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).

 

“Material Permits” shall have the meaning ascribed to such term in Section 3.1(m).

 

“Maximum Rate” shall have the meaning ascribed to such term in Section 5.17.

 

“Participation Maximum” shall have the meaning ascribed to such term in Section 4.13. 

 

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

“Preferred Stock” means the up to 8,000 shares of the Company’s 6% Series E Convertible Preferred Stock issued hereunder having the rights, preferences and privileges set forth in the Certificate of Designation, in the form of Exhibit A hereto.

 

“Pre-Notice” shall have the meaning ascribed to such term in Section 4.13. 

 

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

 

“Purchaser Party” shall have the meaning ascribed to such term in Section 4.11.

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated the date hereof, among the Company and the Purchasers, in the form of Exhibit B attached hereto.

 

“Registration Statement” means a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale of the Underlying Shares by each Purchaser as provided for in the Registration Rights Agreement.

 

“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).

 

“Reverse Split” shall mean a reverse stock split of the Common Stock effected after the Closing Date in a ratio of not less than 1:5 in accordance with Delaware law.

 

 

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

 

“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Securities” means the Preferred Stock, the Warrants, the Warrant Shares and the Underlying Shares.

 

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

 

“Short Sales” shall include all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock).

 

 “Stated Value” means $1,000 per share of Preferred Stock.

 

“Subscription Amount” shall mean, as to each Purchaser, the aggregate amount to be paid for the Preferred Stock purchased hereunder as specified below such Purchaser’s name on the signature page of this Agreement and next to the heading “Subscription Amount”, in United States Dollars and in immediately available funds.

 

“Subsequent Financing” shall have the meaning ascribed to such term in Section 4.13.

 

“Subsequent Financing Notice” shall have the meaning ascribed to such term in Section 4.13.

 

“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a).

 

“Trading Day” means a day on which the Common Stock is traded on a Trading Market.

 

 “Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the Nasdaq Capital Market, the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin Board.

 

“Transaction Documents” means this Agreement, the Certificate of Designation, the Warrants, the Registration Rights Agreement, the Lock-up Agreements and any other documents or agreements executed in connection with the transactions contemplated hereunder.

 

 

“Underlying Shares” means the shares of Common Stock issued and issuable upon conversion of the Preferred Stock, upon exercise of the Warrants and issued and issuable in lieu of the cash payment of dividends on the Preferred Stock in accordance with the terms of the Certificate of Designation.

 

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted for trading as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time); (b)  if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the
“Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company.

 “Warrants” means collectively the Common Stock purchase warrants, in the form of Exhibit C delivered to the Purchasers at the Closing in accordance with Section 2.2(a) hereof, which Warrants shall be exercisable immediately and have a term of exercise equal to five years.

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

 

ARTICLE II

PURCHASE AND SALE

2.1         Closing.  On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and each Purchaser agrees to purchase in the aggregate, severally and not jointly, a minimum of $6,000,000 and up to $8,000,000 of shares of Preferred Stock with an aggregated Stated Value equal to such Purchaser’s Subscription Amount and Warrants as determined by pursuant to Section 2.2(a).  The aggregate number of shares of Preferred Stock sold hereunder shall be up to 8,000.  Each Purchaser shall deliver to the Escrow Agent via wire transfer or a certified check of immediately available funds equal to their Subscription Amount (except that
SDS Capital Group SPC, Ltd. may deliver to the Company the promissory note dated March 15, 2006 in the original principal amount of  $250,000 in full payment of its $300,000 Subscription Amount) and the Company shall deliver to each Purchaser their respective shares of Preferred Stock and Warrants as determined pursuant to Section 2.2(a) and the other items set forth in Section 2.2 issuable at the Closing.  Upon satisfaction of the 

 

conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of FW, or such other location as the parties shall mutually agree.

 

	
             
  	
            2.2
 	
            Deliveries.
 

 

(a)          On the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following:

 

	
             
  	
            (i)
 	
            this Agreement duly executed by the Company;
 

 

(ii)         a legal opinion of Company Counsel, in the form of Exhibit D attached hereto;

(iii)       a certificate evidencing a number of shares of Preferred Stock equal to such Purchaser’s Subscription Amount divided by the Stated Value, registered in the name of such Purchaser;

(iv)        a Warrant registered in the name of such Purchaser to purchase up to a number of shares of Common Stock equal to 100% of such Purchaser’s Subscription Amount divided by $0.20, with an exercise price equal to $0.50, subject to adjustment therein;

(v)          the written agreement, in the form of Exhibit E attached hereto, of all of the executive officers, directors and shareholders holding more than 10% of the issued and outstanding shares of Common Stock on the date hereof to not dispose of any Common Stock or Common Stock Equivalents held by them as set forth therein (the “Lock-up Agreements”);

(vi)        the Registration Rights Agreement duly executed by the Company; and

	
            (vii)
 	
            the Escrow Agreement duly executed by the Company.
 

 

(b)          On the Closing Date, each Purchaser shall deliver or cause to be delivered to the Company the following:

 

	
             
  	
            (i)
 	
            this Agreement duly executed by such Purchaser;
 

 

(ii)         such Purchaser’s Subscription Amount by wire transfer to the Company; and

(iii)       the Registration Rights Agreement duly executed by such Purchaser.

 

	
             
  	
            2.3
 	
            Closing Conditions.
 

 

(a)          The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:

 

 

(i)           the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Purchasers contained herein;

(ii)         all obligations, covenants and agreements of the Purchasers required to be performed at or prior to the Closing Date shall have been performed;

(iii)       the delivery by the Purchasers of the items set forth in Section 2.2(b) of this Agreement; and 

(iv)          the delivery of the Escrow Agreement duly executed by Rodman & Renshaw, LLC and Signature Bank.

 

(b)          The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:

(i)           the accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained herein;

(ii)         all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;

(iii)          the closing of the Hapto Merger on or before April 17, 2006 and the delivery by the Company to Rodman & Renshaw, LLC of a Certificate of Merger certified by the Delaware Secretary of State evidencing the closing of the Hapto Merger.

 

(iii)       the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;

(iv)        there shall have been no Material Adverse Effect with respect to the Company since the date hereof; and

(v)          from the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by the Commission or the Company’s principal Trading Market (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the Closing), and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities
or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of each Purchaser, makes it impracticable or inadvisable to purchase the Preferred Stock at the Closing.

 

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

3.1         Representations and Warranties of the Company.  Except as set forth under the corresponding section of the disclosure schedules delivered to the Purchasers concurrently herewith (the “Disclosure Schedules”) which Disclosure Schedules shall be deemed a part hereof and to qualify any representation or warranty otherwise made herein to the extent of such disclosure, the Company hereby makes the representations and warranties set forth below to each Purchaser.

(a)          Subsidiaries.  All of the direct and indirect subsidiaries of the Company are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.  If the Company has no subsidiaries, then all other references in the Transaction Documents to the Subsidiaries or any of them will be disregarded.

(b)          Organization and Qualification.  The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.  Neither the Company nor any Subsidiary is in violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents.  Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each
jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or
qualification.

(c)          Authorization; Enforcement.  Subject to Authorized Share Approval, the Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.  The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, its board of directors or its stockholders in connection therewith other than in 

 

connection with the Required Approvals and the Authorized Share Approval.  Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to Authorized Share Approval, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

(d)          No Conflicts.  The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the other transactions contemplated hereby and thereby do not and will not: (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, subject to Authorized Share Approval, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.

(e)          Filings, Consents and Approvals.  The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) filings required pursuant to Section 4.6, (ii) the filing with the Commission of the Registration Statement, (iii) the notice and/or application(s) to each applicable Trading Market for the issuance and sale of the Securities and the listing of the Underlying Shares for trading thereon in the time and manner required thereby, (iv) the filing of Form D with the
Commission and such filings as are required to be made under applicable state securities laws and (v) the Authorized Share Approval (collectively, the “Required Approvals”).

(f)          Issuance of the Securities.  The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction 

 

Documents.  The Underlying Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company.  As of the date hereof, the Company has reserved from its duly authorized capital stock an aggregate of 30,000,000 shares of Common Stock for issuance of the Underlying Shares. 

(g)          Capitalization.  The capitalization of the Company is as set forth on Schedule 3.1(g).  The Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock purchase plan and pursuant to the conversion or exercise of Common Stock Equivalents outstanding as of the date of the most recently filed periodic report under the Exchange Act.  No Person has any right of first refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents.  The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. All of the outstanding shares
of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities.  No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities.  There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

(h)          SEC Reports; Financial Statements.  The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) and Section 15(d), for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, together with all reports filed by Company shareholders pursuant to Section 16(a) of the Exchange Act, being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a
valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the 

 

Exchange Act and the rules and regulations of the Commission promulgated thereunder, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be
otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. 

(i)           Material Changes; Undisclosed Events, Liabilities or Developments.  Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in a subsequent SEC Report, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or disclosed in filings made with the Commission, (iii) the Company
has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option plans.  The Company does not have pending before the Commission any request for confidential treatment of information.  Except for the issuance of the Securities contemplated by this Agreement or as set forth on Schedule 3.1(i), no event, liability or development has occurred or exists with respect to the Company or its Subsidiaries or their respective business, properties, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made that has
not been publicly disclosed at least 1 Trading Day prior to the date that this representation is made. 

(j)           Litigation.  There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect.  Neither the Company nor 

 

any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty.  There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company.  The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.

(k)          Labor Relations.  No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company which could reasonably be expected to result in a Material Adverse Effect.  None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company, and neither the Company or any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relationships with their employees are good.  No executive officer, to the knowledge of the Company, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters.  The Company and its Subsidiaries are in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(l)           Compliance.  Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation
of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business and all such laws that affect the environment, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect. 

(m)        Regulatory Permits.  The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not have or reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

 

 

(n)          Title to Assets.  The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them that is material to the business of the Company and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties.  Any real property and facilities held
under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance.

(o)         Patents and Trademarks.  The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”).  Neither the Company nor any Subsidiary has received a notice (written or otherwise) that the Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights.  The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(p)          Insurance.  The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including, but not limited to, directors and officers insurance coverage at least equal to the aggregate Subscription Amount.  Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.

(q)          Transactions With Affiliates and Employees.  Except as set forth in the SEC Reports, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer,
director, trustee or 

 

partner, in each case in excess of $60,000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) for other employee benefits, including stock option agreements under any stock option plan of the Company.

(r)          Sarbanes-Oxley; Internal Accounting Controls.  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 and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  The Company’s certifying officers have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”).  The Company presented in its most recently filed periodic report under the Exchange Act the conclusions
of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no changes in the Company’s internal control over financial reporting (as such term is defined in the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

(s)          Certain Fees.  Other than fees payable to Rodman & Renshaw, LLC, no brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents.  The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.

(t)           Private Placement. Assuming the accuracy of the Purchasers representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as contemplated hereby. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market.

 

 

(u)          Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.  The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act.

(v)          Registration Rights.  Other than each of the Purchasers, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company.

(w)         Listing and Maintenance Requirements.  The Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration.  The Company has not, in the 12 months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

(x)          Application of Takeover Protections.  The Company and its Board of Directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the Company’s issuance of the Securities and the Purchasers’ ownership
of the Securities.

(y)          Disclosure.  Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company confirms that neither it nor any other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that it believes constitutes or might constitute material, nonpublic information.  The Company understands and confirms that the Purchasers will rely on the foregoing representation in effecting transactions in securities of the Company.  All disclosure furnished by or on behalf of the Company to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, with
respect to the representations and warranties made herein are true and correct with respect to such representations and warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or 

 

warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.

(z)          No Integrated Offering. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, neither the Company, nor any of its affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable shareholder approval provisions of any Trading Market on which any of the securities of the Company are listed or designated.  

(aa)        Solvency.  Based on the financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, (i) the 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 debts and other liabilities (including known contingent liabilities) as they mature; (ii) the Company’s assets do not constitute unreasonably small capital to carry on its business as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital
availability thereof; and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid.  The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt).  The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date.  Schedule 3.1(aa) sets forth as of the dates thereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any
Subsidiary has commitments.  For the purposes of this Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (c) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP.  Neither the Company nor any Subsidiary is in default with respect to any Indebtedness.

(bb)       Tax Status.  Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and each Subsidiary has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the 

 

Company has no knowledge of a tax deficiency which has been asserted or threatened against the Company or any Subsidiary.

(cc)       No General Solicitation.  Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising.  The Company has offered the Securities for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.

(dd)       Foreign Corrupt Practices.  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, 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 fully 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.

(ee)       Accountants.  The Company’s accountants are set forth on Schedule 3.1(ee) of the Disclosure Schedule.  To the knowledge of the Company, such accountants, who the Company expects will express their opinion with respect to the financial statements to be included in the Company’s Annual Report on Form 10-KSB for the year ending December 31, 2005 are a registered public accounting firm as required by the Securities Act.

(ff)        Seniority.  As of the Closing Date, no Indebtedness or other equity of the Company is senior to the Preferred Stock in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured by purchase money security interests (which is senior only as to underlying assets covered thereby) and capital lease obligations (which is senior only as to the property covered thereby) other than Indebtedness to Paul Capital Royalty Acquisition Fund, L.P.

(gg)       No Disagreements with Accountants and Lawyers.  There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and 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.

(hh)       Acknowledgment Regarding Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby.  The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives 

 

or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Securities.  The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

(ii)         Acknowledgement Regarding Purchasers’ Trading Activity.  Anything in this Agreement or elsewhere herein to the contrary notwithstanding (except for Sections 3.2(g) and 4.16 hereof), it is understood and acknowledged by the Company (i) that none of the Purchasers have been asked to agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term; (ii) that past or future open market or other transactions by any Purchaser, including Short Sales, and specifically including, without limitation, Short Sales or “derivative” transactions, before or after the
closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities; (iii) that any Purchaser, and counter-parties in “derivative” transactions to which any such Purchaser is a party, directly or indirectly, presently may have a “short” position in the Common Stock, and (iv) that each Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction.  The Company further understands and acknowledges that (a) one or more Purchasers may engage in hedging activities at various times during the period that the Securities are outstanding, including, without limitation, during the periods that the value of the Underlying Shares deliverable with respect to Securities are being determined and (b) such hedging activities (if any) could reduce the value of the existing stockholders' equity interests in the
Company at and after the time that the hedging activities are being conducted.  The Company acknowledges that such aforementioned hedging activities do not constitute a breach of any of the Transaction Documents.

(jj)         Regulation M Compliance.  The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of each of clauses (ii) and (iii), compensation paid to the Company’s placement agent in connection with the placement of the Securities.

3.2         Representations and Warranties of the Purchasers.  Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants as of the date hereof and as of the Closing Date to the Company as follows:

(a)          Organization; Authority.  Such Purchaser, if an entity, is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its 

 

organization with full right, corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution, delivery and performance by such Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate or similar action on the part of such Purchaser.  Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

(b)          Own Account.  Such Purchaser understands that the Securities are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities (this representation and warranty not
limiting such Purchaser’s right to sell the Securities pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws) in violation of the Securities Act or any applicable state securities law.  Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business.

 (c)      Purchaser Status.  At the time such Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it converts any shares of Preferred Stock or exercises any Warrants, it will be either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act.

(d)          Experience of Such Purchaser.  Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment.  Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment

(e)          Access to Information.  The Purchaser has reviewed the SEC Reports.  The Purchaser has also been afforded the opportunity to ask questions of, and receive answers from, the officers and/or directors of the Company concerning the terms and 

 

conditions of this offering and to obtain any additional information, to the extent that the Company possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the accuracy of the information furnished; and has availed himself or itself of such opportunity to the extent he or it considers appropriate in order to permit his or its evaluation of the merits and risks of an investment in the Securities; including, without limitation, information about the Hapto Merger.  It is understood that all documents, records and books pertaining to this investment have been made available for inspection by the Purchaser during reasonable business hours at the Company’s principal place of business. Notwithstanding the foregoing, it is understood that the Purchaser is purchasing the Securities without being furnished any prospectus setting forth all of
the information that would be required to be furnished under the Securities Act and this offering has not been passed upon or the merits thereof endorsed or approved by any state or federal authorities.

(f)          General Solicitation.  Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

(g)          Short Sales and Confidentiality Prior To The Date Hereof.  Other than the transaction contemplated hereunder, such Purchaser has not directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such Purchaser, executed any disposition, including Short Sales, in the securities of the Company during the period commencing from the time that such Purchaser first received a term sheet (written or oral) from the Company or any other Person setting forth the material terms of the transactions contemplated hereunder until the date hereof (“Discussion Time”).  Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed
investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser's assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser's assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Securities covered by this Agreement.  Other than to other Persons party to this Agreement, such Purchaser has maintained the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction).

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

	
            4.1
 	
            Transfer Restrictions.
 

(a)          The Securities may only be disposed of in compliance with state and federal securities laws.  In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company 

 

may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act.  As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement.

(b)          The Purchasers agree to the imprinting, so long as is required by this Section 4.1(b), of a legend on any of the Securities in the following form: 

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

The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and the Registration Rights Agreement and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties.  Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith.  Further, no notice shall be required of such pledge.  At the appropriate Purchaser’s
expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including, if the Securities are subject to registration pursuant to the Registration Rights Agreement, the preparation and filing of any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of Selling Stockholders thereunder.

 

 

(c)          Certificates evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a registration statement (including the Registration Statement) covering the resale of such security is effective under the Securities Act, or (ii) following any sale of such Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company shall cause its counsel to issue a legal opinion to the Company’s transfer agent promptly after the Effective Date if required by the
Company’s transfer agent to effect the removal of the legend hereunder. If all or any shares of Preferred Stock or any portion of a Warrant is converted or exercised (as applicable) at a time when there is an effective registration statement to cover the resale of the Underlying Shares, or if such Underlying Shares may be sold under Rule 144(k) or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission) then such Underlying Shares shall be issued free of all legends.  The Company agrees that following the Effective Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Trading Days following the delivery by a Purchaser to the Company or the Company’s transfer agent of a certificate representing Underlying Shares, as applicable, issued with a restrictive legend (such third Trading Day, the
“Legend Removal Date”), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends.  The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section.  Certificates for Underlying Shares subject to legend removal hereunder shall be transmitted by the transfer agent of the Company to the Purchasers by crediting the account of the Purchaser’s prime broker with the Depository Trust Company System.

 

(d)          In addition to such Purchaser’s other available remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, for each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the date such Securities are submitted to the Company’s transfer agent) delivered for removal of the restrictive legend and subject to Section 4.1(c), $10 per Trading Day (increasing to $20 per Trading Day 5 Trading Days after such damages have begun to accrue) for each Trading Day commencing two Trading Days after the Legend Removal Date until such certificate is delivered without a legend.  Nothing herein shall limit such Purchaser’s right to pursue actual damages for the Company’s failure to deliver certificates
representing any Securities as required by the Transaction Documents, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.

 

(e)           Each Purchaser, severally and not jointly with the other Purchasers, agrees that the removal of the restrictive legend from certificates representing Securities as set forth in this Section 4.1 is predicated upon the Company’s reliance that the Purchaser will sell any Securities pursuant to either the registration requirements of the 

 

Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom, and that if Securities are sold pursuant to a Registration Statement, they will be sold in compliance with the plan of distribution set forth therein.

 

4.2         Acknowledgment of Dilution.  The Company acknowledges that the issuance of the Securities may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions.  The Company further acknowledges that its obligations under the Transaction Documents, including without limitation its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other stockholders of the Company.

4.3         Furnishing of Information.  As long as any Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act.  As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell the Securities under Rule 144.  The Company further covenants that it will take such further action as any holder of Securities may reasonably request, to the extent required from time to time to
enable such Person to sell such Securities without registration under the Securities Act within the requirements of the exemption provided by Rule 144.

4.4         Integration.  The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.

4.5         Conversion and Exercise Procedures.  The form of Notice of Exercise included in the Warrants and the form of Notice of Conversion included in the Certificate of Designation set forth the totality of the procedures required of the Purchasers in order to exercise the Warrants or convert the Preferred Stock.  No additional legal opinion or other information or instructions shall be required of the Purchasers to exercise their Warrants or convert their Preferred Stock.  The Company shall honor exercises of the Warrants and conversions of the Preferred Stock and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in the Transaction Documents.

4.6         Securities Laws Disclosure; Publicity.  The Company shall (i) by 8:30 a.m. (New York City time) on the Trading Day immediately following the date hereof, issue a press release, disclosing the material terms of the transactions contemplated hereby and (ii) by 8:30 a.m. (New York City time) on the third Trading Day immediately following the date hereof, issue a Current Report on Form 8-K, disclosing the material terms of the transactions contemplated hereby and 

 

attaching the Transaction Documents thereto.  The Company shall consult with FW, on behalf of the placement agent, in issuing any press releases with respect to the transactions contemplated hereby. Neither the Company nor any Purchaser shall issue any other press release or otherwise make any such public statement without the prior consent of the Company, with respect to any press release of any Purchaser, or without the prior consent of each Purchaser, with respect to any press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication.  Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the
Commission or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except (i) as required by federal securities law in connection with (A) any registration statement contemplated by the Registration Rights Agreement and (B) the filing of final Transaction Documents (including signature pages thereto) with the Commission and (ii) to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under this subclause (ii).

4.7         Shareholder Rights Plan.  No claim will be made or enforced by the Company or, with the consent of the Company, any other Person, that any Purchaser is an “Acquiring Person” under any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or similar anti-takeover plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the Company and the Purchasers.

4.8         Non-Public Information.  Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information.  The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company.

4.9         Use of Proceeds.  Except as set forth on Schedule 4.9 attached hereto, the Company shall use the net proceeds from the sale of the Securities hereunder to finance the Hapto Acquisition and for working capital, and not for the satisfaction of any portion of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices), to redeem Common Stock or Common Stock Equivalents or to settle any outstanding litigation.  

4.10      Reimbursement.  If any Purchaser becomes involved in any capacity in any Proceeding by or against any Person who is a stockholder of the Company (except as a result of sales, pledges, margin sales and similar transactions by such Purchaser to or with any other stockholder), solely as a result of such Purchaser’s acquisition of the Securities under this Agreement, the Company will reimburse such Purchaser for its reasonable legal and other expenses (including the cost of any investigation preparation and travel in connection therewith) 

 

incurred in connection therewith, as such expenses are incurred.  The reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchasers who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such Affiliate and any such Person.  The Company also agrees that neither the Purchasers nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on behalf of or in
right of the Company solely as a result of acquiring the Securities under this Agreement, except if such claim arises primarily from a breach of such Purchaser’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser may have with any such stockholder or any violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance.

4.11      Indemnification of Purchasers.   Subject to the provisions of this Section 4.11, the Company will indemnify and hold each Purchaser and its directors, officers, shareholders, members, partners, employees and agents (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents, members, shareholders, partners or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of such controlling persons (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against a Purchaser, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of such Purchaser, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser may have with any
such stockholder or any violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party.  Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such
action there is, in the reasonable opinion of such separate counsel, a material conflict on any material 

 

issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than on such separate counsel.  The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser in this Agreement or in the other Transaction Documents.

	
            4.12
 	
            Reservation and Listing of Securities.
 

(a)          On the date hereof, the Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents an aggregate of 30,000,000 shares of Common Stock.  

(b)          On the business day immediately following the date on which Authorized Share Approval is obtained, the Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in an amount equal to the Required Minimum on such date.

(c)          If, on any date, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than 130% of (i) the Actual Minimum on such date, minus (ii) the number of shares of Common Stock previously issued pursuant to the Transaction Documents, then the Board of Directors of the Company shall use commercially reasonable efforts to amend the Company’s certificate or articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Actual Minimum at such time (minus the number of shares of Common Stock previously issued pursuant to the Transaction Documents), as soon as possible and in any event not later than the 75th day after such date; provided that the Company will not be required at
any time to authorize a number of shares of Common Stock greater than the maximum remaining number of shares of Common Stock that could possibly be issued after such time pursuant to the Transaction Documents.

(d)          The Company shall, if applicable: (i) in the time and manner required by the principal Trading Market, prepare and file with such Trading Market an additional shares listing application covering a number of shares of Common Stock at least equal to the Actual Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on such Trading Market as soon as possible thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv) maintain the listing of such Common Stock on any date at least equal to the Actual Minimum on such date on such Trading Market or another Trading Market.  

In addition, the Company shall hold a special meeting of shareholders (which may also be at the annual meeting of shareholders) within 60 calendar days of the date hereof for the purpose of obtaining Authorized Share Approval, with the recommendation of the Company’s Board of Directors that such proposal is approved, and the Company shall solicit proxies from its shareholders in connection therewith in the same manner as all 

 

other management proposals in such proxy statement and all management-appointed proxyholders shall vote their proxies in favor of such proposal.  If the Company does not obtain Authorized Share Approval at the first meeting, the Company shall call a meeting every 4 months thereafter to seek Authorized Share Approval until the earlier of the date Authorized Share Approval is obtained or the date on which no shares of Preferred Stock remain outstanding. Each Purchaser hereby agrees with the Company that it shall vote its shares of Preferred Stock which are eligible to vote at any such shareholder meeting in favor of Authorized Share Approval.

	
            4.13
 	
            Participation in Future Financing.
 

(a)          From the date hereof until the date that is the later of (i) the effective date of the Reverse Split or (ii) the one year anniversary of the Effective Date, upon any issuance by the Company or any of its Subsidiaries of Common Stock or Common Stock Equivalents (a “Subsequent Financing”), each Purchaser shall have the right to participate in up to an amount of the Subsequent Financing equal to 100% of the Subsequent Financing (or such lesser percentage which would not violate any applicable Nasdaq or Amex shareholder approval requirement if the Company is then so listed) (the “Participation Maximum”) on the same terms, conditions and price provided for in
the Subsequent Financing.

 

(b)          At least 5 Trading Days prior to the closing of the Subsequent Financing, the Company shall deliver to each Purchaser a written notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such Purchaser if it wants to review the details of such financing (such additional notice, a “Subsequent Financing Notice”).  Upon the request of a Purchaser, and only upon a request by such Purchaser, for a Subsequent Financing Notice, the Company shall promptly, but no later than 1 Trading Day after such request, deliver a Subsequent Financing Notice to such Purchaser.  The Subsequent Financing Notice shall describe in reasonable
detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the Person or Persons through or with whom such Subsequent Financing is proposed to be effected, and attached to which shall be a term sheet or similar document relating thereto.   

 

(c)          Any Purchaser desiring to participate in such Subsequent Financing must provide written notice to the Company by not later than 5:30 p.m. (New York City time) on the 5th Trading Day after all of the Purchasers have received the Pre-Notice that the Purchaser is willing to participate in the Subsequent Financing, the amount of the Purchaser’s participation, and that the Purchaser has such funds ready, willing, and available for investment on the terms set forth in the Subsequent Financing Notice.  If the Company receives no notice from a Purchaser as of such 5th Trading Day, such Purchaser shall be deemed to have notified the Company that it does not elect to participate.  

 

(d)          If by 5:30 p.m. (New York City time) on the 5th Trading Day after all of the Purchasers have received the Pre-Notice, notifications by the Purchasers of their willingness to participate in the Subsequent Financing (or to cause their designees to participate) is, in the aggregate, less than the total amount of the Subsequent Financing, 

 

then the Company may effect the remaining portion of such Subsequent Financing on the terms and with the Persons set forth in the Subsequent Financing Notice.  

 

(e)          If by 5:30 p.m. (New York City time) on the 5th Trading Day after all of the Purchasers have received the Pre-Notice, the Company receives responses to a Subsequent Financing Notice from Purchasers seeking to purchase more than the aggregate amount of the Participation Maximum, each such Purchaser shall have the right to purchase the greater of (a) their Pro Rata Portion (as defined below) of the Participation Maximum and (b) the difference between the Participation Maximum and the aggregate amount of participation by all other Purchasers.  “Pro Rata Portion” is the ratio of (x) the Subscription Amount of Securities purchased on the Closing Date by a Purchaser
participating under this Section 4.13 and (y) the sum of the aggregate Subscription Amounts of Securities purchased on the Closing Date by all Purchasers participating under this Section 4.13.

 

(f)          The Company must provide the Purchasers with a second Subsequent Financing Notice, and the Purchasers will again have the right of participation set forth above in this Section 4.13, if the Subsequent Financing subject to the initial Subsequent Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within 60 Trading Days after the date of the initial Subsequent Financing Notice. 

 

(g)          Notwithstanding the foregoing, this Section 4.13 shall not apply in respect of an Exempt Issuance.

 

	
            4.14
 	
            Subsequent Equity Sales.  
 

 

(a)          From the date hereof until the date that is the later of (i) 90 days after the Effective Date or (ii) the effective date of the Reverse Split, neither the Company nor any Subsidiary shall file any registration statement with the Commission other than the Registration Statement as set forth in the Registration Rights Agreement; provided, however, the period set forth in this Section 4.14 shall be extended for the number of Trading Days during such period in which (i) trading in the Common Stock is suspended by any Trading Market, or (ii) following the Effective Date, the Registration Statement is not effective or the prospectus included in the Registration Statement may not be
used by the Purchasers for the resale of the Underlying Shares.  

 

(b)          From the date hereof until such time as no Purchaser holds any of the Securities, the Company shall be prohibited from effecting or entering into an agreement to effect any Subsequent Financing involving a “Variable Rate Transaction”.  The term “Variable Rate Transaction” shall mean a transaction in which the Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of
such debt or equity securities, or (B) with a conversion, 

 

exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock or (ii) enters into any agreement, including, but not limited to, an equity line of credit, whereby the Company may sell securities at a future determined price.  

 

(c)           Any Purchaser shall be entitled to obtain injunctive relief against the Company to preclude any such issuance, which remedy shall be in addition to any right to collect damages.

 

(d)          Notwithstanding the foregoing, this Section 4.14 shall not apply in respect of an Exempt Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance.

 

4.15      Equal Treatment of Purchasers.  No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration is also offered to all of the parties to the Transaction Documents.  For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended for the Company to treat the Purchasers as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Securities or otherwise.

4.16      Short Sales and Confidentiality After The Date Hereof. Each Purchaser severally and not jointly with the other Purchasers covenants that neither it nor any Affiliate acting on its behalf or pursuant to any understanding with it will execute any Short Sales during the period commencing at the Discussion Time and ending at the time that the transactions contemplated by this Agreement are first publicly announced as described in Section 4.6.  Each Purchaser, severally and not jointly with the other Purchasers, covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company as described in Section 4.6, such Purchaser will maintain the confidentiality of all disclosures made to it in connection with this transaction (including the
existence and terms of this transaction).  Each Purchaser understands and acknowledges, severally and not jointly with any other Purchaser, that the Commission currently takes the position that coverage of short sales of shares of the Common Stock “against the box” prior to the Effective Date of the Registration Statement with the Securities is a violation of Section 5 of the Securities Act, as set forth in Item 65, Section A, of the Manual of Publicly Available Telephone Interpretations, dated July 1997, compiled by the Office of Chief Counsel, Division of Corporation Finance.  Notwithstanding the foregoing, no Purchaser makes any representation, warranty or covenant hereby that it will not engage in Short Sales in the securities of the Company after the time that the transactions contemplated by this Agreement are first publicly announced as described in Section 4.6.  Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle
whereby separate portfolio managers manage separate portions of such Purchaser's assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser's assets, the covenant set forth above shall only apply with respect to the portion of assets managed by the portfolio manager 

 

that made the investment decision to purchase the Securities covered by this Agreement. Further, each Purchaser agrees that it shall not enter into any transactions with respect to the Common Stock during the 20 Trading Days immediately following the effective date of the Reverse Split provided that they have received prior notice from the Company of such effective date.

4.17      Form D; Blue Sky Filings.  The Company agrees to timely file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof, promptly upon request of any Purchaser. The Company shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for, or to qualify the Securities for, sale to the Purchasers at the Closing under applicable securities or “Blue Sky” laws of the states of the United States, and shall provide evidence of such actions promptly upon request of any Purchaser.

4.18      Capital Change.  Until the one year anniversary of the Effective Date, the Company shall not undertake a reverse or forward stock split or reclassification of the Common Stock, other than the Reverse Split, without the prior written consent of the Purchasers holding a majority in interest of the shares of Preferred Stock.

4.19      Most Favored Nation Provision.  Prior to the effective date of the Reverse Split, at any time the Company effects a Subsequent Financing, each Purchaser may elect, in its sole discretion, to exchange all or some of its Preferred Stock or any Conversion Shares then held by it for any securities issued in a Subsequent Financing based on the Stated Value of the Preferred Stock plus accrued but unpaid dividends and other fees owed; and the effective price at which such securities were sold in such Subsequent Financing.

4.20      Enforcement of Lockup Agreements.  On the Closing Date, the Company shall provide its transfer agent with copies of each Lockup Agreement, and shall identify to the transfer agent all securities covered thereby, with stop-transfer orders. The Company shall maintain a log of all transfers of Excluded Shares, and shall not authorize or acquiesce in the transfer of any shares subject to the Lockup Agreements which are not Excluded Shares.

4.21      Non-Liability of Placement Agent for Escrow Release.Each Purchaser and the Company acknowledge and agree that Rodman & Renshaw, LLC (“Rodman”) has acted as placement agent for the transactions contemplated by this Agreement. Each Purchaser hereby appoints Rodman as its agent for the sole purpose of confirming the closing of the Hapto Merger for purposes of releasing the Subscription Amounts from the escrow account pursuant to the Escrow Agreement. Each Purchaser acknowledges and agrees that in making such determination, Rodman will be relying solely and exclusively on its receipt of the Certificate of Merger among the parties to the Hapto Merger certified as filed by the Delaware Secretary of State. Such certification may be by fax or .pdf file, and
Rodman may rely on any such copy in making its determination. Rodman shall have no liability to any Person for any good faith failure of such document to be genuine or to be effective to effect the Hapto Merger. Each Purchaser and the Company acknowledge and agree that Rodman has made no representation or warranty of any kind as to the merits of Hapto or the Hapto Merger, and no Purchaser or the Company shall make any claim against Rodman or any of its controlling Persons in respect of the same.

 

 

 

ARTICLE V

MISCELLANEOUS

5.1         Termination.  This Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations hereunder only and without any effect whatsoever on the obligations between the Company and the other Purchasers, by written notice to the other parties, if the Closing has not been consummated on or before April 19, 2006; provided, however, that no such termination will affect the right of any party to sue for any breach by the other party (or parties).

5.2         Fees and Expenses.  At the Closing, the Company has agreed to reimburse Rodman the non-accountable sum of $30,000, for its legal fees and expenses.  Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.  The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the delivery of any Securities to the Purchasers.

5.3         Entire Agreement.  The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

5.4         Notices.  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the 2nd Trading
Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices and communications shall be as set forth on the signature pages attached hereto.

5.5         Amendments; Waivers.  No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed by the Company and the Holders of 67% of the outstanding shares of Registrable Securities.  No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.

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

	
            5.7
 	
            Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit
 

 

of the parties and their successors and permitted assigns.  The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Purchaser (other than by merger).  Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions of the Transaction Documents that apply to the “Purchasers”.

5.8         No Third-Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.11.

5.9         Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.  Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York.  Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an  inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of
process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.  The parties hereby waive all rights to a trial by jury.  If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

5.10      Survival.  The representations, warranties, covenants and other agreements contained herein shall survive the Closing and the delivery, exercise and/or conversion of the Securities, as applicable for the applicable statue of limitations.

5.11      Execution.  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, 

 

such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

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

5.13      Rescission and Withdrawal Right.  Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) any of the other Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights; provided, however, in the case of a rescission of a conversion of the Preferred Stock or
exercise of a Warrant, the Purchaser shall be required to return any shares of Common Stock subject to any such rescinded conversion or exercise notice.

5.14      Replacement of Securities.  If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction.  The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Securities.

5.15      Remedies.  In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents.  The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described and hereby agrees to waive and not to assert in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

5.16      Payment Set Aside. To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any 

 

law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

5.17      Usury.  To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any Purchaser in order to enforce any right or remedy under any Transaction Document.  Notwithstanding any provision to the contrary contained in any Transaction Document, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate.  It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date forward, unless such application is precluded by applicable law.  If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to
the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser’s election.

5.18      Independent Nature of Purchasers’ Obligations and Rights.  The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under any Transaction Document.  Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents.
Each Purchaser 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 Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.  Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents.  For reasons of administrative convenience only, Purchasers and their respective counsel have chosen to communicate with the Company through FW.  FW does not represent any of the Purchasers but only Rodman.  The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers.

 

 

5.19      Liquidated Damages.  The Company’s obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled.

5.20      Construction. The parties agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments hereto.

 

[SIGNATURE PAGE FOLLOWS]

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

	
            Ortec International, Inc.

 
 	
            Address for Notice:
 
	
            By:__________________________________________

Name:

Title:

 
 	
            3960 Broadway

New York, NY 10032

Facsimile:

Attention:
 
	
            With a copy to (which shall not constitute notice):

Gabriel Kaszovitz

Feder, Kaszovitz, Isaacson, Weber, 

Skala, Bass & Rhine, LLP

750 Lexington Avenue, 23rd Floor

New York, NY 10022
 	
             
 

 

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

 

[PURCHASER SIGNATURE PAGES TO ORTN SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser: __________________________

Signature of Authorized Signatory of Purchaser: __________________________

Name of Authorized Signatory: _________________________

Title of Authorized Signatory: __________________________

Email Address of Purchaser: ________________________________

Fax Number of Purchaser: ______________________________

 

Address for Notice of Purchaser:

 

 

Address for Delivery of Securities for Purchaser (if not same as above):

 

 

 

Subscription Amount:

Shares of Preferred Stock:

Warrant Shares:

EIN Number:  [PROVIDE THIS UNDER SEPARATE COVER]

 

 

[SIGNATURE PAGES CONTINUE]

 

 

 

 

EXHIBIT A

 

 

ORTEC INTERNATIONAL, INC.

 

CERTIFICATE OF DESIGNATION OF PREFERENCES, 

RIGHTS AND LIMITATIONS

OF

SERIES E 6% CONVERTIBLE PREFERRED STOCK

 

PURSUANT TO SECTION 151 OF THE 

DELAWARE GENERAL CORPORATION LAW

 

	
            The undersigned, __________ and ____________, do hereby certify that:

 

1. They are the President and Secretary, respectively, of Ortec International, Inc., a Delaware corporation (the “Corporation”).

 

2. The Corporation is authorized to issue 1,000,000 shares of preferred stock, 6,272.0156 of which have been issued.

 

	
            3. The following resolutions were duly adopted by the Board of Directors:

 

WHEREAS, the Certificate of Incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, comprised of 1,000,000 shares, $0.001 par value per share, issuable from time to time in one or more series;

 

WHEREAS, the Board of Directors of the Corporation is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms of redemption and liquidation preferences of any wholly unissued series of preferred stock and the number of shares constituting any series and the designation thereof, of any of them; and

 

WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a series of the preferred stock, which shall consist of, except as otherwise set forth in the Purchase Agreement, up to 8,000 shares of the preferred stock which the corporation has the authority to issue, as follows:

 

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of a series of preferred stock for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of preferred stock as follows:

 

 

TERMS OF PREFERRED STOCK

 

Section 1.           Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. For the purposes hereof, the following terms shall have the following meanings:

 

“Alternate Consideration” shall have the meaning set forth in Section 7(e).

 

“Bankruptcy Event” means any of the following events: (a) the Corporation or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Corporation or any Significant Subsidiary thereof; (b) there is commenced against the Corporation or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Corporation or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Corporation or any
Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment; (e) the Corporation or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Corporation or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (g) the Corporation or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

 

“Base Conversion Price” shall have the meaning set forth in Section 7(b).

 

“Business Day” means any day except Saturday, Sunday, any day which shall be a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

“Buy-In” shall have the meaning set forth in Section 6(e)(iii).

 

“Change of Control Transaction” means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual, legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Corporation, by contract or otherwise) of in excess of 33% of the voting securities of the Corporation (other than by means of conversion or exercise of Preferred Stock and the Securities issued together with the Preferred Stock), or (ii) the Corporation merges into or 

 

consolidates with any other Person, or any Person merges into or consolidates with the Corporation and, after giving effect to such transaction, the stockholders of the Corporation immediately prior to such transaction own less than 66% of the aggregate voting power of the Corporation or the successor entity of such transaction, or (iii) the Corporation sells or transfers all or substantially all of its assets to another Person and the stockholders of the Corporation immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, or (iv) a replacement at one time or within a one year period of more than one-half of the members of the Corporation’s board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those
individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (v) the execution by the Corporation of an agreement to which the Corporation  is a party or by which it is bound, providing for any of the events set forth in clauses (i) through (iv) above; provided, however, that the Corporation’s issuance of shares of its Common Stock in connection with the Hapto Merger shall not be deemed to constitute a Change of Control Transaction.

 

“Closing Date” means the Trading Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto and all conditions precedent to (i) the Holders’ obligations to pay the Subscription Amount and (ii) the Corporation’s obligations to deliver the Securities have been satisfied or waived.

 

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the Corporation’s common stock, par value $.001 per share, and stock of any other class of securities into which such securities may hereafter be reclassified or changed into.

 

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

 

“Conversion Amount” means the sum of the Stated Value at issue.

 

“Conversion Date” shall have the meaning set forth in Section 6(a).

 

“Conversion Price” shall have the meaning set forth in Section 6(b). 

 

“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of the shares of Preferred Stock in accordance with the terms hereof.

 

 

 

“Conversion Shares Registration Statement” means a registration statement that registers the resale of all Conversion Shares of the Holder, who shall be named as a “selling stockholder” therein and meets the requirements of the Registration Rights Agreement.

 

“Dilutive Issuance” shall have the meaning set forth in Section 7(b).

 

“Dilutive Issuance Notice” shall have the meaning set forth in Section 7(b).

 

“Dividend Payment Date” shall have the meaning set forth in Section 3(a).

 

“Dividend Share Amount” shall have the meaning set forth in Section 3(a).

 

“Effective Date” means the date that the Conversion Shares Registration Statement is declared effective by the Commission.

 

“Equity Conditions” means, during the period in question, (i) the Corporation shall have duly honored all conversions scheduled to occur or occurring by virtue of one or more Notices of Conversion of the Holder on or prior to the dates so requested or required, if any, (ii) the Corporation shall have paid all liquidated damages and other amounts owing to the Holder in respect of the Preferred Stock, (iii) there is an effective Conversion Shares Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the shares of Common Stock issuable pursuant to the Transaction Documents (and the Corporation believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable future), (iv) the
Common Stock is trading on a Trading Market and all of the shares issuable pursuant to the Transaction Documents are listed for trading on such Trading Market (and the Corporation believes, in good faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for the foreseeable future), (v) there is a sufficient number of authorized, but unissued and otherwise unreserved, shares of Common Stock for the issuance of all of the shares of Common Stock issuable pursuant to the Transaction Documents, (vi) there is no existing Triggering Event or no existing event which, with the passage of time or the giving of notice, would constitute a Triggering Event, (vii) the issuance of the shares in question to the Holder would not violate the limitations set forth in Section 6(c) herein, (viii) there has been no public announcement of a pending or proposed Fundamental Transaction or Change of Control Transaction that has not been consummated, (ix)
no Holder is in possession of any information that constitutes, or may constitute, material non-public information and (x) the Corporation shall have received Authorized Share Approval.

 

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

 

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Corporation pursuant to any stock or option plan duly adopted by (i) a majority of the non-employee members of the Board of Directors of the Corporation, (ii) a majority of the members of a committee of non-employee directors 

 

established for such purpose or (iii) an affirmative vote of the shareholders of the Corporation pursuant to Delaware law, (b) securities upon the exercise of or conversion of any securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of the Purchase Agreement, provided that such securities have not been amended since the date of the Purchase Agreement to increase the number of such securities or to decrease the exercise or conversion price of any such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors, provided that any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Corporation and
shall provide to the Corporation additional benefits in addition to the investment of funds, but shall not include a transaction in which the Corporation is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.

“Forced Conversion” shall mean the automatic conversion of the Preferred Stock pursuant to Section 8(a).

 

“Fundamental Transaction” shall have the meaning set forth in Section 7(e).

 

“Holder” shall have the meaning given such term in Section 2.

 

“Junior Securities” means the Common Stock and all other Common Stock Equivalents of the Corporation other than those securities which are explicitly senior or pari passu to the Preferred Stock in dividend rights or liquidation preference.

 

“Liquidation” shall have the meaning set forth in Section 5.

 

“New York Courts” shall have the meaning set forth in Section 11(d).

 

“Notice of Conversion” shall have the meaning set forth in Section 6(a).

 

“Original Issue Date” means the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.

 

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“Permitted Indebtedness” means the Indebtedness existing on the Original Issue Date and set forth on Schedule 3.1(ff) attached to the Purchase Agreement and (b) any other Indebtedness incurred with the prior written consent of the Holders of 75% of the outstanding Preferred Stock at the time such additional Indebtedness is incurred, which consent may be granted or withheld in the absolute discretion of each Holder.

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“Permitted Lien” means the individual and collective reference to the following: (a) Liens for taxes, assessments and other governmental charges or levies not yet due or Liens for taxes, assessments and other governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the Corporation) have been established in accordance with GAAP; (b) Liens imposed by law which were incurred in the ordinary course of the Corporation’s business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory 

 

landlords’ Liens, and other similar Liens arising in the ordinary course of the Corporation’s business, and which (x) do not individually or in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Corporation and its consolidated Subsidiaries or (y) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien; and (c) Liens incurred in connection with Permitted Indebtedness under clause (b) thereunder, provided that such Liens are not secured by assets of the Corporation or its Subsidiaries other than the assets so acquired or leased.

 

 “Preferred Stock” shall have the meaning set forth in Section 2.

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of the Original Issue Date, to which the Corporation and the original Holders are parties, as amended, modified or supplemented from time to time in accordance with its terms.

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated as of the date of the Purchase Agreement, to which the Corporation and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.

 

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

 

“Share Delivery Date” shall have the meaning set forth in Section 6(e).

 

“Stated Value” shall have the meaning set forth in Section 2.

 

“Subscription Amount” means, as to each Purchaser, the amount in United States Dollars and in immediately available funds to be paid for the Preferred Stock purchased pursuant to the Purchase Agreement as specified below such Purchaser’s name on the signature page of the Purchase Agreement and next to the heading “Subscription Amount.”

 

“Subsidiary” shall have the meaning set forth in the Purchase Agreement.

 

“Trading Day” means a day on which the principal Trading Market is open for business.

 

“Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq National Market, the New York Stock Exchange or the OTC Bulletin Board.

 

“Transaction Documents” shall have the meaning set forth in the Purchase Agreement.

 

“Triggering Event” shall have the meaning set forth in Section 9(a).

 

 

 

“Triggering Redemption Amount” means, for each share of Preferred Stock, the sum of (i) the greater of (A) 130% of the Stated Value and (B) the product of (a) the VWAP on the Trading Day immediately preceding the date of the Triggering Event and (b) the Stated Value divided by the then Conversion Price, (ii) all accrued but unpaid dividends thereon and (iii) all liquidated damages and other costs, expenses or amounts due in respect of the Preferred Stock.

 

“Triggering Redemption Payment Date” shall have the meaning set forth in Section 9(b).

 

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted for trading as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)); (b)  if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the
“Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers and reasonably acceptable to the Corporation.                

 

Section 2.           Designation, Amount and Par Value. The series of preferred stock shall be designated as its Series E 6% Convertible Preferred Stock (the “Preferred Stock”) and the number of shares so designated shall be up to 8,000 (which shall not be subject to increase without the written consent of all of the holders of the Preferred Stock (each, a “Holder” and collectively, the “Holders”)). Each share of Preferred Stock shall have a par value of $.001 per share and a stated value equal to $1,000, subject to increase set forth in Section 3(a) below (the
“Stated Value”).

 

	
            Section 3.
 	
            Dividends.
 

 

a)                                     Dividends in Cash or in Kind. Holders shall be entitled to receive, and the Corporation shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) of 6% per annum (subject to increase pursuant to Section 9(b)), payable quarterly on January 1, April 1, July 1 and October 1, beginning on July 1, 2006, and on each Conversion Date (except that, if such date is not a Trading Day, the payment date shall be the next succeeding Trading Day) (each such date, a “Dividend Payment
Date”) in cash or duly authorized, validly issued, fully paid and non-assessable shares of Common Stock as set forth in this Section 3(a), or a combination thereof (the amount to be paid in shares of Common Stock, the “Dividend Share Amount”).  The form of dividend payments to each Holder shall be determined in the following order of priority: (i) if funds are legally available for the payment of dividends and the Equity Conditions have not been met during the 20 consecutive Trading Days immediately prior to the applicable Dividend Payment Date, in cash only; (ii) if funds are legally available for the payment of dividends and the Equity Conditions have been met during the 20 consecutive Trading Days immediately prior to the applicable Dividend Payment Date, at the sole election of the Corporation, in cash or shares of 

 

Common Stock which shall be valued solely for such purpose at 90% of the average of the VWAPs for the 10 consecutive Trading Days ending on the Trading Day that is immediately prior to the Dividend Payment Date; (iii) if funds are not legally available for the payment of dividends and the Equity Conditions have been met during the 20 consecutive Trading Days immediately prior to the applicable Dividend Payment Date, in shares of Common Stock which shall be valued solely for such purpose at 90% of the average of the VWAPs for the 10 consecutive Trading Days ending on the Trading Day that is immediately prior to the Dividend Payment Date; (iv) if funds are not legally available for the payment of dividends and the Equity Condition relating to an effective Conversion Shares Registration Statement  has been waived by such Holder, as to such Holder only, in unregistered shares of Common Stock
which shall be valued solely for such purpose at 90% of the average of the VWAPs for the 10 consecutive Trading Days ending on the Trading Day that is immediately prior to the Dividend Payment Date; and (v) if funds are not legally available for the payment of dividends and the Equity Conditions have not been met during the 20 consecutive Trading Days immediately prior to the applicable Dividend Payment Date, then, at the election of such Holder, such dividends shall accrue to the next Dividend Payment Date or shall be accreted to, and increase, the outstanding Stated Value.  The Holders shall have the same rights and remedies with respect to the delivery of any such shares as if such shares were being issued pursuant to Section 6.  On the Closing Date the Corporation shall have notified the Holders whether or not it may legally pay cash dividends as of the Closing Date.  The Corporation shall promptly notify the Holders at any time the Corporation shall become able or unable, as the
case may be, to legally pay cash dividends. If at any time the Corporation has the right to pay dividends in cash or Common Stock, the Corporation must provide the Holder with at least 20 Trading Days’ notice of its election to pay a regularly scheduled dividend in Common Stock (the Corporation may indicate in such notice that the election contained in such notice shall continue for later periods until revised by a subsequent notice).  Dividends on the Preferred Stock shall be calculated on the basis of a 360-day year, shall accrue daily commencing on the Original Issue Date, and shall be deemed to accrue from such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends.  Except as otherwise provided herein, if at any time the Corporation pays dividends partially in cash and partially in shares, then such payment shall be distributed ratably among the Holders based upon
the number of shares of Preferred Stock held by each Holder on such Dividend Payment Date.  Any dividends, whether paid in cash or shares of Common Stock, that are not paid within three Trading Days following a Dividend Payment Date shall continue to accrue and shall entail a late fee, which must be paid in cash, at the rate of 18% per annum or the lesser rate permitted by applicable law (such fees to accrue daily, from the Dividend Payment Date through and including the date of payment).  If at any time the Corporation delivers a notice to the Holders of its election to pay the dividends in shares of Common Stock, the Corporation shall timely file a prospectus supplement pursuant to Rule 424 disclosing such election.

 

b)                                     So long as any Preferred Stock shall remain outstanding, neither the Corporation nor any Subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities except as expressly permitted by Section 9(a)(viii). So long as any Preferred Stock shall remain outstanding, neither the Corporation nor any Subsidiary thereof shall directly or indirectly pay or declare any dividend or make any distribution upon (other than a dividend or distribution described in Section 6 or dividends due and paid in the ordinary course on preferred stock of the Corporation at such times when the
Corporation is in compliance with its payment and other obligations hereunder), nor shall any distribution be made in respect of, any Junior Securities as long as any dividends due on the Preferred Stock remain unpaid, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities or shares pari passu with the Preferred Stock.

 

c)                                     The Corporation acknowledges and agrees that the capital of the Corporation (as such term is used in Section 154 of the Delaware General Corporation Law) in respect of the Preferred Stock and any future issuances of the Corporation’s capital stock shall be equal to the aggregate par value of such Preferred Stock or capital stock, as the case may be, and that, on or after the date of the Purchase Agreement, it shall not increase the capital of the Corporation with respect to any shares of the Corporation’s capital stock issued and outstanding on such date.  The Corporation also acknowledges and agrees
that it shall not create any special reserves under Section 171 of the Delaware General Corporation Law without the prior written consent of each Holder.

 

 

 

Section 4.           Voting Rights. Subject to the limitations set forth in Section 6(c), the Preferred Stock shall vote on an “as converted” basis on all matters submitted to the holders of the Common Stock, and as otherwise required by law. In addition, as long as any shares of Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of 67% of the then outstanding shares of the Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock or alter or amend this Certificate of Designation, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a Liquidation (as defined in Section 5) senior
to or otherwise pari passu with the Preferred Stock, (c) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (d) increase the authorized number of shares of Preferred Stock, (e) enter into a Fundamental Transaction or Change of Control Transaction or (f) enter into any agreement with respect to any of the foregoing.

 

Section 5.           Liquidation. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation an amount equal to the Stated Value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages owing thereon, for each share of Preferred Stock before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Holders shall be ratably distributed among
the Holders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.  A Fundamental Transaction or Change of Control Transaction shall be deemed a Liquidation. The Corporation shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each Holder.

 

	
            Section 6.
 	
            Conversion.
 

 

a)                                     Conversions at Option of Holder. Each share of Preferred Stock shall be convertible at the option of the Holder, at any time and from time to time from and after the Original Issue Date into that number of shares of Common Stock (subject to the limitations set forth in Section 6(c) determined by dividing the Stated Value of such share of Preferred Stock by the Conversion Price. Prior to Authorized Share Approval, each Holder shall only be entitled to convert up to that number of shares of Preferred Stock as shall constitute such Holder’s pro-rata portion of the total number of
shares of Preferred Stock outstanding on the Original Issue Date in respect of the 30,000,000 authorized but unissued shares of Common Stock reserved for issuance upon conversion of the Preferred Stock. Holders shall effect conversions by providing the Corporation with the form of conversion notice attached hereto as Annex A (a “Notice of Conversion”). Each Notice of Conversion shall specify the number of shares of Preferred Stock to be converted, the number of shares of Preferred Stock owned prior to the conversion at issue, the number of shares of Preferred Stock owned subsequent to the conversion at issue and the date on which such conversion is to be effected, which date may not be prior to the date the Holder delivers by facsimile such Notice of Conversion to the Corporation (the “Conversion Date”). If no Conversion Date
is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion to the Corporation is deemed delivered hereunder. The calculations and entries set forth in the Notice of Conversion shall control in the absence of manifest or mathematical error.  To effect conversions, as the case may be, of shares of Preferred Stock, a Holder shall not be required to surrender the certificate(s) representing such shares of Preferred Stock to the Corporation unless all of the shares of Preferred Stock represented thereby are so converted, in which case the Holder shall deliver the certificate representing such shares of Preferred Stock promptly following the Conversion Date at issue.  Shares of Preferred Stock 

 

converted into Common Stock or redeemed in accordance with the terms hereof shall be canceled and shall not be reissued.

 

b)                                     Conversion Price.  The conversion price for the Preferred Stock shall equal $0.20, subject to adjustment herein (the “Conversion Price”).

 

c)                                     Beneficial Ownership Limitation.  The Corporation shall not effect any conversion of the Preferred Stock, and a Holder shall not have the right to convert any portion of the Preferred Stock, to the extent that, after giving effect to the conversion set forth on the applicable Notice of Conversion, such Holder (together with such Holder’s Affiliates, and any other person or entity acting as a group together with such Holder or any of such Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation
(as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of the Preferred Stock with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (A) conversion of the remaining, unconverted Stated Value of Preferred Stock beneficially owned by such Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Corporation  subject to a limitation on conversion or exercise analogous to the limitation contained herein (including the Warrants) beneficially owned by such Holder or any of its Affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 6(c), beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  To the extent that the limitation contained in this Section 6(c) applies, the determination of whether the Preferred Stock is convertible (in relation to other securities owned by such Holder together with any Affiliates) and of how many shares of Preferred Stock are convertible shall be in the sole discretion of such Holder, and the submission of a Notice of Conversion shall be deemed to be such Holder’s determination of whether the shares of Preferred Stock may be converted (in relation to other securities owned by such Holder together with any Affiliates) and how many shares of the Preferred Stock are convertible, in each case subject to such aggregate percentage limitations. To ensure compliance with this restriction, each Holder will be deemed to represent to the Corporation each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this
paragraph and the Corporation shall have no obligation to verify or confirm the accuracy of such determination.  In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this Section 6(c), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (A) the Corporation’s most recent Form 10-QSB or Form 10-KSB, as the case may be, (B) a more recent public announcement by the Corporation or (C) a more recent notice by the Corporation or the Corporation’s transfer agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Corporation shall within two Trading Days confirm orally and in
writing to such Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Corporation, including the Preferred Stock, by such Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of Preferred Stock held by the Holder.  The Beneficial Ownership Limitation provisions of this Section 6(c) may be waived by such Holder, at the election of such Holder, upon not less than 61 days’ prior notice to the Corporation, to change the Beneficial Ownership Limitation to 9.99% of the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock upon conversion of Preferred Stock held by the Holder and the provisions of this Section 6(c) shall continue to apply.  Upon such a change by a Holder of the Beneficial Ownership Limitation from such 4.99% limitation to such 9.99% limitation, the Beneficial Ownership Limitation shall not be further waived by such Holder.  The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 6(c) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to 

 

properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of Preferred Stock.

 

	
            d)
 	
            [RESERVED].  
 

 

	
            e)
 	
            Mechanics of Conversion
 

 

i.       Delivery of Certificate Upon Conversion. Not later than three Trading Days after each Conversion Date (the “Share Delivery Date”), the Corporation shall deliver, or cause to be delivered, to the Holder (A) a certificate or certificates which, on or after the Effective Date, shall be free of restrictive legends and trading restrictions (other than those which may then be required by the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of shares of Preferred Stock, and (B) a bank check in the amount of accrued and unpaid dividends (if the Corporation has elected or is required to pay accrued dividends in cash). On or after the Effective Date, the
Corporation shall, upon request of the Holder, use its best efforts to deliver any certificate or certificates required to be delivered by the Corporation under this Section 6 electronically through the Depository Trust Company or another established clearing corporation performing similar functions. If in the case of any Notice of Conversion such certificate or certificates are not delivered to or as directed by the applicable Holder by the third Trading Day after the Conversion Date, the Holder shall be entitled to elect by written notice to the Corporation at any time on or before its receipt of such certificate or certificates, to rescind such Conversion Notice by written notice to the Corporation, in which event the Corporation shall promptly return to the Holder any original Preferred Stock certificate delivered to the Corporation and the Holder shall promptly return any Common Stock certificates representing the shares of Preferred Stock tendered for conversion to the
Corporation.

 

ii.      Obligation Absolute; Partial Liquidated Damages.  The Corporation’s obligation to issue and deliver the Conversion Shares upon conversion of Preferred Stock in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Corporation or any violation or alleged violation of law by the Holder or any other person, and irrespective of any other circumstance which might otherwise limit such
obligation of the Corporation to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Corporation of any such action that the Corporation may have against the Holder.  In the event a Holder shall elect to convert any or all of the Stated Value of its Preferred Stock, the Corporation may not refuse conversion based on any claim that such Holder or any one associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any other reason, unless an injunction from a court, on notice to Holder, restraining and/or enjoining conversion of all or part of the Preferred Stock of the Holder shall have been sought and obtained, and the Corporation posts a surety bond for the benefit of the Holder in the amount of 150% of the Stated Value of Preferred Stock which is subject to
the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment.  In the absence of such injunction, the Corporation shall issue Conversion Shares and, if applicable, cash, upon a properly noticed conversion. If the Corporation fails to deliver to the Holder such certificate or certificates pursuant to Section 6(e)(i) on the second Trading Day after the Share Delivery Date applicable to such conversion, the Corporation shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of Stated Value of Preferred Stock being converted, $50 per Trading Day (increasing to $100 per Trading Day on the third Trading Day and increasing to $200 per Trading Day on the sixth Trading Day after such damages begin to accrue) for each Trading Day after such second Trading Day after the Share Delivery Date until such
certificates are delivered. Nothing herein shall limit a Holder’s right to pursue actual damages or declare a Triggering Event pursuant to Section 9 for the Corporation’s failure to deliver Conversion Shares within the period specified 

 

herein and such Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.  The Exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 

iii.     Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. If the Corporation fails to deliver to the Holder such certificate or certificates by the Share Delivery Date pursuant to Section 6(e)(i), and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the Corporation shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount by which
(x) the Holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) the shares of Preferred Stock equal to the number of shares of Preferred Stock submitted for conversion or deliver to the Holder the number of shares of Common Stock that would have been issued if the Corporation had timely complied with its delivery requirements under Section 6(e)(i). For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of shares of Preferred Stock with respect to which the
actual sale price (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Corporation shall be required to pay the Holder $1,000. The Holder shall provide the Corporation written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Corporation, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Corporation’s failure to timely deliver certificates representing shares of Common Stock upon conversion of the shares of Preferred Stock as required pursuant to the terms hereof.

 

iv.     Reservation of Shares Issuable Upon Conversion. The Corporation covenants that it has reserved 30,000,000 shares of Common Stock as of the Original Issue Date, and upon receipt of Authorized Share Approval, will at all times thereafter, reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of the Preferred Stock and payment of dividends on the Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holders of the Preferred Stock, not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 7) upon the conversion of all outstanding shares of Preferred Stock and payment of dividends hereunder.  The Corporation covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable and, if the Conversion Shares Registration Statement is then effective under the Securities Act, shall be registered for public sale in accordance with such Conversion Shares Registration Statement.

 

v.      Fractional Shares. Upon a conversion hereunder, the Corporation shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the VWAP at such time.  If the Corporation elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

 

	
            vi.
 	
            Transfer Taxes.  The issuance of certificates for shares of the Common Stock on
 

 

 

conversion of this Preferred Stock shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such shares of Preferred Stock so converted and the Corporation shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid.

 

	
            Section 7.
 	
            Certain Adjustments.
 

 

a)                                     Stock Dividends and Stock Splits.  If the Corporation, at any time while this Preferred Stock is outstanding: (A) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any other Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Corporation upon conversion of, or payment of a dividend on, this Preferred Stock); (B) subdivides outstanding shares of Common Stock into a larger number of shares; (C) combines (including by way of a reverse stock
split) outstanding shares of Common Stock into a smaller number of shares; or (D) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Corporation, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Corporation) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event.  Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

b)                                     Subsequent Equity Sales.  If the Corporation or any Subsidiary thereof, at any time while this Preferred Stock is outstanding, sells or grants any option to purchase or sells or grants any right to reprice its securities, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “Base Conversion
Price” and such issuances collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be reduced to equal the Base Conversion Price.  Notwithstanding the foregoing, no adjustment will be made under this Section 7(b) in respect of an Exempt Issuance.  The Corporation shall notify the Holder in writing, no later than the Business Day
following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 7(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”).  For purposes of clarification, whether or not the Corporation provides a Dilutive Issuance Notice pursuant to this Section 7(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Conversion Price in the Notice of Conversion.  

 

c)                                     Subsequent Rights Offerings.  If the Corporation, at any time while this Preferred Stock is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share that is lower than the VWAP on the record date referenced below, then the Conversion Price shall be multiplied by a fraction of which the denominator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for 

 

subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered (assuming delivery to the Corporation in full of all consideration payable upon exercise of such rights, options or warrants) would purchase at such VWAP.  Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants.

 

d)                                     Pro Rata Distributions. If the Corporation, at any time while this Preferred Stock is outstanding, distributes to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security (other than Common Stock, which shall be subject to Section 7(b)), then in each such case the Conversion Price shall be adjusted by multiplying such Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then fair market value at such record date of the portion of such assets, evidence of indebtedness or rights or warrants so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors of the Corporation in good faith.  In either case the adjustments shall be described in a statement delivered to the Holder describing the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock.  Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

 

e)                                     Fundamental Transaction. If, at any time while this Preferred Stock is outstanding, (A) the Corporation effects any merger or consolidation of the Corporation with or into another Person, (B) the Corporation effects any sale of all or substantially all of its assets in one transaction or a series of related transactions, (C) any tender offer or exchange offer (whether by the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Corporation effects any
reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “Fundamental Transaction”), then, upon any subsequent conversion of this Preferred Stock, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of Common Stock (the “Alternate Consideration”).  For purposes of any such conversion, the determination of the Conversion Price shall be appropriately
adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Corporation shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration.  If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Preferred Stock following such Fundamental Transaction.  To the extent necessary to effectuate the foregoing provisions, any successor to the Corporation or surviving entity in such Fundamental Transaction shall file a new Certificate of Designation with the same terms and conditions and issue to the Holder new preferred stock consistent with the foregoing
provisions and evidencing the Holder’s right to convert such preferred stock into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 7(e) and insuring that this Preferred Stock (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.

 

f)                                      Calculations.  All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.  For purposes of this Section 7, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of 

 

shares of Common Stock (excluding any treasury shares of the Corporation) issued and outstanding.

 

	
            g)
 	
            Notice to the Holders.
 

 

i.       Adjustment to Conversion Price.  Whenever the Conversion Price is adjusted pursuant to any provision of this Section 7, the Corporation shall promptly mail to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.  If the Corporation issues a variable rate security, despite the prohibition thereon in the Purchase Agreement, the Corporation shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase Agreement).

 

ii.      Notice to Allow Conversion by Holder.  If (A) the Corporation shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Corporation shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Corporation shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Corporation shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Corporation is a party, any sale or transfer of all or substantially all of the assets of the Corporation, of any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or property or (E) the Corporation shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, then, in each case, the Corporation shall cause to be filed at each office or agency maintained for the purpose of conversion of this Preferred Stock, and shall cause to be delivered to the Holder at its last address as it shall appear upon the stock books of the Corporation, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice.  The Holder is entitled to convert the Conversion Amount of this Preferred Stock (or any part hereof) during the 20-day period commencing on the date of such notice through the effective date of the event triggering such notice. 

 

	
            Section 8.  
 	
            Forced Conversion.
 

 

a)                                     Forced Conversion.  Notwithstanding anything herein to the contrary, on the 21st Trading Day (the “Automatic Conversion Date”) following the later of the effective date of the Reverse Split and the Effective Date, the Preferred Stock plus all accrued but unpaid dividends thereon and all liquidated damages and other amounts due in respect of the Preferred Stock shall automatically convert into Common Stock pursuant to Section 6, at a conversion price equal to the lesser of (i)
$0.20 (subject to adjustment for the Reverse Split) or (ii) 90% of the average of the VWAPs for the 20 Trading Days immediately following the effective date of the Reverse Split.  All Forced Conversions shall occur automatically without any action on the part of the Holders; provided, however, that a Holder may voluntarily convert its Preferred Stock prior to the Automatic Conversion Date.  Notwithstanding anything herein to the contrary, the limitations on conversion set forth in Section 6(c) hereof shall not apply to any Forced Conversion.

 

	
            Section 9.  
 	
            Redemption Upon Triggering Events.
 

 

 

 

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

 

i.       the failure of a Conversion Shares Registration Statement to be declared effective by the Commission on or prior to the 270th day after the Original Issue Date;

 

ii.      if, during the Effectiveness Period, the effectiveness of the Conversion Shares Registration Statement lapses for more than an aggregate of 75 calendar days (which need not be consecutive calendar days) during any 12 month period, or the Holder shall not otherwise be permitted to resell Registrable Securities under the Conversion Shares Registration Statement for more than an aggregate of 75 calendar days (which need not be consecutive calendar days) during any 12 month period;

 

iii.     the Corporation shall fail to deliver certificates representing Conversion Shares issuable upon a conversion hereunder that comply with the provisions hereof prior to the tenth Trading Day after such shares are required to be delivered hereunder, or the Corporation shall provide written notice to any Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversion of any shares of Preferred Stock in accordance with the terms hereof;

 

iv.     one of the Events (as defined in the Registration Rights Agreement) described in subsections (i), (ii) or (iii) of Section 2(b) of the Registration Rights Agreement shall not have been cured to the satisfaction of the Holders prior to the expiration of 30 calendar days from the Event Date (as defined in the Registration Rights Agreement) relating thereto (other than an Event resulting from a failure of a Conversion Shares Registration Statement to be declared effective by the Commission on or prior to the 270th day after the Original Issue Date, which shall be covered by Section 9(a)(i));

 

v.      the Corporation shall fail for any reason to pay in full the amount of cash due pursuant to a Buy-In within fifteen calendar days after notice therefor is delivered hereunder or shall fail to pay all amounts owed on account of any Event (as defined in the Registration Rights Agreement) within fifteen days of the date due;

 

vi.     the Corporation shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder;

 

vii.    unless specifically addressed elsewhere in this Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of the Transaction Documents, and such failure or breach shall not, if subject to the possibility of a cure by the Corporation, have been cured within 30 calendar days after the date on which written notice of such failure or breach shall have been delivered;

 

viii.   the Corporation shall redeem more than a de minimis number of  Junior Securities other than as to repurchases of Common Stock or Common Stock Equivalents from departing officers and directors of the 

 

Corporation, provided that, while any of the Preferred Stock remains outstanding, such repurchases shall not exceed an aggregate of $100,000 from all officers and directors;

 

ix.     the Corporation shall be party to a Change of Control Transaction; 

 

	
            x.
 	
            there shall have occurred a Bankruptcy Event;
 

 

xi.     the Common Stock shall fail to be listed or quoted for trading on a Trading Market for more than ten Trading Days, which need not be consecutive Trading Days; or

 

xii.    any monetary judgment, writ or similar final process shall be entered or filed against the Corporation, any Subsidiary or any of their respective property or other assets for greater than $50,000, and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of 45 calendar days.

 

b)                                     Upon the occurrence of a Triggering Event, each Holder shall (in addition to all other rights it may have hereunder or under applicable law) have the right, exercisable at the sole option of such Holder, to require the Corporation to, (A) with respect to the Triggering Events set forth in Sections 9(a)(iii), (v), (vi), (vii), (viii), (ix) (as to Changes of Control approved by the Board of Directors of the Corporation) and (x) (as to voluntary filings only), redeem all of the Preferred Stock then held by such Holder for a redemption price, in cash, equal to the Triggering Redemption Amount or (B) at the option
of the Holder and with respect to the Triggering Events set forth in Sections 9(a)(i), (ii), (iv), (ix) (as to Changes of Control not approved by the Board of Directors of the Corporation), (x) (as to involuntary filings only), (xi) and (xii), either (a) redeem all of the Preferred Stock then held by such Holder for a redemption price, in shares of Common Stock, equal to a number of shares of Common Stock equal to the Triggering Redemption Amount divided by 75% of the average of the 10 VWAPs immediately prior to the date of election hereunder or (b) increase the dividend rate on all of the outstanding Preferred Stock held by such Holder to 18% per annum thereafter.  The Triggering Redemption Amount, in cash or in shares, shall be due and payable or issuable, as the case may be, within five Trading Days of the date on which the notice for the payment therefor is provided by a Holder (the “Triggering Redemption Payment Date”).  If
the Corporation fails to pay in full the Triggering Redemption Amount hereunder on the date such amount is due in accordance with this Section (whether in cash or shares of Common Stock), the Corporation will pay interest thereon at a rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law, accruing daily from such date until the Triggering Redemption Amount, plus all such interest thereon, is paid in full.  For purposes of this Section, a share of Preferred Stock is outstanding until such date as the Holder shall have received Conversion Shares upon a conversion (or attempted conversion) thereof that meets the requirements hereof or has been paid the Triggering Redemption Amount in cash.

 

Section 10.        Negative Covenants.  So long as any shares of Preferred Stock are outstanding, the Corporation shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, without the prior written consent of the Holders of 67% of the shares of Preferred Stock then outstanding:

 

a)      other than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;

 

b)      other than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest 

 

therein or any income or profits therefrom;

 

c)      amend its certificate of incorporation, bylaws or other charter documents so as to materially and adversely affect any rights of any Holder;

 

d)      repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its Common Stock, Common Stock Equivalents or Junior Securities, except for the Conversion Shares to the extent permitted or required under the Transaction Documents or as otherwise permitted by the Transaction Documents; 

 

	
            e)
 	
            enter into any agreement or understanding with respect to any of the foregoing; or
 

 

	
            f)
 	
            pay cash dividends or distributions on Junior Securities of the Corporation.
 

 

	
            Section 11.
 	
            Miscellaneous.
 

 

a)      Notices.  Any and all notices or other communications or deliveries to be provided by the Holder hereunder including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service, addressed to the Corporation, at the address set forth above, facsimile number 646-218-1885, Attn: Alan Schoenbart or such other facsimile number or address as the Corporation may specify for such purposes by notice to the Holders delivered in accordance with this Section 11.  Any and all notices or other communications or deliveries to be provided by the Corporation hereunder shall be in writing and delivered personally, by facsimile, or
sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number or address of such Holder appearing on the books of the Corporation, or if no such facsimile number or address appears on the books of the Corporation, at the principal place of business of the Holder.  Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 11 prior to 5:30 p.m. (New York City time) on any date, (ii) the date immediately following the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 11 between 5:30 p.m. and 11:59 p.m. (New York City time) on any date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given.

 

b)      Absolute Obligation. Except as expressly provided herein, no provision of this Certificate of Designation shall alter or impair the obligation of the Corporation, which is absolute and unconditional, to pay liquidated damages, accrued dividends and accrued interest, as applicable, on the shares of Preferred Stock at the time, place, and rate, and in the coin or currency, herein prescribed.  

 

c)      Lost or Mutilated Preferred Stock Certificate.  If a Holder’s Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new certificate for the shares of Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such certificate, and of the ownership hereof reasonably satisfactory to the Corporation.

 

d)      Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of this Certificate of Designation shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflict of laws thereof.  Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the 

 

New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Certificate of Designation and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Certificate of Designation or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Certificate of Designation, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.

 

e)      Waiver.  Any waiver by the Corporation or the Holder of a breach of any provision of this Certificate of Designation shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Certificate of Designation.  The failure of the Corporation or the Holder to insist upon strict adherence to any term of this Certificate of Designation on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of Designation.  Any waiver by the Corporation or the Holder must be in writing.

 

f)      Severability.  If any provision of this Certificate of Designation is invalid, illegal or unenforceable, the balance of this Certificate of Designation shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances.  If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. 

 

g)      Next Business Day.  Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

 

h)      Headings.  The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designation and shall not be deemed to limit or affect any of the provisions hereof.

 

i)       Status of Converted or Redeemed Preferred Stock.  Shares of Preferred Stock may only be issued pursuant to the Purchase Agreement.  If any shares of Preferred Stock shall be converted, redeemed or reacquired by the Corporation, such shares shall resume the status of authorized but unissued shares of preferred stock and shall no longer be designated as Series E 6% Convertible Preferred Stock.

 

*********************

 

 

RESOLVED, FURTHER, that the Chairman, the president or any vice-president,   and the secretary or any assistant secretary, of the Corporation be and they hereby are authorized and directed to prepare and file a Certificate of Designation of Preferences, Rights and Limitations in accordance with the foregoing resolution and the provisions of Delaware law.

 

IN WITNESS WHEREOF, the undersigned have executed this Certificate this ___ day of March __ 2006.

 

	
            __________________________________________

Name:  

Title:  

 
 	
            __________________________________________

Name:  

Title:  

 
 

 

 

 

ANNEX A

 

NOTICE OF CONVERSION

 

(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED STOCK)

 

The undersigned hereby elects to convert the number of shares of  Series E 6% Convertible Preferred Stock indicated below into shares of common stock, par value $.001 per share (the “Common Stock”), of Ortec International, Inc., a Delaware corporation (the “Corporation”), according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as may be required by the Corporation in accordance with the Purchase Agreement. No fee will be charged to the Holder for any conversion, except for any such transfer taxes.

 

Conversion calculations:

 

	
            Date to Effect Conversion: _____________________________________________

 

	
            Number of shares of Preferred Stock owned prior to Conversion: _______________

 

	
            Number of shares of Preferred Stock to be Converted: ________________________

 

	
            Stated Value of shares of Preferred Stock to be Converted: ____________________

 

	
            Number of shares of Common Stock to be Issued: ___________________________

 

	
            Applicable Conversion Price:____________________________________________

 

	
            Number of shares of Preferred Stock subsequent to Conversion: ________________

 

	
             
	
             

[HOLDER]

 

By:___________________________________

Name:

Title:

		

 

 

 

 

      

	
            SCHEDULES TO SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH ____, 2006, AMONG ORTEC INTERNATIONAL, INC. AND EACH PURCHASER
 

 

 

	
            Schedule 3.1(a)
 	
            Subsidiaries
 

 

 

	
             
 	
            1.
 	
            Orcel, LLC, a Delaware limited liability company.
 

 
 

	
             
 	
            2.
 	
            A new corporation to be incorporated under the laws of the State of Delaware into which Hapto Biotech, Inc. will be merged.
 

 

 

	
            Schedule 3.1(c)
 	
            Authorized Shares
 

 

The Company is currently authorized to issue 200,000,000 shares of Common Stock and 1,000,000 shares of preferred stock.  The Common Stock which the Company has issued and may be required to issue upon conversion or exercise of other securities are the following:

 

52,892,275 shares of Common Stock outstanding

 

The following shares required to be issued:

 

	
            3,240,199
 	
            Shares to Cambrex BioScience Walkersville, Inc., in lieu of suite fees, per agreement
 
	
            25,088,062
 	
            shares upon conversion of Series D Convertible Preferred Stock
 
	
            176,198
 	
            shares upon exercise of Series B-1 Warrants at $4.00 per share
 
	
            112,798
 	
            shares upon exercise of Series B-2 Warrants at $5.00 per share
 
	
            102,000
 	
            shares upon exercise of Series C Warrants at $3.60 per share
 
	
            3,184,189
 	
            shares upon exercise of Series E Warrants at $1.80 per share
 
	
            717,600
 	
            shares upon exercise of Series E Warrants at $1.50 per share
 
	
            14,266,001
 	
            shares upon exercise of Series E Warrants at $0.001 per share
 
	
            2,746,376
 	
            shares upon exercise of EPA Warrants at $0.35 per share
 
	
            16,595,292
 	
            shares upon exercise of Series F Warrants at $0.50 per share
 
	
            3,179,619
 	
            shares upon exercise of Series FPA Warrants at $0.30 per share
 
	
            239,052
 	
            shares upon exercise of other Warrants at prices ranging from $0.50 to $3.25 per share
 
	
            434,542
 	
            shares upon exercise of stock options granted under Ortec’s Stock Option Plan at prices ranging from $0.26 to $127.50 per share
 
	
            7,733,638
 	
            shares upon exercise of stock options granted outside the Stock Option Plan, of which 6,359,238 are exercisable at $0.26 per share and the remainder of 1,374,400 shares at prices ranging from $1.80 to $3.60 per share
 

 

 

 

 

 

 

	
            SCHEDULES TO SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH ____, 2006, AMONG ORTEC INTERNATIONAL, INC. AND EACH PURCHASER
 

 

 

 

However, holders of all of the Company’s Series D Convertible Preferred Stock convertible into 25,088,062 shares of the Company’s Common Stock, and holders of warrants exercisable to acquire 7,911,938 shares of the Company’s Common Stock, have agreed not to convert their Series D Convertible Preferred Stock, or exercise such warrants, that would require the Company to issue shares of the Company’s Common Stock in excess of the number of shares of its Common stock the Company is authorized to issue until the Company’s stockholders adopt an amendment to the Company’s certificate of incorporation to increase the number of shares of its Common Stock the Company is authorized to issue, or take any other action (such as enacting a reverse stock split), which will enable the Company to have a sufficient number of shares of Common Stock it is
authorized to issue, to issue in the private placement transaction provided for in the Securities Purchase Agreement and in the other Transaction Documents.  Provided, however, that such restraint agreed to by such holders in converting those Series D preferred shares and in exercising those warrants expires on April 30, 2006 if the private placement of Ortec’s securities provided for in the Securities Purchase Agreement and the other Transaction Documents is not closed by that date.

In addition, upon closing the Hapto acquisition the Company will issue to Hapto’s shareholders and option holders: (a) 30,860,000 shares of its Common Stock, and (b) warrants to purchase an additional 3,000,000 shares of the Company’s Common Stock at $0.50 per share, and will issue to Rodman & Renshaw as a fee (c) three-year warrants to purchase 4,000,000 shares of the Company’s Common Stock at $0.30 per share.

Schedule 3.1(g)

 

	
            1.
 	
            The Company issued 1,697,200 shares to designees of Burnham Hill Partners, a division of Pali Capital, Inc., for services in securing financing for the Company.
 

 
 

	
            2.
 	
            The Company has issued warrants and options which are still outstanding other than as a result of the purchase and sale of securities as follows:
 

 

	
            (a)
 	
            Options under the Company’s Stock Option Plan;
 

(b)    Options to executive employees outside the Company’s Stock Option Plan;

(c)    Warrants to placement agents as part of their compensation for arranging private placements of the Company’s securities in the period between May 2002 and October 2005;

	
            (d)
 	
            Warrants to a vendor in settlement of its claim; and
 

 

	
             
 	
            (e)
 	
            Warrants to investor relations firms as part of their compensation for services rendered to the Company.
 

 

 

 

 

 

	
            SCHEDULES TO SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH ____, 2006, AMONG ORTEC INTERNATIONAL, INC. AND EACH PURCHASER
 

 

 

	
            3.
 	
            The issuance of the Securities will result in the right of holders of the Company’s warrants who acquired their warrants in connection with their purchases of the Company’s securities, or who acquired their warrants for services rendered to the Company as placement agents in the sale of those securities, to adjust the exercise prices of their warrants.  The formula for such adjustment of the exercise price for warrants to purchase an aggregate of 23,845,509 shares of the Company’s Common Stock, is a weighted average formula, and for warrants to purchase an aggregate of 288,996 shares of the Company’s Common Stock, is a full ratchet adjustment. 
 

 

Schedule 3.1(l)

 

The Company is late in its payments of rent owed to its landlord and late in payments owed to some of its suppliers of goods and services.  Approximately $1,000,000 of the proceeds to be received by the Company from this private placement of the Company’s securities will be used to make such payments.

Schedule 3.1(m)

At December 31, 2005 the Company owes approximately $30,000 on equipment leases.

Schedule 3.1(o)

Paul Royalty Fund LP has been given a security interest in the Company’s United States patents, patent applications and trademarks as security for any obligations owed by the Company to Paul Royalty Fund pursuant to the Revenue Interest Assignment Agreement, and other agreements related to the Revenue Interest Assignment Agreement, between the Company and Paul Royalty Fund LP.

Schedule 3.1(p)

The Company’s workmen’s compensation policy has lapsed for non-payment of premium.

Schedule 3.1(q)

One of the Company’s directors, Dr. Gregory B. Brown, serves as the designee of Paul Royalty Fund LP pursuant to the provisions of the Royalty Interest Assignment Agreement between the Company and Paul Royalty Fund.  The Company may be obligated to make payments in excess of $60,000 per annum to Paul Royalty Fund under the terms of the Royalty Interest Assignment Agreement.  We have been advised that Dr. Brown is a partner in an entity which is an affiliate of Paul Royalty Fund.

Schedule 3.1(s)

The Company is required to pay fees to Burnham Hill Partners, a division of Pali Capital, Inc., on purchases of Securities pursuant to this Securities Purchase Agreement, by investors who purchased the Company’s securities from the Company in earlier private placements in which Burnham Hill Partners or its principal served as placement agent.

The Company may also have to pay fees to a finder, M.R.C. Investment Ltd., which is securing purchaser(s) in Israel.

 

 

 

	
            SCHEDULES TO SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH ____, 2006, AMONG ORTEC INTERNATIONAL, INC. AND EACH PURCHASER
 

 

Schedule 3.1(x)

The Company does not have any poison pill or other similar anti-takeover provision in the Company’s certificate of incorporation.

Schedule 3.1(aa)

Since the Company is still in the development stage and has no revenues, the proceeds from this private placement will not be sufficient to meet the cash needs of the Company for the next twelve months and the Company anticipates that it will need to raise additional capital, or borrow money, at some time before the expiration of the next twelve months in order to continue its business operations for the next twelve months.

Indebtedness of the Company

Paul Royalty Fund, LP - Although the Company is not currently indebted to Paul Royalty Fund, LP, the potential liability of approximately $30,000,000 to Paul Royalty Fund is carried as a liability on the Company’s financial statements in accordance with GAAP requirements.  

Two bridge loans recently borrowed by the Company for which the Company owes $130,000 and $300,000 plus interest.

Schedule 3.1(ff)

The Company has recently borrowed an aggregate of $380,000 from two lenders as bridge loans to be repaid from the proceeds of this private placement.

Schedule 4.9

The Company will use $130,000 of the proceeds for repayment of Indebtedness recently borrowed by the Company as one of two bridge loans used to fund its operations in the past few weeks.  The Company will also use not more than $500,000 to repay another bridge loan the Company expects to secure after March 27, 2006.  The Company will also use some of the proceeds for payment of amounts owed to vendors (of goods and services, including the Company’s landlord) which are past due.  In addition, $50,000 of such proceeds will be paid pursuant to an agreement to which the Company is a party and which is not for working capital.

 

 

 

	
            SCHEDULES TO REGISTRATION RIGHTS AGREEMENT DATED AS OF MARCH ____, 2006, AMONG ORTEC INTERNATIONAL, INC. AND EACH PURCHASER
 

 

Schedule 6(b)

 

The following shares of the Company’s Common stock owned by security holders, or issuable to holders of the Company’s other securities which are convertible to, or exercisable for, shares of the Company’s Common Stock, will be included in the initial Registration Statement.

 

	
            1.
 	
            Securities sold in the private placement of the Company’s securities in October, 2005:
 

 

 

	
             
 	
            a)
 	
            Shares of Common Stock                                           
                                          
                                          
20,937,689
 

 
 

	
             
 	
            b)
 	
            Issuable upon conversion of the Company’s Series D 
 

 

	
            Convertible Preferred Stock
 	
            10,858,496
 

 

	
             
 	
            c)
 	
            Issuable upon exercise of the Company’s Series F Warrants                                          
                     16,595,292
 

 

 

	
            2.
 	
            Issuable upon exercise of the Company’s Series FPA Warrants issued to
 

 

	
            the designees of the placement agent in such October 2005 private placement
 	
            3,179,619
 

 

	
            3.
 	
            Shares to Cambrex BioScience Walkersville, Inc. for suite fees                                          
                             5,450,398
 

 
 

	
            4.
 	
            Shares issued to designees of Burnham Hill Partners, a division of
 

 

Pali Capital, Inc., in lieu of consulting fee and portion of fee for

	
            placement of promissory notes
 	
            1,697,200
 

 

 

	
            5.
 	
            Issuable upon exercise of warrant granted to Quality ReSolve, Inc., as
 

 

	
            part of settlement of a vendor claim
 	
            285,000
 

 

 

	
            6.
 	
            Issuable upon exercise of warrants granted to Elite Financial as part of
 

 

	
            compensation for services
 	
            100,000
 

 

The prospectus in the initial Registration Statement will be a “combined prospectus” which will also include the shares of the Company’s Common Stock (all held by security holders) listed in the Company’s prospectus dated May 19, 2005 which (a) have not already been sold in the public securities markets and (b) which cannot be sold pursuant to Rule 144-k promulgated under the Securities Act of 1933, as amended.

 

Schedule 6(i)

 

There is a registration statement required to be filed by the Company for the Common Stock issued, and issuable upon exercise of warrants and conversion of Series D Convertible Preferred stock, which common stock, preferred stock and warrants were sold by the Company in its October 2005 private placement.  That registration obligation was recited in the registration rights agreement that was part of the transaction documents in that financing.  The Company has not yet fulfilled that obligation but plans to fulfill it by including those registrable securities in the Registration Statement which is the subject of this Registration Rights Agreement.

 

 

 

 

 

 

 

	
            EXHIBIT B
 

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”) is made and entered into as of March __, 2006 among Ortec International, Inc., a Delaware corporation (the “Company”), and the several purchasers signatory hereto (each such purchaser is a “Purchaser” and collectively, the “Purchasers”).

 

This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof between the Company and each Purchaser (the “Purchase Agreement”).

 

	
            The Company and each Purchaser hereby agrees as follows:
 

 

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

 

“Advice” shall have the meaning set forth in Section 6(d).

 

“Effectiveness Date” means, with respect to the initial Registration Statement required to be filed hereunder, the 135th calendar day following the date hereof and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 75th calendar day following the date on which the Company first knows, or reasonably should have known, that such additional Registration Statement is required hereunder; provided, however, in the event the Company is notified by the Commission that one of the above Registration Statements will not be reviewed or is no longer subject to further review and comments, the Effectiveness Date as to such Registration Statement shall be the fifth Trading Day
following the date on which the Company is so notified if such date precedes the dates required above.

 

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

 

“Event” shall have the meaning set forth in Section 2(b).

 

“Event Date” shall have the meaning set forth in Section 2(b).

 

“Filing Date” means, with respect to the initial Registration Statement required hereunder, the 75th calendar day following the date hereof and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 30th day following the date on which the Company first knows, or reasonably should have known that such additional Registration Statement is required hereunder.            

 

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

 

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

 

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

 

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

 

“Plan of Distribution” shall have the meaning set forth in Section 2(a).

 

 “Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as 

 

amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

 

 “Registrable Securities” means, as of the date in question, (i) all of the shares of Common Stock issuable upon conversion in full of the shares of Preferred Stock, (ii) all shares of Common Stock issuable as dividends or principal on the Preferred Stock assuming all dividend and principal payments are made in shares of Common Stock and the Preferred Stock is held for at least 3 years, (iii) all Warrant Shares, (iv) any additional shares issuable in connection with any anti-dilution provisions associated with the Preferred Stock and Warrants (in each case, without giving effect to any limitations on conversion set forth in the Certificate of Designation or limitations on exercise set forth in the Warrant) and (v) any securities issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event with respect to the foregoing.  

 

 “Registration Statement” means the registration statements required to be filed hereunder and any additional registration statements contemplated by Section 3(c), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. 

 

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

 

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

 

“Selling Shareholder Questionnaire” shall have the meaning set forth in Section 3(a).

 

	
            2.
 	
            Shelf Registration
 

 

(a)     On or prior to each Filing Date, the Company shall prepare and file with the Commission a “Shelf” Registration Statement covering the resale of 125% of the Registrable Securities on such Filing Date for an offering to be made on a continuous basis pursuant to Rule 415.  The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith) and shall contain (unless otherwise directed by at least an 85% majority in interest of the Holders) substantially the “Plan of Distribution” attached hereto as Annex A.  Subject
to the terms of this Agreement, the Company shall use its best efforts to cause a Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the applicable Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until all Registrable Securities covered by such Registration Statement have been sold, or may be sold without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the “Effectiveness Period”).  The Company shall telephonically request effectiveness of a Registration Statement as of 5:00 pm Eastern Time on a Trading Day.   The Company shall immediately notify the Holders via
facsimile of the effectiveness of a Registration Statement on the same Trading Day that the Company telephonically confirms effectiveness with the Commission, which shall be the date requested for effectiveness of a Registration Statement.  The Company shall, by 9:30 am Eastern Time on the Trading Day after the Effective Date (as defined in the Purchase Agreement), file a final Prospectus with the Commission as required by Rule 424.  Failure to so notify the Holder within 1 Trading Day of such notification of effectiveness or failure to file a final Prospectus as aforesaid shall be deemed an Event under Section 2(b).

 

 

(b)     If: (i) a Registration Statement is not filed on or prior to its Filing Date (if the Company files a Registration Statement without affording the Holders the opportunity to review and comment on the same as required by Section 3(a), the Company shall not be deemed to have satisfied this clause (i)), or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be “reviewed,” or not subject to further review, or (iii) prior to its Effectiveness Date, the Company fails to file a pre-effective amendment and otherwise respond in writing to
comments made by the Commission in respect of such Registration Statement within 10 calendar days after the receipt of comments by or notice from the Commission that such amendment is required in order for a Registration Statement to be declared effective, or (iv) a Registration Statement filed or required to be filed hereunder is not declared effective by the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities for which it is required to be effective, or the Holders are otherwise not permitted to utilize the Prospectus therein to resell such Registrable Securities for more than 10 consecutive calendar days or more than an aggregate of 15 calendar days during any 12-month period (which need not be consecutive calendar days) (any such failure or breach being referred to as an “Event”, and for
purposes of clause (i) or (iv) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five Trading Day period is exceeded, or for purposes of clause (iii) the date which such 10 calendar day period is exceeded, or for purposes of clause (v) the date on which such 10 or 15 calendar day period, as applicable, is exceeded being referred to as “Event Date”), then in addition to any other rights the Holders may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 2% of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement for any Registrable Securities then held by such Holder, subject to
an overall cap of 24 months (48%).  If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata basis for any portion of a month prior to the cure of an Event.

 

	
            3.
 	
            Registration Procedures.
 

 

	
            In connection with the Company’s registration obligations hereunder, the Company shall:
 

 

(a)    Not less than 5 Trading Days prior to the filing of each Registration Statement and not less than one 1 Trading Day prior to the filing of any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall, (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to each Holder to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file a Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities shall reasonably object in good faith, provided that, the Company is notified of such objection in writing no later than 5 Trading Days after the Holders have been so furnished copies of a Registration Statement or 1 Trading Day after the Holders have been so furnished copies of any related Prospectus or amendment or supplement thereto. Each Holder agrees to furnish to the Company a completed Questionnaire in the form attached to this Agreement as Annex B (a “Selling Shareholder Questionnaire”) not less than two Trading Days prior to the Filing Date or by the end of the fourth Trading Day following the date on which such 

 

Holder receives draft materials in accordance with this Section.

 

(b)    (i) Prepare and file with the Commission such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to
a Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to a Registration Statement (provided that the Company may excise any information contained therein which would constitute material non-public information as to any Holder which has not executed a confidentiality agreement with the Company); and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.

 

(c)    If during the Effectiveness Period, the number of Registrable Securities at any time exceeds 100% of the number of shares of Common Stock then registered in a Registration Statement, then the Company shall file as soon as reasonably practicable but in any case prior to the applicable Filing Date, an additional Registration Statement covering the resale by the Holders of not less than 125% of the number of such Registrable Securities.

 

(d)    Notify the Holders of Registrable Securities to be sold (which notice shall, pursuant to clauses (iii) through (vi) hereof, be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than 1 Trading Day prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement; and
(C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for
inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (vi) the occurrence or existence of any pending corporate development with respect to the Company that the Company believes may be material and that, in the determination of the Company, makes it not in the best interest of the Company to allow continued availability of a Registration Statement or Prospectus; provided that any and all of such information shall remain
confidential to each Holder until such information otherwise becomes public, unless disclosure by a Holder is required by law; provided, further, notwithstanding each Holder’s agreement to keep such information confidential, the Holders make no acknowledgement that any such information is material, non-public information. 

 

 

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

 

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

 

(g)    Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving of any notice pursuant to Section 3(d).

 

(h)    If NASDR Rule 2710 requires any broker-dealer to make a filing prior to executing a sale by a Holder, the Company shall (i) make an Issuer Filing with the NASDR, Inc. Corporate Financing Department pursuant to proposed NASDR Rule 2710(b)(10)(A)(i), (ii) respond within five Trading Days to any comments received from NASDR in connection therewith, and (iii) pay the filing fee required in connection therewith.

 

(i)     Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the Registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by each Registration Statement; provided, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction.

 

(j)     If requested by the Holders, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.

 

(k)    Upon the occurrence of any event contemplated by this Section 3, as promptly as reasonably possible under the circumstances taking into account the Company’s good faith assessment of any adverse consequences to the Company and its stockholders of the premature disclosure of such event, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with clauses (iii) through (vi) of Section 3(d) above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, then the Holders shall suspend use of such Prospectus.  The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable.  The Company shall be entitled to exercise its right under this Section 3(k) to suspend the availability of a Registration Statement and Prospectus, subject to the payment of partial liquidated damages pursuant to Section 2(b), for a period not to exceed 60 calendar days (which need not be 

 

consecutive days) in any 12 month period.

 

	
            (l)
 	
            Comply with all applicable rules and regulations of the Commission.
 

 

(m)   The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if required by the Commission, the natural persons thereof that have voting and dispositive control over the Shares. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three Trading Days of the Company’s request, any liquidated damages that are accruing at such time as to such Holder only shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended as to such Holder only, until such information is delivered to the Company.

 

4.           Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with any Trading Market on which the Common Stock is then listed for trading, (B) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with
Blue Sky qualifications or exemptions of the Registrable Securities) and (C) if not previously paid by the Company in connection with an Issuer Filing, with respect to any filing that may be required to be made by any broker through which a Holder intends to make sales of Registrable Securities with NASD Regulation, Inc. pursuant to the NASD Rule 2710, so long as the broker is receiving no more than a customary brokerage commission in connection with such sale, (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in a Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement.  In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder.  In no event shall the Company be responsible for any broker or similar commissions of any Holder or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders.

 

	
            5.
 	
            Indemnification
 

 

(a)    Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, members, partners, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, members, shareholders, partners, agents and employees (and any
other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to (1) any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, or (2) any 

 

violation or alleged violation by the Company of the Securities Act, Exchange Act or any state securities law, or any rule or regulation thereunder, in connection with the performance of its obligations under this Agreement, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (ii) in the case of an
occurrence of an event of the type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d).  The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding arising from or in connection with the transactions contemplated by this Agreement of which the Company is aware.

 

(b)    Indemnification by Holders. Absent any negligence or misconduct by the Company, each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: (x) such Holder’s failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or (ii) to the extent that such information relates to such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (ii) in the case of an occurrence of an event of
the type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

 

(c)    Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have prejudiced the Indemnifying Party.

 

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless:  (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both 

 

such Indemnified Party and the Indemnifying Party, and counsel to the Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of no more than one separate counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed.  No Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

 

Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party; provided, that the Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is judicially determined to be not entitled to indemnification hereunder.

 

(d)    Contribution. If the indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless for any Losses, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission
of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission.  The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

 

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

 

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

 

	
            6.
 	
            Miscellaneous
 

 

(a)    Remedies.  In the event of a breach by the Company or by a Holder, of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement.  The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses 

 

incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall not assert or shall waive the defense that a remedy at law would be adequate.

 

(b)    No Piggyback on Registrations. Except as set forth on Schedule 6(b) attached hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the initial Registration Statement other than the Registrable Securities.  The Company shall not file any other registration statements until the date that is the later of (i) 90 days after the Effective Date or (ii) the effective date of the Reverse Split, provided that this Section 6(b) shall not prohibit the Company from filing amendments to registration statements already filed.

 

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

 

(d)    Discontinued Disposition. Each Holder agrees by its acquisition of Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(d)(iii) through (vi), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus (as it may have been supplemented or amended) may be resumed.  The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as it practicable.  The Company agrees and acknowledges that any periods during which the Holder is required to
discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(b).

 

(e)    Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the stock option or other employee benefit plans, then the Company shall send to each Holder a written notice of such determination
and, if within fifteen days after the date of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered; provided, however, that, the Company shall not be required to register any Registrable Securities pursuant to this Section 6(e) that are eligible for resale pursuant to Rule 144(k) promulgated under the Securities Act or that are the subject of a then effective Registration Statement.

 

(f)     Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of at least 67% of the then outstanding Registrable Securities.  Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of all of the Registrable Securities to which such waiver or consent relates; provided,
however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. 

 

(g)    Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the Purchase Agreement.  

 

(h)    Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign (except by merger) its rights or obligations hereunder without the prior written 

 

consent of all of the Holders of the then-outstanding Registrable Securities. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement.

 

(i)     No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries has entered, as of the date hereof, nor shall the Company or any of its Subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof.  Except as set forth on Schedule 6(i), neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full.

 

(j)     Execution and Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

 

(k)    Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be determined in accordance with the provisions of the Purchase Agreement.

 

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

 

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

 

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

 

(o)    Independent Nature of Holders’ Obligations and Rights. The obligations of each Holder hereunder are several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Holders are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Holder shall be entitled to protect and enforce its
rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose.

 

********************

 

 

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

 

                

ORTEC INTERNATIONAL, INC.

 

By:__________________________________________

	
             
	
            Name:
 
	
            Title:
 	
             

			

 

[SIGNATURE PAGE OF HOLDERS FOLLOWS]

 

 

 

[SIGNATURE PAGE OF HOLDERS TO ORTN RRA]

 

Name of Holder: __________________________

Signature of Authorized Signatory of Holder: __________________________

Name of Authorized Signatory: _________________________

Title of Authorized Signatory: __________________________

 

 

[SIGNATURE PAGES CONTINUE]

 

 

 

 

ANNEX A

 

Plan of Distribution

Each Selling Stockholder (the “Selling Stockholders”) of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the Over the Counter Bulletin Board or any other stock exchange, market or trading facility on which the shares are traded or in private transactions.  These sales may be at fixed or negotiated prices.  A Selling Stockholder may use any one or more of the following methods when selling shares:

 

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

 
 

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

 
 

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

 
 

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

 
 

	
             
 	
            •
 	
            privately negotiated transactions;
 

 
 

	
             
 	
            •
 	
            settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
 

 
 

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

 
 

	
             
 	
            •
 	
            through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; 
 

 
 

	
             
 	
            •
 	
            a combination of any such methods of sale; or
 

 
 

	
             
 	
            •
 	
            any other method permitted pursuant to applicable law.
 

 

The Selling Stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage 

 

commission in compliance with NASDR Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.  

In connection with the sale of the 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 the 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 Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales.  In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.  Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

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

Because Selling Stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder.  In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus.  There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Stockholders.

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the Selling Stockholders without registration and without regard to any volume limitations by reason of Rule 144(k) under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect.  The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution.  In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Stockholders or any other person.  We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

 

 

 

Annex B

ORTEC INTERNATIONAL, INC.

Selling Securityholder Notice and Questionnaire

The undersigned beneficial owner of common stock, par value $0.001 per share (the “Common Stock”), of Ortec International, Inc., a Delaware corporation (the “Company”), (the “Registrable Securities”) understands that the Company has filed or intends to file with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 or SB-2 (the “Registration Statement”) for the registration and resale under Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”), of the Registrable Securities, in accordance
with the terms of the Registration Rights Agreement, dated as of March ___, 2006, 2006 (the “Registration Rights Agreement”), among the Company and the Purchasers named therein.  A copy of the Registration Rights Agreement is available from the Company upon request at the address set forth below.  All capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Registration Rights Agreement.

Certain legal consequences arise from being named as a selling securityholder in the Registration Statement and the related prospectus.  Accordingly, holders and beneficial owners of Registrable Securities are advised to consult their own securities law counsel regarding the consequences of being named or not being named as a selling securityholder in the Registration Statement and the related prospectus.

NOTICE

The undersigned beneficial owner (the “Selling Securityholder”) of Registrable Securities hereby elects to include the Registrable Securities owned by it and listed below in Item 3 (unless otherwise specified under such Item 3) in the Registration Statement.

 

 

The undersigned hereby provides the following information to the Company and represents and warrants that such information is accurate:

QUESTIONNAIRE

 

	
            1.
 	
            Name.
 

 
 

	
             
 	
            (a)
 	
            Full Legal Name of Selling Securityholder
 

 

	
             
 
	
             
 

 

 

	
             
 	
            (b)
 	
            Full Legal Name of Registered Holder (if not the same as (a) above) through which Registrable Securities Listed in Item 3 below are held:
 

 

	
             
 
	
             
 

 

 

	
             
 	
            (c)
 	
            Full Legal Name of Natural Control Person (which means a natural person who directly or indirectly alone or with others has power to vote or dispose of the securities covered by the questionnaire):
 

 

	
             
 
	
             
 

 

2.  Address for Notices to Selling Securityholder:

	
             
 
	
             
 
	
             
 
	
            Telephone:                                    
 
	
            Fax:                           
 
	
            Contact Person:           
 

 

3.  Beneficial Ownership of Registrable Securities:

 

	
             
 	
            (a)
 	
            Type and Number of Registrable Securities beneficially owned (not including the Registrable Securities that are issuable pursuant to the Purchase Agreement):
 

 

	
             
 
	
             
 
	
             
 
	
             
 

 

 

 

4.  Broker-Dealer Status:

 

	
             
 	
            (a)
 	
            Are you a broker-dealer?
 

 

	
            Yes  
 	
            o
 	
            No  
 	
            o
 

 

	
             
 	
            (b)
 	
            If “yes” to Section 4(a), did you receive your Registrable Securities as compensation for investment banking services to the Company.
 

 

	
            Yes  
 	
            o
 	
            No  
 	
            o
 

 

	
             
 	
            Note:
 	
            If no, the Commission’s staff has indicated that you should be identified as an underwriter in the Registration Statement.
 

 
 

	
             
 	
            (c)
 	
            Are you an affiliate of a broker-dealer?
 

 

	
            Yes  
 	
            o
 	
            No  
 	
            o
 

 

	
             
 	
            (d)
 	
            If you are an affiliate of a broker-dealer, do you certify that you bought the Registrable Securities in the ordinary course of business, and at the time of the purchase of the Registrable Securities to be resold, you had no agreements or understandings, directly or indirectly, with any person to distribute the Registrable Securities?
 

 

	
            Yes  
 	
            o
 	
            No  
 	
            o
 

 

	
             
 	
            Note:
 	
            If no, the Commission’s staff has indicated that you should be identified as an underwriter in the Registration Statement.
 

 

5.  Beneficial Ownership of Other Securities of the Company Owned by the Selling Securityholder.

Except as set forth below in this Item 5, the undersigned is not the beneficial or registered owner of any securities of the Company other than the Registrable Securities listed above in Item 3.

 

	
             
 	
            (a)
 	
            Type and Amount of Other Securities beneficially owned by the Selling Securityholder:
 

 

	
             
 
	
             
 
	
             
 

 

 

 

 

6.  Relationships with the Company:

Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (owners of 5% of more of the equity securities of the undersigned) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.

State any exceptions here:

	
             
 
	
             
 
	
             
 

 

The undersigned agrees to promptly notify the Company of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof at any time while the Registration Statement remains effective.

By signing below, the undersigned consents to the disclosure of the information contained herein in its answers to Items 1 through 6 and the inclusion of such information in the Registration Statement and the related prospectus and any amendments or supplements thereto.  The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the Registration Statement and the related prospectus.

IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent.

	
            Dated:
 	
            Beneficial Owner:
 

 

	
            By:
 	
             

	
             
	
            Name:
 
	
             
	
            Title:
 	
             

				

 

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

[Company counsel]

 

 

 

 

 

 

 

EXHIBIT C           

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

 

COMMON STOCK PURCHASE WARRANT

 

To Purchase __________ Shares of Common Stock of

[__________

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, _____________ (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to the close of business on the fifth anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Ortec International, Inc., a Delaware corporation (the “Company”), up to ______ shares (the “Warrant
Shares”) of Common Stock, par value $0.001 per share, of the Company (the “Common Stock”).  The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).  

Section 1.                Definitions.  Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the “Purchase Agreement”), dated March ___, 2006, among the Company and the purchasers signatory thereto.

	
            Section 2.
 	
            Exercise.
 

a)      Exercise of Warrant.  Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed  hereto (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); and, within 3 Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received  payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank.
Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in 

 

full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within 3 Trading Days of the date the final Notice of Exercise is delivered to the Company.  Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased.  The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases.  The Company shall deliver any objection to any Notice of Exercise Form within 1 Business Day of receipt of such notice.  In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any
assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

b)      Exercise Price.  The exercise price per share of the Common Stock under this Warrant shall be $0.50, subject to adjustment hereunder (the “Exercise Price”).

c)      Cashless Exercise.  If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 (A) = the VWAP on the Trading Day immediately preceding the date of such election;

 

(B) =  the Exercise Price of this Warrant, as adjusted; and 

 

(X) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise.

 

 

	
            d)
 	
            Exercise Limitations.
 

 

	
             
 	
            i.
 	
            Holder’s Restrictions.  The Company shall not effect any exercise of this Warrant, and a  Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2(c) or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, such Holder (together with such Holder’s Affiliates, and any other person or entity acting as a group together with such Holder or any of such Holder’s Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such Holder and its Affiliates shall include the number of
shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by such Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other  Preferred Stock or Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Holder or any of its affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 2(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by a Holder that the Company is not representing to such Holder that
such calculation is in compliance with Section 13(d) of the Exchange Act and such Holder is solely responsible for any schedules required to be filed in accordance therewith.   To the 
 

 

 

extent that the limitation contained in this Section 2(d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder together with any Affiliates) and of which a portion of this Warrant is exercisable shall be in the sole discretion of a Holder, and the submission of a Notice of Exercise shall be deemed to be each Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination.   In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder.  For purposes of this Section 2(d), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to such Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by such Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock
was reported.  The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant.  The Beneficial Ownership Limitation provisions of this Section 2(d)(i) may be waived by such Holder, at the election of such Holder, upon not less than 61 days’ prior notice to the Company to change the Beneficial Ownership Limitation to 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant, and the provisions of this Section 2(d) shall continue to apply.  Upon such a change by a Holder of the Beneficial Ownership Limitation from such 4.99% limitation to such 9.99% limitation, the Beneficial Ownership Limitation may not be further waived by such Holder.  The provisions of this paragraph shall be construed and implemented in a
manner otherwise than in strict conformity with the terms of this Section 2(d)(i) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

	
            e)
 	
            Mechanics of Exercise.
 

i.       Authorization of Warrant Shares.  Subject to receipt of Authorized Share Approval, the Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).  

ii.      Delivery of Certificates Upon Exercise.  Certificates for shares purchased hereunder shall be transmitted by the transfer agent of the Company to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is a participant in such system, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise within 3 Trading Days from the delivery to the 

 

Company of the Notice of Exercise Form, surrender of this Warrant (if required) and payment of the aggregate Exercise Price as set forth above (“Warrant Share Delivery Date”).  This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company.  The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(e)(vii) prior to the issuance of such shares, have been paid.  

iii.     Delivery of New Warrants Upon Exercise.  If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iv.     Rescission Rights.  If the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 2(e)(iv) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

v.       Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise.  In addition to any other rights available to the Holder, if the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder.  For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause
(1) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss.  Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

vi.     No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up 

 

to the next whole share.

vii.    Charges, Taxes and Expenses.  Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

viii.   Closing of Books.  The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

	
            Section 3.
 	
            Certain Adjustments.
 

a)      Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (A) pays a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (B) subdivides outstanding shares of Common Stock into a larger number of shares, (C) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted.  Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

b)      Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase or sell or grant any right to reprice its securities, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Exercise Price (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced and only reduced to equal the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise Price payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price prior to such adjustment.  Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued.  Notwithstanding the foregoing, no
adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt Issuance.  The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this section, indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice the “Dilutive Issuance Notice”).  For purposes of clarification, whether or not the Company provides a Dilutive Issuance 

 

Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise.

c)      Subsequent Rights Offerings.  If the Company, at any time while the Warrant is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the VWAP at the record date mentioned below, then the Exercise Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of
shares which the aggregate offering price of the total number of shares so offered (assuming receipt by the Company in full of all consideration payable upon exercise of such rights, options or warrants) would purchase at such VWAP.  Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants. 

d)      Pro Rata Distributions.  If the Company, at any time prior to the Termination Date, shall distribute to all holders of Common Stock (and not to Holders of the Warrants) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the
then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith.  In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock.  Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

e)      Fundamental Transaction. If, at any time while this Warrant is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder, (a) upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event or (b) if the Company is acquired in an all cash transaction, cash equal to the value of this Warrant as determined in accordance with
the Black-Scholes option pricing formula.  For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration.  If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction.  To the extent necessary to 

 

effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to exercise such warrant into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(d) and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.

f)       Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

g)      Voluntary Adjustment By Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

	
            h)
 	
            Notice to Holders.  
 

i.       Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to each Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. [If the Company issues a variable rate security, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase Agreement).

ii.      Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of
record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice.  The Holder is entitled to exercise this Warrant during the 20-day period commencing on the date of such notice to the effective date of the event triggering such notice.

 

 

	
            Section 4.
 	
            Transfer of Warrant.
 

a)      Transferability.  Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled.  A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.  

b)      New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney.  Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

c)      Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

d)      Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the
effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the Securities Act or a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act.

	
            Section 5.
 	
            Miscellaneous.
 

a)      No Rights as Shareholder Until Exercise.  This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof as set forth in Section 2(e)(ii).  

b)      Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

c)      Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be 

 

taken or such right may be exercised on the next succeeding Business Day.

	
            d)
 	
            Authorized Shares.  
 

Subject to receipt of Authorized Share Approval, the Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant.  The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the
Common Stock may be listed.  

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities 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 actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.  Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

e)      Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement.

f)       Restrictions.  The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

g)      Nonwaiver and Expenses.  No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date.  If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights,
powers or remedies hereunder.

h)      Notices.  Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement.

 

 

i)       Limitation of Liability.  No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

j)       Remedies.  Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

k)      Successors and Assigns.  Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.

l)       Amendment.  This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

m)     Severability.  Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

n)      Headings.  The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

********************

 

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

 

Dated:  March ___, 2006

 

	
            ORTEC INTERNATIONAL, INC.
 

 

 

	
            By:__________________________________________
 
	
             
	
            Name:
 	
             

	
             
	
            Title:
 	
             

					

 

 

 

 

 

NOTICE OF EXERCISE

 

	
            To:
 	
            Ortec international, inc.
 

 

(1)         The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

	
            (2)
 	
            Payment shall take the form of (check applicable box):
 

o in lawful money of the United States; or

o [if permitted] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3)         Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

	
            _______________________________
 

 

 

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

 

	
            _______________________________
 

 

	
            _______________________________
 

 

	
            _______________________________
 

 

 (4)  Accredited Investor.  The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: ________________________________________________________________________

Signature of Authorized Signatory of Investing Entity: _________________________________________________

Name of Authorized Signatory: ___________________________________________________________________

Title of Authorized Signatory: ____________________________________________________________________

Date: ________________________________________________________________________________________

 

 

 

 

ASSIGNMENT FORM

 

(To assign the foregoing warrant, execute

this form and supply required information. 

Do not use this form to exercise the warrant.)

 

 

FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

_______________________________________________ whose address is

 

_______________________________________________________________.

 

 

_______________________________________________________________

 

	
            Dated:  ______________, _______
 

 

 

	
            Holder’s Signature:
 	
            _____________________________
 

 

	
            Holder’s Address:
 	
            _____________________________
 

 

	
            _____________________________
 

 

 

Signature Guaranteed:  ___________________________________________

 

NOTE:  The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company.  Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 

 

 

 

 

 

 

EXHIBIT D

 

FORM OF LEGAL OPINION

[List of Purchasers]

 

 

Ladies and Gentlemen:

 

We have acted as counsel to Ortec International, Inc., a Delaware corporation (the “Company”), in connection with the execution and delivery by the Company of the Securities Purchase Agreement dated as of March 16, 2006 (the “Agreement”), by and among the Company and the purchasers identified on the signature pages thereto (the “Purchasers”).  This opinion is given to you pursuant to Section 2.2(a)(ii) of the Agreement.  (Capitalized terms not otherwise defined herein are defined as set forth in the Agreement.)

 

We have participated in the preparation and negotiation of the Agreement and the Exhibits and Schedules thereto, and the other documents referred to therein.  We also have examined such certificates of public officials, corporate documents and records and other certificates, opinions, agreements and instruments and have made such other investigations as we have deemed necessary in connection with the opinions hereinafter set forth.

 

We have assumed the genuineness of all signatures (other than those of officers of the Company) and the authenticity of all items submitted to us as originals and the conformity with originals of all items submitted to us as copies.  In making our examination of the Transaction Documents, we have assumed that you each have authority to execute and deliver, and to perform and observe the provisions of, the Transaction Documents, and have duly authorized, executed and delivered the Transaction Documents to which each of you is a party, and that the Transaction Documents to which each of you is a party constitute the legal, valid and binding obligations of each of you enforceable against each of you in accordance with their terms.

 

Whenever our opinion herein with respect to the existence or absence of facts is indicated to be based on our knowledge, or of which we are aware, it is intended to signify that, in the course of our representation of the Company and its subsidiaries in connection with the Agreement, and numerous other matters, none among Gabriel Kaszovitz, Saul Kaszovitz, Larry Miller or Irving Rothstein has acquired actual knowledge of the existence or absence of such facts.  Please be advised that the above named persons are the only attorneys of this firm who have been actively engaged in the representation of either the Company or its subsidiaries in connection with this or other matters.  While we have not undertaken any independent investigation to determine the existence or absence of such facts, and no inference as to our knowledge of the existence or absence of such facts should be drawn from
the fact of our representation of the Company and its subsidiaries, whenever we refer to our knowledge with respect to the 

 

existence or absence of facts, it is after due inquiry, and based upon Gabriel Kaszovitz's extensive familiarity with the Company’s and its subsidiaries’ business.

 

Based on the foregoing and upon such investigation as we have deemed necessary, we give you our opinion as follows:

 

The Company is a corporation duly organized, validly existing and in good standing under the laws of Delaware.  The Company has all requisite power and authority, and to our knowledge all material governmental licenses, authorizations, consents and approvals, required to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted (all as described in the Company’s Annual Report on Form 10-KSB for its fiscal year ended December 31, 2004). The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to qualify could have a Material Adverse Effect on the Company.

Each of the following subsidiaries of the Company (the “Subsidiaries”) is a corporation, duly organized and in good standing under the laws of the state of organization, as noted: Orcel LLC – Delaware; ORTN Acquisition Corp. - Delaware.

The Company has all requisite power and authority to execute, deliver and perform the Transaction Documents, to issue, sell and deliver the Preferred Stock, the Warrants and, after the Authorized Share Approval, the Underlying Shares pursuant to the Transaction Documents and to carry out and perform its obligations under, and to consummate the transactions contemplated by, the Transaction Documents. 

All action, on the part of the Company, its directors and its stockholders necessary for the authorization, execution and delivery by the Company of the Transaction Documents, the authorization, issuance, sale and delivery of the Preferred Stock and the Warrants pursuant to the Agreement, and after the Authorized Share Approval, the issuance and delivery of the Underlying Shares, and the consummation by the Company of the transactions contemplated by the Transaction Documents has been duly taken.  The Transaction Documents have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with their terms, except (a) that such enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors’ rights in general and (b)
that the remedies of specific performance and injunctive and other forms of injunctive relief may be subject to equitable defenses.

The schedule annexed hereto as Schedule 3.1(c) accurately sets forth:

 

	
             
 	
            (a)
 	
            the number of shares of Common Stock and preferred stock the Company is authorized to issue.
 

 

 

 

	
             
 	
            (b)
 	
            the number of shares of Common Stock outstanding.  There are 6,272.0155 shares of Series D Convertible Preferred Stock outstanding which are convertible into 25,088,062 shares of Common Stock.
 

 
 

	
             
 	
            (c)
 	
            the number of shares of Common Stock the Company is obligated to issue pursuant to outstanding warrants, options and agreements.
 

 
 

	
             
 	
            (d)
 	
            the number of shares of Common Stock, and the number of shares of Common Stock issuable upon exercise of warrants, the Company will deliver upon closing the Hapto Acquisition.
 

 

All presently issued and outstanding shares of Common Stock and preferred stock have been duly authorized and validly issued and are fully paid and nonassessable and free of any preemptive or similar rights, and have been issued in compliance with applicable securities laws and regulations.  The Preferred Stock and Warrants which are being issued on the date hereof pursuant to the Agreement have been duly authorized and validly issued and are fully paid and nonassessable and free of preemptive or similar rights, and have been issued in compliance with applicable securities laws, rules and regulations.  After the Authorized Share Approval the Underlying Shares will be duly and validly authorized and reserved for issuance, and when issued in accordance with the conversion of the Preferred Stock or the exercise of the Warrants in accordance with their respective terms will be validly issued, fully paid and
nonassessable, and free of any preemptive or similar rights.  To our knowledge, except for rights described in Schedule 3.1(c), there are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire from the Company any capital stock or other securities of the Company, or any other agreements to issue any such securities or rights.  The rights, privileges and preferences of the Common Stock and the Preferred Stock are as stated in the Company’s Certificate of Incorporation and the Certificate of Designation establishing each outstanding series of preferred stock.

To our knowledge, the Company has filed all reports (the “SEC Reports”) required to be filed by it under Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  As of their respective filing dates, the SEC Reports complied in all material respects as to form with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder.

Based in part upon the representations of the Purchasers contained in the Agreement, the Preferred Stock, the Warrants and the Underlying Shares may be issued to the Purchasers without registration under the Securities Act of 1933, as amended. 

The execution, delivery and performance by the Company of, and the compliance by the Company with the terms of, the Transaction Documents and the issuance, sale and delivery of the Preferred Stock, the Warrants and, after the Authorized Share Approval, the Underlying Shares, pursuant to the Agreement do not (a) conflict with or result in a violation of any provision of law, rule or regulation having applicability to the Company or its Subsidiaries or of the certificate of incorporation or by-laws or other similar organizational documents of the Company or its Subsidiaries, (b) conflict with, result in a breach of or constitute a default (or an 

 

event which with notice or lapse of time or both would become a default) under, or result in or permit the termination or modification of, any agreement, instrument, order, writ, judgment or decree known to us to which the Company or its Subsidiaries is a party or is subject or (c) result in the creation or imposition of any lien, claim or encumbrance on any of the Company’s or its Subsidiaries’ assets or properties. 

To our knowledge, there is no claim, action, suit, proceeding, arbitration, investigation or inquiry, pending or threatened, before any court or governmental or administrative body or agency, or any private arbitration tribunal, against the Company or its Subsidiaries, or any of its officers, directors or employees (in connection with the discharge of their duties as officers, directors and employees), or affecting any of its properties or assets.

No consent, license, permit, waiver, approval or authorization of, or designation, declaration, registration or filing with, any court, governmental or regulatory authority, or self-regulatory organization, is required in connection with the valid execution, delivery and performance by the Company of the Transaction Documents, or the offer, sale, issuance or delivery of the Preferred Stock, the Warrants and, other than the Authorized Share Approval, the Underlying Shares or the consummation of the transactions contemplated thereby.

The Company is not an Investment Company within the meaning of the Investment Company Act of 1940, as amended.

 

 

	
            Very truly yours,
 

 

 

 

 

 

 

 

 

 

 

	
            EXHIBIT E
 

 

FORM OF LOCK-UP AGREEMENT

March __, 2006

 

To: The Purchasers of the Company’s Series E Preferred Stock

 

 

 

	
             
 	
            Re:
 	
            Securities Purchase Agreement dated March __, 2006 (the “Agreement”) by and among, Ortec International, Inc., a Delaware corporation (the “Company”) and the purchasers signatory thereto (each, a “Purchaser” and collectively referred to as the “Purchasers”) 
 

 

Ladies and Gentlemen:

Defined terms not otherwise defined herein (the “Letter Agreement”) shall have the meanings set forth in the Agreement.  Pursuant to Section 2.2(a) of the Agreement and in satisfaction of a condition of the  Purchasers’ obligations under the Agreement, the undersigned irrevocably agrees with the Purchasers that, from the date hereof until the date that is the twelve month anniversary of the Effective Date (such period, the “Restriction Period”), the undersigned will not sell, offer, pledge, contract to sell, grant any option for the sale of, transfer or otherwise dispose of any of the Common Stock beneficially owned by, or issuable to, the undersigned (the “Securities”); provided, however, that the undersigned shall have the right to sell, offer, pledge, contract to sell, grant any option for the sale of, transfer or otherwise dispose of shares of the Common Stock beneficially owned by, or issuable to, the undersigned (the “Excluded Shares”) that together with all other shares of Common Stock sold, transferred or otherwise disposed of by all persons who on the date hereof are executive officers, directors or shareholders owning more than 10% of the issued and outstanding shares of Common Stock, (together with the undersigned the “Restricted Persons”), during the Restriction Period aggregate not more than 4,000,000 shares.  

The Company hereby agrees to notify its transfer agent of the provisions of this Letter Agreement.  The undersigned acknowledges and agrees that the Company will require the Company’s transfer agent to place a stop transfer instruction on all Securities beneficially owned by the undersigned, reflecting this Letter Agreement, until the end of the Restriction Period, so as to be able to enforce the aggregate limit of shares which may be so sold.  This Letter Agreement shall be binding on successors and assigns of the undersigned with respect to the Securities (other than the Excluded Shares) and any such successor or assign shall enter into a similar agreement for the benefit of the Purchasers.

ORTEC LOCKUP LETTER SIGNATURE PAGE

 

Very truly yours,

 

	
            By:
 	
             

	
             
	
            Name:
 
			

 

Acknowledged and agreed to:

Ortec International, Inc.

 

By:__________________________________________

	
            Name:
 
	
             
	
            Title:
 	
             

			

 

 

 

EXHIBIT F

ESCROW DEPOSIT AGREEMENT

THIS ESCROW AGREEMENT (the “Agreement”) dated this ___ day of _____ 2006, by and between Rodman & Renshaw, LLC (“Rodman” or “Placement Agent”), having an address at 1270 Avenue of the Americas, 16th Floor, New York, NY 10020, Ortec International, Inc., a Delaware corporation (the “Company”), having an office at 3960 Broadway, New York, NY 10032 and SIGNATURE BANK (“Signature Bank” or the “Escrow Agent”), a New York State chartered bank and having an office at, 261 Madison Avenue, New York, New York
10016. Capitalized terms used but not defined herein shall have the meanings set forth in the Purchase Agreement referred to in the first recital.

W I T N E S S E T H:

WHEREAS, pursuant to the terms of the Securities Purchase Agreement, dated on or about March ____, 2006 (the “Purchase Agreement”) the Company desires to sell (the “Offering”) a maximum of, in the aggregate, $8,000,000 of securities of the Company; and

WHEREAS, unless the Company consummates the Offering by April 19, 2006 (the “Termination Date”), the Offering will terminate and all funds will be returned to the Purchasers (hereinafter defined); and

 

WHEREAS, the Company and Placement Agent desire to establish an escrow account with the Escrow Agent into which the Company and Placement Agent shall instruct purchasers introduced to the Company by Placement Agent (the “Purchasers”) to deposit checks and other instruments for the payment of money made payable to the order of “Signature Bank as Escrow Agent for Ortec International, Inc.” and Escrow Agent is willing to accept said checks and other instruments for the payment of money in accordance with the terms hereinafter set forth; and

WHEREAS, each of the Company and Placement Agent, severally and not jointly, represents and warrants to the Escrow Agent that it has not stated to any individual or entity that the Escrow Agent’s duties will include anything other than those duties stated in this Agreement; and

WHEREAS, the Company and Placement Agent warrant to the Escrow Agent that a copy of each document that has been delivered to Purchasers and third parties that include Escrow Agent’s name and duties, has been attached hereto as Schedule I.

NOW, THEREFORE, IT IS AGREED as follows:

	
            1.
 	
            Delivery of Escrow Funds.
 

(a) Placement Agent and the Company shall instruct Purchasers to deliver to Escrow Agent checks made payable to the order of “Signature Bank, as Escrow Agent for Ortec International, Inc.” or wire transfer to Signature Bank, 261 Madison Avenue, New York, New York 10016, ABA No. 026013576 for credit to Signature Bank, as Escrow Agent for Ortec International, Inc., Account No. _____________, in each case, with the name, address and social security number or taxpayer identification number of the individual or entity making payment.  In the event any Purchaser’s address and/or social security number or taxpayer identification number are not provided to Escrow Agent by the Purchaser, then Placement Agent and/or the Company agree to promptly provide Escrow Agent with
such information in writing.  The checks or wire transfers shall be deposited into a non interest-bearing account at Signature Bank entitled “Signature Bank, as Escrow Agent for Ortec International, Inc.” (the “Escrow Account”).

	
            (b)
 	
            The collected funds deposited into the Escrow Account are referred to as the “Escrow  
 

 

 

Funds.”

(c)    The Escrow Agent shall have no duty or responsibility to enforce the collection or demand payment of any funds deposited into the Escrow Account.  If, for any reason, any check deposited into the Escrow Account shall be returned unpaid to the Escrow Agent, the sole duty of the Escrow Agent shall be to return the check to the Purchaser and advise the Company and Placement Agent promptly thereof.

2.      Release of Escrow Funds.  The Escrow Funds shall be paid by the Escrow Agent in accordance with the following:

(a)    In the event that the Company and Placement Agent advise the Escrow Agent in writing that the Offering has been terminated (the “Termination Notice”), the Escrow Agent shall promptly return the funds paid by each Purchaser to said Purchaser without interest or offset.

(b)    The Escrow Agent shall, upon receipt of written instructions, in the form of Exhibit A attached hereto or in form and substance satisfactory to the Escrow Agent, received from the Company and Placement Agent, pay the Escrow Funds in accordance with such written instructions, such payment or payments to be made by wire transfer within one (1) business day of receipt of such written instructions.

(c)    If by 3:00 P.M. Eastern time on the Termination Date, the Escrow Agent has not received written instructions from the Company and Placement Agent regarding the disbursement of the Escrow Funds, then the Escrow Agent shall promptly return the Escrow Funds to the Purchasers without interest or offset.  The Escrow Funds returned to each Purchaser shall be free and clear of any and all claims of the Escrow Agent.

(d)    Following the distribution of the Escrow Funds by the Escrow Agent in accordance with (b) of this Section 2 through the Termination Date, the Escrow Agent shall from time to time distribute any additional Escrow Funds, by wire transfer or bank check, in accordance with written instructions received from the Placement Agent and the Company in the form of Exhibit A or in form and substance satisfactory to the Escrow Agent.

(e)    The Escrow Agent shall not be required to pay any uncollected funds or any funds that are not available for withdrawal.

(f)     If the Termination Date or any date that is a deadline under this Agreement for giving the Escrow Agent notice or instructions or for the Escrow Agent to take action is not a Banking Day, then such date shall be the Banking Day that immediately preceding that date. A Banking Day is any day other than a Saturday, Sunday or a day that a New York State chartered bank is not legally obligated to be opened.  

3.      Acceptance by Escrow Agent.  The Escrow Agent hereby accepts and agrees to perform its obligations hereunder, provided that:

(a)     The Escrow Agent may act in reliance upon any signature believed by it to be genuine, and may assume that any person who has been designated by Placement Agent or the Company to give any written instructions, notice or receipt, or make any statements in connection with the provisions hereof has been duly authorized to do so.  Escrow Agent shall have no duty to make inquiry as to the genuineness, accuracy or validity of any statements or instructions or any signatures on statements or instructions.  The names and true signatures of each individual authorized to act singly on behalf of the Company and Placement Agent are stated in Schedule II, which is attached hereto and made a part hereof. The Company and Placement Agent may each remove or add one or
more of its authorized signers stated on Schedule II by notifying the Escrow Agent of such change in accordance with this Agreement, which notice shall include the true signature for any new authorized signatories.

 

 

(b)    The Escrow Agent may act relative hereto in reliance upon advice of counsel in reference to any matter connected herewith.  The Escrow Agent shall not be liable for any mistake of fact or error of judgment or law, or for any acts or omissions of any kind, unless caused by its willful misconduct or gross negligence.

(c)    Placement Agent and the Company agree to indemnify and hold the Escrow Agent harmless from and against any and all claims, losses, costs, liabilities, damages, suits, demands, judgments or expenses (including but not limited to reasonable attorney’s fees) claimed against or incurred by Escrow Agent arising out of or related, directly or indirectly, to this Escrow Agreement unless caused by the Escrow Agent’s gross negligence or willful misconduct.

(d)    In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder, the Escrow Agent shall be entitled to (i) refrain from taking any action other than to keep safely the Escrow Funds until it shall be directed otherwise by a court of competent jurisdiction, or (ii) deliver the Escrow Funds to a court of competent jurisdiction.

(e)    The Escrow Agent shall have no duty, responsibility or obligation to interpret or enforce the terms of any agreement other than Escrow Agent’s obligations hereunder, and the Escrow Agent shall not be required to make a request that any monies be delivered to the Escrow Account, it being agreed that the sole duties and responsibilities of the Escrow Agent shall be to the extent not prohibited by applicable law (i) to accept checks or other instruments for the payment of money and wire transfers delivered to the Escrow Agent for the Escrow Account and deposit said checks and wire transfers into the non-interest bearing Escrow Account, and (ii) to disburse or refrain from disbursing the Escrow Funds as stated above, provided that the checks received by the Escrow Agent have been collected and are
available for withdrawal.

4.      Resignation and Termination of the Escrow Agent.  The Escrow Agent may resign at any time by giving 30 days’ prior written notice of such resignation to Placement Agent and the Company.  Upon providing such notice, the Escrow Agent shall have no further obligation hereunder except to hold as depositary the Escrow Funds that it receives until the end of such 30-day period.  In such event, the Escrow Agent shall not take any action, other than receiving and depositing Purchasers checks and wire transfers in accordance with this Agreement, until the Company has designated a banking corporation, trust company, attorney or other person as successor.  Upon receipt of such written designation signed by Placement Agent and the Company, the Escrow Agent shall promptly deliver the Escrow Funds to such
successor and shall thereafter have no further obligations hereunder.  If such instructions are not received within 30 days following the effective date of such resignation, then the Escrow Agent may deposit the Escrow Funds held by it pursuant to this Agreement with a clerk of a court of competent jurisdiction pending the appointment of a successor.  In either case provided for in this paragraph, the Escrow Agent shall be relieved of all further obligations and released from all liability thereafter arising with respect to the Escrow Funds.

5.      Termination.  The Company and Placement Agent may terminate the appointment of the Escrow Agent hereunder upon written notice specifying the date upon which such termination shall take effect, which date shall be at least 30 days from the date of such notice.  In the event of such termination, the Company and Placement Agent shall, within 30 days of such notice, appoint a successor escrow agent and the Escrow Agent shall, upon receipt of written instructions signed by the Company and Placement Agent, turn over to such successor escrow agent all of the Escrow Funds; provided, however, that if the Company and Placement Agent fail to appoint a successor escrow agent within such 30-day period, such termination
notice shall be null and void and the Escrow Agent shall continue to be bound by all of the provisions hereof.  Upon receipt of the Escrow Funds, the successor escrow agent shall become the escrow agent hereunder and shall be bound by all of the provisions hereof and Signature Bank shall be relieved of all further obligations and released from all liability thereafter arising with respect to the Escrow Funds and under this Agreement.

	
            6.
 	
            Investment.  All funds received by the Escrow Agent shall be invested only in non-interest bearing
 

 

bank accounts at Signature Bank.

7.      Compensation.  Escrow Agent shall be entitled, for the duties to be performed by it hereunder, to a fee of $2,500, which fee shall be paid by the Company upon the signing of this Agreement. In addition, the Company shall be obligated to reimburse Escrow Agent for all fees, costs and expenses incurred or that become due in connection with this Agreement or the Escrow Account, including reasonable attorney’s fees.  Neither the modification, cancellation, termination or rescission of this Agreement nor the resignation or termination of the Escrow Agent shall affect the right of Escrow Agent to retain the amount of any fee which has been paid, or to be reimbursed or paid any amount which has been incurred or becomes due, prior to the effective date of any such modification, cancellation, termination,
resignation or rescission.  To the extent the Escrow Agent has incurred any such expenses, or any such fee becomes due, prior to any closing, the Escrow Agent shall advise the Company and the Company shall direct all such amounts to be paid directly at any such closing.

8.      Notices.  All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if sent by hand-delivery, by facsimile (followed by first-class mail), by nationally recognized overnight courier service or by prepaid registered or certified mail, return receipt requested, to the addresses set forth below:

If to Placement Agent:

Rodman & Renshaw, LLC

1270 Avenue of the Americas, 16th Floor

New York, NY 10020

Attention: ____________

Fax: ______________

 

If to the Company:

Ortec International, Inc.

3960 Broadway

New York, NY 10032

Attention: ____________

Fax: _______________

 

If to Escrow Agent:

Signature Bank

261 Madison Avenue

New York, New York 10016

Attention: Cliff Broder, Senior Vice President

Fax: (646) 822-1359

	
            9.
 	
            General.
 

(a)    This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be entirely performed within such State, without regard to choice of law principles.

(b)    This Agreement sets forth the entire agreement and understanding of the parties with respect to the matters contained herein and supersedes all prior agreements, arrangements and understandings relating thereto.

 

 

(c)    All of the terms and conditions of this Agreement shall be binding upon, and inure to the benefit of and be enforceable by, the parties hereto, as well as their respective successors and assigns.

(d)    This Agreement may be amended, modified, superseded or canceled, and any of the terms or conditions hereof may be waived, only by a written instrument executed by each party hereto or, in the case of a waiver, by the party waiving compliance.  The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same.  No waiver of any party of any condition, or of the breach of any term contained in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term of this Agreement.  No party may assign any rights, duties or
obligations hereunder unless all other parties have given their prior written consent.

(e)    If any provision included in this Agreement proves to be invalid or unenforceable, it shall not affect the validity of the remaining provisions.

(f)     This Agreement and any modification or amendment of this Agreement may be executed in several counterparts or by separate instruments and all of such counterparts and instruments shall constitute one agreement, binding on all of the parties hereto.

10.    Form of Signature. The parties hereto agree to accept a facsimile transmission copy of their respective actual signatures as evidence of their actual signatures to this Agreement and any modification or amendment of this Agreement; provided, however, that each party who produces a facsimile signature agrees, by the express terms hereof, to place, promptly after transmission of his or her signature by fax, a true and correct original copy of his or her signature in overnight mail to the address of the other party.

******************************

 

 

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first set forth above.

	
            ORTEC INTERNATIONAL, INC.
 	
            RODMAN & RENSHAW, LLC
 

 

 

	
            By:
 	
            ______________________________
 	
            By:
 	
            _______________________
 

 

	
             
 	
            Name: 
 	
            Name:   
 

 
 

	
             
 	
            Title:  
 	
            Title:   
 

 

Officer       

 

SIGNATURE BANK

	
            By:
 	
            _____________________________
 
	
             
	
            Name:
 	
             

	
             
	
            Title:
 	
             

					

 

	
            By:
 	
            _____________________________
 
	
             
	
            Name:
 	
             

	
             
	
            Title:
 	
             

					

 

 

Schedule I

 

OFFERING DOCUMENTS

Purchase Agreement and all exhibits and schedules thereto.

 

 

Schedule II

The Escrow Agent is authorized to accept instructions signed or believed by the Escrow Agent to be signed by any one of the following on behalf of the Company and Placement Agent.

Ortec International, Inc.

	
            Name
 	
            True Signature
 

 

	
             
 	
            _______________________ 
 	
            _____________________
 

 

 

Rodman & Renshaw, LLC

	
            Name
 	
            True Signature
 	
             

	
            ________________________
 	
            _____________________
 
				

 

	
            ________________________
 	
            _____________________
 

 

 

 

 

 

Exhibit A

 

	
            INSTRUCTIONS TO DISBURSE ESCROW FUNDS
 

 

 

Date: 

 

SIGNATURE BANK

261 Madison Avenue

New York, N.Y. 10016

Attn: Cliff Broder, Senior Vice President

 

Dear Mr. Broder:

 

In accordance with the terms of paragraph 2(b) of an Escrow Deposit Agreement dated ___ _______, by and among  Ortec International, Inc. (the “Company”), Rodman & Renshaw, LLC (“Placement Agent”), and Signature Bank (the “Escrow Agent”), the Company and Placement Agent hereby notifies the Escrow Agent that the ________ closing will be held on ___________ for gross proceeds of $_________.

 

PLEASE DISTRIBUTE FUNDS BY WIRE TRANSFER OR CHECK OR TRANSFER AS FOLLOWS (wire instructions attached if applicable):

 

 

	
            Ortec International, Inc.
 	
            $  
 

 

 

	
            Rodman & Renshaw, LLC
 	
            $  
 

 

	
            ____________
 	
            $  
 

 

 

Very truly yours,

 

Ortec International, Inc.

 

By:_____________

Name:__________

Title:____________

 

Rodman & Renshaw, LLC

 

By:_____________

Name:___________

Title:____________<PAGE>
                                                                    Exhibit 10.1

                         LEASE AND OPERATION AGREEMENT

                     SIGNED IN TEL-AVIV ON JULY 20TH, 2000

                                  B E T W E E N

OMRIX BIOPHARMACEUTICALS LTD.
whose offices are located at Building 14, Kiribati Weitzman, Nes Zion,
(hereinafter "OMRIX")

                                   ON THE ONE PART

                                      AND

MAGEN DAVID ADOM in Israel
a statutory, not - for - profit organization, existing under the Laws of the
State of Israel, whose headquarters are located at 60 Yigal Allon Street, Tel
Aviv (hereinafter "MDA")

                                   OF THE SECOND PART

WHEREAS   With the help and the donations of the friends and of the donors of
          MDA in the United States of America as well as others around the
          world, MDA has built and erected a blood fractionation plant belonging
          to MDA within the perimeter of the Tel Hashomer hospital
          (hereinafter: "THE PLANT"), occupying part of the Building belonging
          to MDA, for the purpose of achieving such goals and purposes as
          mentioned hereinafter; and

WHEREAS   Said goals and purposes are, primarily, the establishment of a blood
          fractionation plant in order to enable the manufacture from plasma
          collected in Israel and the supply therefrom of the Licensed Products
          (as defined herein below) to the population of Israel in times of
          peace as well as in times of crisis and/or war; and

WHEREAS   In light of the aforesaid, OMRIX declares that it understands the
          importance to MDA and to the state of Israel of supplying the Israeli
          population with the Licensed Products manufactured from plasma
          collected in Israel, and states and confirms that it bases its plans
          and calculations, among others, on selling to the Israeli market the
          Licensed Products manufactured from plasma collected in Israel.; and

WHEREAS   MDA and OCTAPHARMA A.G. entered, on September 2, 1990, into a
          know-how, License and Manufacturing Contract (hereinafter "THE
          CONTRACT"); and

      PORTIONS OF THIS EXHIBIT MARKED BY AN *** HAVE BEEN OMITTED PURSUANT
        TO A REQUEST FOR CONFIDENTIAL TREATMENT FILED SEPARATELY WITH THE
                       SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
                                     - 2 -

WHEREAS   On September 5, 1995, OCTAPHARMA A.G.. assigned its rights and
          duties under the Contract to OMRIX, except some duties and obligations
          towards MDA in respect of which OCTAPHARMA A.G. remains liable and
          obligated as specified in the abovementioned assignment document; and

WHEREAS   On February 27, 1996, MDA and OMRIX executed an Addendum to the
          Contract ("THE ADDENDUM"); and

WHEREAS   The parties hereto wished to drastically amend the modus operandi
          and as a result thereof also the relations between the parties, so
          that OMRIX shall lease from MDA, the Plant and the Premises (as
          hereinafter defined) and operate the Plant on its own, paying MDA a
          Rent and Lease Fee as provided herein; and

WHEREAS   Consequently the parties signed on April 17, 1997 an agreement
          which was subject to the approval of the MDA's executive committee
          ("THE 1997 AGREEMENT"); and

WHEREAS   Ever since, the parties acted in accordance with the provisions of
          the 1997 Agreement as if it had been approved by MDA's executive
          committee; and

WHEREAS   The parties wish to amend certain provisions of the 1997
          Agreement, among others, in order to further improve the level of
          cooperation between the parties; and

WHEREAS   The parties wish to enter into an agreement pertaining to the
          purchase by OMRIX, during the Term of this Agreement, of plasma from
          MDA; and

WHEREAS   Both parties hereby declare that they have the full right and
          authority to enter into this Agreement; and

WHEREAS   It is agreed that unless otherwise specifically indicated herein,
          and except for some duties and obligations towards MDA in respect of
          which OCTAPHARMA A.G. remains liable and obligated as specified in the
          aforementioned assignment documents, the 1997 Agreement replaced,
          substituted and came instead of the Contract and the Addendum; and

WHEREAS   The parties wish that this Agreement ("AGREEMENT") will replace,
          substitute, and come instead of the 1997 Agreement.

NOW THEREFORE THE PARTIES HERETO AGREE AS FOLLOWS:

1.     THE PREAMBLE, SCHEDULES AND DEFINITIONS

1.1    The preamble to this Agreement and the Schedules attached thereto form an
       integral part thereof and are as binding upon the parties as the
       Agreement itself.

1.2    The capitalized terms listed below shall have the meaning assigned to
       them, unless the context requires otherwise.

<PAGE>
                                     - 3 -

       LICENSED PRODUCTS (or PRODUCTS)- shall mean Licensed Products as defined
       in the Contract, with the exclusion of the words "Factor IX and such
       other products" from the definition therein.

       THE PLANT - as described in the first recital of this Agreement.

       THE PREMISES - The part of the Building hereby leased to OMRIX as marked
       in yellow on the plan of the Building attached hereto as SCHEDULE "A".

       THE BUILDING - The MDA Blood Services Center Building within the
       perimeter of the Tel Hashomer Hospital.

       SUPPLIES - Electricity, water, fuel, salt and other supplies, should they
       be agreed upon from time to time.

       SYSTEMS - The central systems located in the Building and serving the
       Building and the Plant, being at present as detailed in SCHEDULE C1
       attached hereto.

       EQUIPMENT - The machinery, equipment and instrumentation belonging to MDA
       and used for the Plant as detailed in Schedule C3 attached hereto.

       BIOLOGICAL GLUE - The Glue product produced and/or marketed by OMRIX
       under the trademark/trade name "Quixil" or under any other trademark
       and/or trade name.

       FACILITY ENGINEER - The person appointed or to be appointed by the
       parties hereto, acting as supervisor over all maintenance in the
       Building, including the Plant - as referred to in Sub Section 2.7A

       MAINTENANCE BODY - As defined in Section 2.7

       EFFECTIVE DATE - January 1st, 1997.

       ARBITRATOR - A single ruling arbitrator who shall be appointed by both
       parties. In case agreement cannot be reached as to the identity of the
       Arbitrator within 30 days as from the date on which a party hereto
       requests to refer a matter to arbitration, the issue shall be referred to
       the head of the Israeli Bar Association, who will appoint the Arbitrator.

       FDA APPROVAL - Registration by the United States Food and Drug
       Administration of the Biological Glue and permit to market the Biological
       Glue in the United States.

       TERM - Period of this agreement as referred to in Section 4

2.     THE LEASE OF THE PREMISES

       2.1    OMRIX hereby leases from MDA and MDA hereby lets to OMRIX, for
              the Term of this Agreement, the Premises in which the Plant is
              located.

<PAGE>
                                     - 4 -

       2.2    It is hereby understood that OMRIX may, in the future, require
              additional space in the Building. In such an event MDA will make
              its best efforts to accommodate OMRIX's requirements for
              additional space and the parties will negotiate in good faith a
              mutually agreeable arrangement for such space including the
              payment of rent therefore. Since the Effective Date, the parties
              have agreed that MDA shall lease to OMRIX additional space
              ("ADDITIONAL SPACE") as marked in yellow lines on SCHEDULE A. The
              additional rent in consideration of the Additional Space has been
              agreed to be $15 US per sq.m per month, and since OMRIX has
              undertaken to finance some construction work for MDA at a cost of
              $104,000 OMRIX shall be entitled to set off the additional rent
              against that amount. Said Additional Space shall be deemed for all
              intents and purposes to be part of the Premises, except with
              regard to the Rent and Lease Fee; the aforementioned fee with
              respect to the Additional Space and/or any future additional
              space, shall be paid, subject to the offset provisions referred to
              above, in addition to the Rent and Lease Fee, as set forth in
              section 7 hereunder.

       2.3    In addition to the Premises, MDA hereby grants OMRIX, for the
              duration of the Agreement, the non-exclusive passage rights in
              respect of other parts of the Building, as may be reasonably
              required by OMRIX, such as the warehouse entrance, the entrance
              to the Building, etc.

       2.4    Whereas the Premises and the Plant obtain their Supplies from the
              Systems, and it is the intention of the parties that all the
              Systems will continue, in the future, to supply both the Blood
              Bank Services and the offices of MDA on the one hand, and the
              Premises and Plant on the other hand, MDA hereby undertakes to
              provide for the professionally sufficient and adequate, continuous
              and uninterrupted supply of all the above Supplies to OMRIX during
              the duration of this Agreement.

              It was recognized that on the Effective Date, the mechanical state
              of the Plant and the Systems were deficient in terms of cooling
              capacity, specifically regarding the repair of the second chiller
              and the installation of a third chiller. The cost of the above
              units and the installation thereof, as well as the cost of
              rectifying the above deficiencies were borne by MDA. At MDA's
              request, OMRIX financed the above costs and has offset same,
              against amounts that were due to MDA from OMRIX.

              Both parties hereby confirm that MDA authorized OMRIX to purchase
              a third chiller, which was installed at the Premises/Plant. OMRIX
              financed the acquisition of the third chiller, the specifications
              and the price of which were already agreed upon by the parties,
              and has debited MDA for the amount paid by OMRIX for the above
              chiller. For the avoidance of any doubt it is hereby agreed and
              declared that the third chiller is not part of the Systems, and
              serves the Plant only.

              As the entrance to the Warehouse did not meet GMP standards and
              was modified to do so, the parties agreed about the installation
              of a door at the back entrance to the Premises, to be operated by
              means of remote control, and about the division of the costs
              thereof between them.

<PAGE>
                                     - 5 -

       2.5    MDA hereby acknowledges and confirms that any interruption of
              supply to OMRIX of any of the Supplies and/or prevention of access
              to the Premises and any other deed or misdeed of MDA or anybody on
              its behalf which might lead to the disruption of the operational
              activities of the Plant - which is designed and intended to
              operate 364 days a year, may cause OMRIX severe damages for which
              MDA shall be fully liable.

              In view of the above MDA hereby states and undertakes that under
              no circumstances will it disconnect or allow anybody else to
              disconnect or discontinue any of the Systems or the Supplies nor
              let any such System remain, for any period of time, out of order
              and/or inoperable, unless such interruption is absolutely required
              for the repair and maintenance and as far as such interruption
              could be foreseeable in advance, upon coordination with OMRIX.

       2.6    Without derogating from the generality of the above, MDA hereby
              undertakes to maintain, at all times, in good operating order and
              in compliance with FDA and EC GMP requirements all the Systems
              which will serve both MDA and OMRIX and will take whatever
              steps necessary - including replacement of defective or aging
              units, in order to ensure the uninterrupted supply of the
              Supplies. OMRIX declares that at the time of the signing of this
              Agreement, the maintenance is in compliance with EC GMP
              requirements. OMRIX further declares that it is not aware of any
              aspect of the maintenance, which is not in compliance with the FDA
              GMP requirements, except some items regarding which OMRIX has
              informed the Facility Engineer

              It is hereby agreed by the Parties that OMRIX shall share with MDA
              the costs of the Supplies and the costs of the operating and
              maintenance of the Systems. The division of the said costs between
              MDA and OMRIX shall be calculated in a manner as described below.
              MDA and OMRIX, respectively, will invoice each other monthly for
              the applicable charges with regard to said costs, paid by the
              invoicing party. The other Party will pay such invoiced costs
              within 30 days of the date of invoice, or offset same against
              amounts currently due to such invoicing party, provided that the
              invoicing party will provide the other Party with adequate proof
              of the payment of said underlying supplies and maintenance
              invoices.

              During the initial period starting from the Effective Date until
              December 31, 1997, the parties bore the cost of the Supplies and
              the operating cost of the Systems as follows: OMRIX ***% and MDA
              ***%. The same ratio shall prevail with respect to the cost of the
              Supplies, until either party requests the comparison and the
              re-examination of the consumption of the Supplies as set forth
              hereunder, against the consumption during calendar year 1995. Such
              consumption shall be quantified in terms of units used rather than
              monetary terms. It is agreed that, assuming MDA will not introduce
              new activities or significantly increased levels of consumption in
              its part of the Building, all the growth in consumption of the
              Supplies (in units - as opposed to price) shall be attributed to
              OMRIX. In view of the results of the above comparison, the parties
              shall make the necessary retroactive adjustments in respect of the
              calendar

<PAGE>
                                     - 6 -

              year which had been the subject of the comparison. Thereafter,
              such allocation percentage will be used for all future years
              unless either party significantly changes its level of activity.

              It is hereby clarified that the aforementioned comparison shall be
              made separately with regard to each of the Supplies.

              Without derogating from the aforesaid, each Party shall have the
              right to demand on an annual basis during any given year of the
              Term, that a new comparison of units be made and that a new
              allocation percentage be determined, if a Significant Change has
              occurred.

              A Significant Change shall be defined as a five percent (5%) or
              greater variation in unit consumption as compared to the previous
              applicable year in which the percentage had been established (such
              previous year shall be referred to as the "BASE YEAR"). Each
              Supply out of the following - fuel, water/sewage & electricity
              shall be separately examined and shall be separately subject to a
              new determination of the allocation percentage. All comparisons
              shall be made on a calendar year basis and if a Significant Change
              has occurred such change shall be retroactively adjusted for such
              one calendar year only. Any new allocation percentage so changed
              shall continue to be applied prospectively until the next such
              change with regard to the same Supply. The first comparison for
              the determination of a Significant Change of the allocation
              percentages with regard to each of the aforesaid Supplies shall
              use 1995 as the initial Base Year, Thereafter, subsequent
              comparisons shall be made against units consumed in the year in
              which the applicable ratio was last changed (i.e. the new Base
              Year with regard to same Supply).

              Since the parties have already reached an agreement with regard to
              the accounting up until December 31st, 1997 - the first review of
              the allocation percentages shall compare usage during the first
              year thereafter in which either party requests a new comparison,
              against 1995 usage. AN example is presented below for
              clarification, which assumes that all increases have been caused
              by OMRIX:

<TABLE>
<CAPTION>
                             FUEL         Electricity     Water/
                             Liters       KW/H            Sewage
                             ------       -----------     M(Delta)3
                                                          -------
<S>                          <C>          <C>             <C>
(1)  1998 Units              500,000       5,500,000       53,000

(2)  1995 Units               32,000       2,200,000       19,000
                             -------       ---------       -------

(3)  Difference (1) - (2)    468,000       3,300,000       34,000
                             =======       =========       ======

(4)  % Change vs. Base Year
     Units (3)/(2)              1463%            150%         179%
                             =======       =========       ======
     Allocation Change           Yes             Yes          Yes

(5)  Calculation of New
     Allocation Percentage
     to OMRIX = (3)/(1)           94%             60%          64%
                             =======       =========       ======
</TABLE>

<PAGE>
                                     - 7 -

              The percentages in (5) above will be used to re -allocate 1998
              amounts and will be prospectively used in 1999 pending future
              comparisons. Again in the interest of clarity an example of a 1999
              comparison is illustrated below (again all increases are assumed
              to be caused by OMRIX):

<TABLE>
<CAPTION>
                                Fuel         Electricity     Water/
                                Liters       KW/H            Sewage
                                ------       -----------     M(Delta)3
                                                             ---------
<S>                             <C>          <C>             <C>
(1)  1999 Units                  600,000      5,600,000       54,000

(2)  1998 Units                  500,000      5,500,000       53,000
                                 -------      ---------       -------

(3)  Difference( 1) - (2)        100,000        100,000        1,000
                                 =======      =========       ======

(4)  %Change vs. Base Year
     units (3)/(2)                    20%           1.8%        1.88%
                                 =======      =========       ======

     Allocation Change               Yes             No           No

(5)  Calculation of New
     Allocation % to OMRIX            95%           N/A          N/A
</TABLE>

              In years subsequent to the initial review, if all of the increases
              are attributed solely to OMRIX, the new allocation percentage
              shall be determined as follows: (current year units minus 1995
              units) divided by current year units.

              In Fuel it is (600,000 - 32,000) / 600,000 = 95%

              In the next year's comparison 1998 is still the Base year for
              Electricity & Water/Sewage but 1999 becomes the Base year for
              Fuel.

              The cost of maintenance and repair of the Systems, as well as the
              cost of the Maintenance Body and of the Facility Engineer, shall
              be divided between the parties, so that ***% of all such costs
              shall be borne by OMRIX, and ***% shall be borne by MDA.

              Provided, however, that if it appears that due to excessive use of
              the Systems or any of them by OMRIX, there has been a substantial
              increase in the cost of spare parts required for the maintenance
              of such System(s), in an amount exceeding $ 25,000 per annum, MDA
              shall have the right to demand that the question of the division
              of the cost of maintenance of such System(s) shall be reexamined
              by the parties and that following

<PAGE>
                                     - 8 -

              such I reexamination, if such claim is found justified, a new
              division of such costs shall be made.

       2.7    OMRIX undertakes to exercise reasonable care and to maintain the
              Premises in a proper way, fixing and repairing any damages to the
              Premises other than those caused by defective and/or
              unprofessionally made or installed parts of the Premises or of any
              installations therein. In addition, OMRIX shall replace and repair
              any damages caused by reasonable wear and tear which must be
              replaced/repaired in order to enable the continued operation of
              the Plant.

              Without derogating from the respective liability of each party to
              bear the cost of and the responsibility for maintenance and other
              works as stipulated above, it is hereby agreed, that the parties
              shall hire, for all maintenance which is the responsibility of
              MDA, as well as for all maintenance, fixing and repairing works,
              which are the responsibility of OMRIX under this sub- section 2.7
              and sub-section 3.2 hereinbelow as well as all relevant schedules,
              the services of one person or one entity only (hereinafter "the
              Maintenance BODY"). The parties hereby acknowledge, that currently
              the Maintenance Body is the Teus Group.

              In the event any one of the parties hereto chooses to
              dismiss/terminate the employment and/or relations with the Teus
              Group (or any subsequent Maintenance Body) or any employee
              thereof, the party demanding the dismissal/termination shall be
              obligated to submit to the other party a detailed written letter
              stating the reasons which are the basis for the requested
              dismissal/termination, and in such case - the other party's
              consent to such dismissal may not be unreasonably withheld.

              Upon THE dismissal/termination as aforesaid, the hiring of a
              substitute Maintenance Body and/or of a substitute employee of the
              Teus Group or of any subsequent Maintenance Body (the dismissal of
              whom was required by one of the parties) shall require the mutual
              consent of both parties.

              Without derogating from the above, in the event OMRIX believes
              that it is not able to assure or ascertain satisfactory
              maintenance of the Plant while observing the above mentioned
              mechanism of hiring/firing, OMRIX shall have the right to employ
              at its own cost and responsibility additional maintenance
              person/people who shall engage in the maintenance only of the
              Equipment, as well as the systems which only serve the
              Plant/Premises, provided however that such maintenance
              person/people shall be subject to the prior written approval of
              the Facility Engineer as to the professional capacity of the
              candidate, which approval shall not be unreasonably withheld. Such
              additional maintenance person/people shall be entitled to work
              within the maintenance workshop and all other work areas, which
              are normally used by the Maintenance Body, located in the
              Building.

              For the avoidance of doubt it is hereby clarified that all of the
              aforementioned maintenance people, whether jointly hired or hired

<PAGE>
                                     - 9 -

              separately by OMRIX - shall be subject to the professional
              supervision of the Facility Engineer.

       2.7A   The parties shall appoint, for the purpose of supervision over all
              maintenance works in the Building, including the Plant, the
              services of one person only (hereinafter: "the Facility
              Engineer"), and shall bear all costs pertaining to the employment
              of the Facility Engineer as stipulated above, i.e. - OMRIX shall
              bear ***% of all such costs and MDA shall bear ***% of all such
              costs.

              The Facility Engineer's responsibility shall be to ensure that the
              Plant, and all of the Systems and the Equipment contained therein
              are being maintained and upheld by the parties, by the Maintenance
              Body, and by the Facility Engineer himself in strict compliance
              with GMP requirements, The Facility Engineer, subject to executing
              a confidentiality agreement with OMRIX and with MDA separately,
              shall have the right to enter any part of the Building, including
              the Plant, in order to carry out his duties. Subject to the
              execution by the Facility Engineer of a confidentiality agreement
              satisfactory to OMRIX, both parties hereby undertake not to deny
              the Facility Engineer such access to any part of the Building.

              After execution of a Confidentiality Agreement satisfactory to
              OMRIX, the Facility Engineer shall be entitled to demand from each
              of the parties relevant documents and/or plans necessary in order
              to perform his duties, and the parties hereby undertake to comply
              with all such reasonable demands presented by the Facility
              Engineer.

              The parties hereby agree, that Engineer Meir Rappaport, is
              currently the Facility Engineer.

              Should Engineer Rappaport refuse to act as the Facility Engineer
              and/or is unable to do so for any reason whatsoever, then in such
              case the parties shall mutually appoint an alternative Facility
              Engineer.

              Each of the parties shall be entitled to request that the Facility
              Engineer be replaced. Any such request shall be accompanied by a
              detailed statement detailing the reasons for such request. If the
              other party does not agree to such request, the matter shall be
              referred to an Arbitrator. Any new Facility Engineer shall also
              be appointed mutually by both parties.

       2.7B   For the avoidance of doubt, it is hereby clarified that the terms
              "the Systems" and "the Supplies" indicating common systems and
              supplies, shall not include devices and/or equipment and/or the
              supplies generated therefrom, which are designated solely and
              which are used exclusively by and for one party only, even if same
              are not, wholly or partially located inside those parts of the
              Building actually held or occupied by such party. The systems
              which, at the present time, are designated for the sole use and
              responsibility of OMRIX are itemized in SCHEDULE C2 attached
              hereto.

<PAGE>
                                     - 10 -

              The aforesaid in this sub-section shall mean for all purposes of
              this agreement, inter alia, that said systems and/or supplies
              designated solely for the benefit and use of one party only, shall
              be deemed to be part of the equipment held by such party, and
              therefore the cost of the maintenance with regard to such systems,
              and/or the cost of such supplies, as the case may be, must be
              borne by such party.

              In case it is realized at any time that any System is actually
              used normally and continuously by one party, while the other
              party's use of such System is negligible, then the parties shall
              meet and if mutually agreed, it shall be deemed, for all intents
              and purposes, that such System is used solely by the party mostly
              using it.

       2.8    OMRIX's employees, sub-contractors, customers and visitors etc.,
              shall have at all times, free access to the Plant and the
              Building, and free access to and use of those common areas of the
              Building to which such people may reasonably need access to and/or
              use of. Any persons visiting the Building at the invitation of
              OMRIX will be accompanied by or supervised by an OMRIX employee or
              Maintenance Body employee while outside the Premises. MDA shall
              use its best efforts to obtain for OMRIX's employees the same
              approvals that it obtained for MDA's employees in order to enable
              them a free-of-charge entrance to the perimeter of the Tel
              Hashomer Hospital.

       2.9    MDA shall allow the commercial vehicles loading and unloading
              goods and products to and from the Plant, to load and unload
              freely at the part of the Building designated for that purpose. As
              far as parking of the vehicles of OMRIX's employees is concerned,
              MDA will secure the same rights for OMRIX's employees as for MDA's
              employees.

       2.10   OMRIX's employees shall not be entitled to enter the Blood Bank
              without prior coordination provided, however, that OMRIX'S
              employees and guests will have at all times free access to their
              rooms and offices, some of which are located in the Blood Services
              part of the Building.

              During the regular working hours OMRIX's employees and visitors
              shall enter the Plant through the main door of the Building, or at
              their discretion, through the back door. The access to the Plant
              at any time not within the regular working hours shall be through
              the back door only.

              OMRIX's employees will have, at any time, free access to the
              mechanical areas of the Building for the purpose of monitoring the
              Supplies and the Systems. However, except in cases of urgency,
              emergency or strike, OMRIX's employees shall not be entitled to
              engage in the maintenance of the Systems or interfere with the
              Supplies. Whenever OMRIX`s employees shall engage in the
              maintenance of the Systems, as provided above, it shall be at
              OMRIX's responsibility.

              OMRIX's employees shall have the access to any and all mechanical
              areas in the Building for the purpose of monitoring and/or
              maintaining systems and supplies and for monitoring and/or
              maintaining any Equipment, which are designated solely for or used
              for the most part by

<PAGE>
                                     - 11 -

              the Plant.

       2.11   The parties have executed an Acceptance Protocol describing the
              situation of the Plant, the Premises and the Systems, indicating
              the defects, which were known at that point of time. The above
              Acceptance Protocol shall be attached to this Agreement as
              SCHEDULE "B1". It has been agreed that in order to rectify the
              defects specified in Schedule B1 OMRIX's capital expenditures of
              $*** will be invoiced to MDA. Upon repayment or offset of the
              above amount, OMRIX shall have no further claim against MDA for
              the above defects and/or for any other defects that may be found.

       2.12   Notwithstanding section 2.11, other items were noted as defects of
              the Plant, Premises, and the Systems at the same time as the above
              and are detailed in SCHEDULE B2. It has been agreed that the items
              detailed therein will be treated as Discretionary Investments made
              by OMRIX according to Section 15 herein below, to the extent OMRIX
              has already or shall in fact repair such defects.

       2.13   It is hereby agreed that OMRIX shall be entitled to carry out from
              time to time construction changes, modifications and/or expansions
              of the Plant within the Premises, subject to observing the
              procedure outlined below.

              Once OMRIX decides to carry out construction changes and/or
              modification(s) in the Premises, it will submit to MDA for its
              approval the plans of any such changes or modifications. MDA shall
              not unreasonably object to any such works provided the plans
              submitted for its approval are accompanied by a statement of a
              construction engineer that such modifications/changes shall not
              adversely affect the Building or any part thereof. Any such
              changes or modifications shall be carried out by OMRIX at its own
              cost and responsibility.

              The aforementioned plans which shall be submitted by OMRIX, shall
              be submitted in stages as follows:

              The first stage shall be the basic and/or conceptual design of the
              required construction changes (and/or modifications) accompanied
              by a time schedule, which shall be submitted for MDA's approval
              prior to the commencement of construction (hereinafter: "THE BASIC
              DESIGN"). MDA will respond to the Basic Design within 14 days.
              Failing to do so will be deemed to be an approval of the Basic
              Design. In the event that MDA responds within said 14-day period
              with specific adverse issues, such issues will be resolved by
              OMRIX prior to the commencement of the construction
              changes/modifications. This process of resolution will be carried
              out as quickly and efficiently as reasonably possible by both
              parties.

              When available, OMRIX shall submit a detailed design to MDA
              (hereinafter: "THE DETAILED DESIGN");

<PAGE>
                                     - 12 -

              Should OMRIX desire to deviate from the Detailed Design during
              construction/modification, OMRIX shall submit all plans relating
              to the required deviation for MDA's approval;

              Not later than 45 days after completion of
              construction/modification, OMRIX shall submit to MDA "as made"
              plans and drawings with regard to the construction/modification,
              which had been undertaken.

              OMRIX shall indemnify MDA for any damages resulting from such
              construction changes. MDA agrees to maintain all plans and
              documents submitted to it by OMRIX as aforesaid as confidential
              information. Should MDA choose to use the services of an external
              engineering consultant in order to review OMRIX's
              construction/modification, then such consultant, who must be
              acceptable to OMRIX, shall be obligated to sign a confidentiality
              agreement with OMRIX as drafted by OMRIX's attorney.

       2.14   It is hereby agreed that OMRIX shall not be entitled to register a
              Long Term Lease ( ??? with the Land Registrar in respect of
              this Agreement.

       2.15   In utilizing access to and use of any part of the Building as
              permitted in sub-sections 2.3,2.7,2.8 and 2.10. OMRIX and its
              personnel shall observe all safety, security, and secrecy rules
              and regulations published by MDA from time to time and applicable
              to MDA'S employees in the Building. Such rules and regulations,
              which shall be prepared jointly by both parties hereto, shall be
              attached to this Agreement as of their publishing (and/or
              addition/modification),as Schedule C4(the "RULES").

       2.16   Should OMRIX wish to place or install items of equipment outside
              the Premises, whether necessitating structural changes in the
              Building or not necessitating such changes, it shall be entitled
              to do so upon the receipt of a prior written consent of MDA which
              shall not be unreasonably withheld. Once such a consent is
              granted, all the above provisions shall apply mutatis mutandis to
              such equipment and the installation thereof.

       2.17   Upon expiration or termination of this agreement for any reason
              before JANUARY 1st, 2007, OMRIX undertakes, if so required by MDA,
              to leave the plant in a good working condition, and capable of
              manufacturing all the Licensed Products. If the expiration or
              termination of this agreement occurs after January 1st, 2007,
              OMRIX shall hand over the plant to MDA in a good working
              condition. If however at such a point of time the plant will not
              be capable of manufacturing all the Licensed Products, and MDA
              wishes that Licensed Products or a Licensed Product should be
              manufactured at the plant, then OMRIX should participate in the
              cost of reinstating such missing manufacturing line in the maximum
              amount being 50% of the Grant to which OMRIX might be entitled
              according to the provisions of section 16.3.

3.     LEASE OF THE EQUIPMENT

<PAGE>
                                     - 13 -

       3.1    MDA hereby leases to OMRIX and OMRIX hereby leases from MDA, for
              the Term of the Agreement the machinery, equipment and
              instrumentation installed in the Plant and belonging to MDA,
              detailed in Schedule "C3"attached hereto (the "EQUIPMENT").

       3.2    OMRIX undertakes to exercise reasonable care while operating the
              Equipment and to maintain it in a proper and professional way in
              accordance with the manufacturers manuals and instructions and
              shall repair the Equipment, including replacement of parts, as
              may be necessary in order to ensure that the Equipment is in good
              operating condition at all times.

       3.3    OMRIX shall be entitled to remove and/or replace any item of
              Equipment as well as to add, replace or change any item of
              equipment or system installed in the Building by OMRIX, after
              giving ten days notice to the Facility Engineer about its
              intention to do so.

       3.4    Any item of Equipment which shall be removed BY OMRIX from the
              Plant shall be stored and maintained by OMRIX for possible future
              use. Alternatively, OMRIX will return such items of equipment to
              MDA.

       3.5    The aforesaid in sub-sections 3.3 and 3.4 shall apply mutatis
              mutandis to other items of equipment or systems owned partially or
              in their entirety by MDA.

       3.6    Should any removal or replacement of an item mentioned in
              sub-section 3.3 not involve any risk to other items of
              Equipment/equipment in the Plant and/or to the Systems, OMRIX
              shall have the right to remove or replace same at its own
              discretion and at its own responsibility. However, should such
              removal or replacement pose an adverse effect on other items
              and/or systems as aforesaid, OMRIX shall not be entitled to carry
              such removal or replacement without the prior written approval of
              MDA which shall not be unreasonably withheld. MDA shall reply to
              OMRIX's request within 14 days.

4.     THE TERM OF THE AGREEMENT

       The effective date of this Agreement is January 1, 1997 ("THE EFFECTIVE
       DATE") and unless terminated at an earlier date by OMRIX, in accordance
       with the provisions of Section 5 below, it will remain in force for a
       period of 18 years, i.e. until December 31,2014 (hereinafter: "THE TERM")

5.     EARLY TERMINATION

       5.1    OMRIX shall be entitled to terminate this Agreement on December
              31, 2001, by giving MDA a written notice not less than twelve
              (12) months before the above date.

       5.2    OMRIX shall be entitled to terminate this Agreement on December
              31, 2006, by giving MDA a written notice not less than eighteen
             (18) months

<PAGE>
                                     - 14 -

              before the above date.

       5.3    At the end of the Term, i.e. December 31, 2014, OMRIX shall have
              the right of first refusal to extend the Term of this Agreement
              for a period of an additional 8 years, on terms equal to the terms
              offered to MDA in good faith by a third party.

6.     (DELETED)

7.     THE RENT AND LEASE FEE

       7.1    In return for the lease of the Premises and the Equipment as an
              operational Plasma Fractioning Plant at its current condition and
              in return for the fulfillment of all the other undertakings of MDA
              as provided for herein, OMRIX shall pay MDA a yearly Rent and
              Lease Fee in the amount of NIS equivalent to US$ 1,000,000 (one
              million United States Dollars). The above amount represents Rent
              for the Premises in the amount of US$ 300,000 (Three hundred
              thousand United States Dollars) and a Lease Fee for the Equipment
              in the amount of US$ 700,000 (Seven hundred thousand United States
              Dollars).

       7.2    The above Rent and Lease Fee shall be adjusted, once every two (2)
              years, in accordance with the increase/decrease of the Consumer
              Price Index in the U.S.A. ("CPI") during the Term of this
              Agreement. The adjustments will be made in January of every second
              year starting as of January 1999, by which time the Rent and Lease
              Fee payable during calendar years 1999 and 2000 shall be
              established, by modifying the Rent and Lease Fee indicated in
              sub-Section 7.1 above in accordance with the change (if any), of
              the CPI between January 1997 and December 1998. The same procedure
              shall be observed every second year thereafter.

       7.3    The Rent and Lease Fee shall be paid by OMRIX to MDA each year
              in three (3) installments in the middle of each trimester i.e. on
              February 28, June 30 and October 31, of each calendar year.

              Notwithstanding the provisions of this Section 7.3 above, it is
              declared that, pursuant to an agreement between the parties, the
              Rent and Lease fee for the first two years of the lease, i.e.
              calendar years 1997 and 1998, was and/or will be paid as follows:

              7.3.1  During each of those two (2) calendar years, OMRIX paid
                     MDA Rent in the amount of US$ 120,000 (one hundred and
                     twenty thousand United States Dollars) per annum and Lease
                     Fee in the amount of US$ 480,000 (four hundred and eighty
                     thousand United States Dollars) per annum.

              7.3.2  The parties have agreed as to the deferral of payment by
                     OMRIX of the difference between the Rent and Lease Fee in
                     the amount of US$ one million per annum and between the
                     amount of US$ 600,000 per annum (which was paid by OMRIX
                     during calendar

<PAGE>
                                     - 15 -

                     years 1997/8, as aforesaid in subsection 7.3.1). The total
                     amount of the deferred payments with regard to said 2
                     years, shall be US $800,000 (hereinafter: "THE DEFERRED
                     RENT AND LEASE FEE.")

                     The Deferred Rent and Lease Fee shall be paid to MDA by
                     OMRIX by December 31st, 2001.

                     However, Should OMRIX decide not to exercise its right of
                     early termination as set forth in section 5.1 above, OMRIX
                     shall pay the Deferred Rent and Lease Fee in payments of
                     $160,000, during each of the years 2002, 2003, 2004, 2005,
                     2006 (Hereinafter: "THE ANNUAL ADDITIONAL AMOUNT"). The
                     Annual Additional Amount shall be paid by OMRIX to MDA
                     during each of the above 5 years together with the second
                     trimesteral payment due from OMRIX to MDA, as provided for
                     in this sub-section 7.3 above.

       7.4

              7.4.1  Without derogating from any of the aforesaid in this
                     section 7, and subject to receipt by OMRIX of the FDA
                     Approval for the marketing of the Biological Glue in the
                     USA, OMRIX hereby undertakes to pay MDA an additional
                     amount of $*** (***U.S dollars) annually, with regard to
                     the period commencing as of receipt of the FDA Approval,
                     and ending on December 31st, 2006, or upon the termination
                     of this Agreement, including early termination in
                     accordance with section 5.1 above (hereinafter: "THE ANNUAL
                     BONUS"). The total additional amounts to be paid by OMRIX
                     as Annual Bonuses shall not exceed the amount of US$***
                     (***U.S. dollars) (hereinafter "THE TOTAL BONUS").

                     OMRIX undertakes to make its best efforts to obtain the
                     FDA Approval as soon as possible. MDA shall refrain from
                     unreasonably raising any obstacles or taking any action
                     that may delay such process and, at the request of OMRIX,
                     will extend any assistance reasonably possible in order to
                     assist OMRIX in such effort.

                     It is agreed that the entitlement of MDA to the Total Bonus
                     or any part thereof, as the case may be, will commence only
                     upon receipt of the FDA Approval by OMRIX; (hereinafter;
                     "MDA'S ENTITLEMENT"). Actual payment by OMRIX shall start
                     upon commencement of production of the Biological Glue at
                     the Plant for sale in USA. Receipt by OMRIX of the FDA
                     Approval with regard to the Plant, shall be deemed
                     commencement of production by OMRIX, whether or not OMRIX
                     actually commences production at such time (hereinafter:
                     "THE PAYMENT COMMENCEMENT DATE").

              7.4.2  It is further agreed that the payments of Annual Bonus
                     stipulated in section 7.4.1 shall be postponed for any
                     period during which OMRIX cannot or is not permitted to
                     manufacture the Biological Glue due to Acts of God and
                     Force Majeure including, without

<PAGE>
                                     - 16 -

                     limitation, legal action taken by third parties and/or by
                     any authority and until such obstacle is removed.

              7.4.3  OMRIX hereby undertakes to inform MDA in writing no later
                     than 30 days of receipt of the FDA Approval.

                     In case OMRIX exercises its option of early termination as
                     set forth in section 5.1, and at such time OMRIX has not
                     yet received FDA approval with regard to the Plant - OMRIX
                     shall pay MDA the proportionate part of the Total Bonus,
                     for the period commencing upon receipt of FDA Approval and
                     ending on December 31st, 2001 - upon commencement of
                     production of the Biological Glue by OMRIX anywhere in the
                     world. OMRIX has indicated that the situation described
                     above is an impossibility.

                     For the avoidance of doubt - should OMRIX receive the FDA
                     Approval during the course of any calendar year - OMRIX
                     shall pay MDA the proportionate part of the Annual Bonus
                     with regard to same year, in accordance with the time
                     remaining from the date of receipt of the FDA Approval and
                     until the end of the same year.

              7.4.4  Payment of The Annual Bonus or any part thereof owed by
                     OMRIX to MDA shall be made by OMRIX to MDA in 3 equal
                     installments each year, concurrently with payment by OMRIX
                     of the Rent and Lease Fee, as provided for in sub-section
                     7.3 above.

       7.5    For the avoidance of doubt, unless specifically stated to the
              contrary, all the amounts stated in this Agreement are stated net
              of VAT. Should MDA provide OMRIX with a Tax Invoice, or with any
              other document which shall be acceptable to the Director of VAT
              and will entitle OMRIX to offset the VAT paid by it, OMRIX shall
              pay MDA, the applicable VAT.

       7.6    As of January 1st, 2007 and until the end of the Term, unless
              OMRIX exercises its right of early termination, as per sections
              5.1 or 5.2 above, OMRIX shall continue paying MDA the Rent and
              Lease Fee of US $1 million per annum as per sections 7.1, 7.2, as
              well as an additional amount per each calendar year, which shall
              be the higher of the following:

              (1)    $500,000; or

              (2)    A commission at the rate of 2% (two percent) which shall be
                     calculated from that part of annual Net Sales (as
                     hereinbelow defined) of OMRIX's products manufactured at
                     the Plant, which is in excess of $10,000,000 per annum (ten
                     million US dollars) ("THE COMMISSION").

<PAGE>
                                     - 17 -

              The total amounts payable to MDA as of the year 2007 as aforesaid,
              shall be referred to as: "THE INCREASED RENT AND LEASE FEE").

              The amount of the Rent and Lease Fee plus the amount of $500,000
              U.S out of the Increased Rent and Lease Fee shall be paid in three
              equal installments each year, as indicated in section 7.3 above.
              Should MDA be entitled to additional payment with regard to any
              specific year above said amounts (due to the Commission payable to
              MDA with regard to same year), then such additional payment shall
              be made within 30 days from the submission of the applicable
              Annual Sales Report by OMRIX.

       7.7    Unless OMRIX exercises its right of early termination as per
              section 5.1 or 5.2 - OMRIX shall submit to MDA, once a year,
              within 90 days of the end of each calendar year, as of the year
              2007, a detailed report stating OMRIX's total net sales turnover
              of all products manufactured by OMRIX at the Plant, and the
              Commission due to MDA with regard thereto. All such annual reports
              shall be certified by OMRIX's Certified Public Accountants ("THE
              ANNUAL SALES REPORTS").

              In each Annual Sales Report, OMRIX shall state the net sales of
              the products manufactured at the Plant and sold "at arm's length"
              by OMRIX or by any subsidiary/mother company/affiliated company of
              OMRIX ("THE OMRIX GROUP"). "Net Sales" shall mean sales to the
              first buyers not constituting part of the OMRIX Group, less any
              discounts, rejects, returns, refunds, replacements, and any direct
              taxes such as VAT, sales tax, etc. It is hereby agreed and
              clarified that in the event OMRIX shall appoint a major
              corporation as its distributor in certain parts of the world, and
              such corporation shall acquire shares in OMRIX, such corporation
              shall not be deemed part of the OMRIX Group.

              MDA shall have the right, in order to verify the accuracy and
              truthfulness of such Annual Sales Reports, to request an external
              audit of the Annual Sales Reports submitted by OMRIX, which shall
              be carried out at MDA's cost, by a firm of Israeli Certified
              Public Accountants of MDA's choice, provided such accountants
              shall be required to execute a confidentiality agreement with
              OMRIX. Said accountants shall maintain in strict confidence, and
              shall neither use for their own purposes nor disclose to any third
              party including MDA, any information gathered by them in the
              course of such external audit. The external auditors shall report
              to MDA, with a copy to OMRIX, their findings as to the accuracy
              and truthfulness of OMRIX's Annual Sales Reports.

              In case any dispute arises between the parties following such
              external audit, the matter will be referred by the parties to a
              mutually appointed Israeli firm of Certified Public Accountants,
              who will act as a ruling authority and whose findings shall be
              binding upon the parties and shall not be subject to appeal.

8.     MANUFACTURING IN THE PLANT AND SPECIAL TERMS REGARDING THE ISRAELI MARKET

<PAGE>
                                     - 18 -

       8.1    Subject to the provisions of sections 8.2, 8.3 hereunder OMRIX
              shall be free to manufacture in the Plant the Licensed Products,
              the Biological Glue and any other products OMRIX may wish, in any
              quantities OMRIX may determine, provided any such manufacture is
              in compliance with the prevailing laws and regulations and
              provided that priority shall be given to the manufacture from
              plasma supplied by MDA of the Licensed Products required for
              local use in Israel and ordered from OMRIX.

       8.2    With regard to manufacturing and/or marketing of the Licensed
              Products for THE Israeli market, the following conditions and
              rules shall apply:

              8.2.1  While manufacturing the Licensed Products for the Israeli
                     market, OMRIX shall use as a first priority, plasma
                     collected from donors in Israel, and purchased from MDA in
                     accordance with the provisions of section 10 below. Should
                     OMRIX decide to manufacture additional quantities of
                     Licensed Products for the Israeli market from imported
                     plasma and/or plasma derivatives, it will be free to do so
                     provided that same imported plasma and/or plasma
                     derivatives, including their source, are approved by the
                     Israeli Ministry of Health.

              8.2.2  OMRIX shall sell the Licensed Products in the Israeli
                     market at fair and competitive prices, and shall make its
                     best endeavors in good faith to meet the demands of the
                     Israeli marker as may be from time to time, of the Licensed
                     Products manufactured by OMRIX from plasma collected from
                     donors in Israel; Provided however, that if competitors
                     offer competitive products at prices which OMRIX cannot
                     match without obtaining a reasonable gross margin, then in
                     such case, OMRIX shall inform MDA about it and the parties
                     shall evaluate the situation together.

              8.2.3  In view of the fact that MDA attaches the utmost importance
                     to quoting prices as low as possible for the Licensed
                     Products to the Israeli Defense Forces ("IDF"), it is
                     hereby agreed that OMRIX shall present to the Head of the
                     MDA Blood Services, in advance, the price quotations it
                     intends to quote in any tender, bid or request for price
                     quotations for the IDF.

                     OMRlX shall offer and/or bid and/or participate in any
                     tender with regard to the Licensed Products, as well as any
                     other products produced by it in the Plant from time to
                     time, to the IDF and/or any other Israeli security force,
                     only after receiving the prior written approval of MDA.
                     Such approval shall not be unreasonably withheld.

                     OMRIX shall make its best endeavors in good faith, to
                     ensure that any such offer. presented for the approval of
                     MDA, shall be at the lowest possible prices, reasonable
                     under the circumstances.

<PAGE>
                                     - 19 -

                     MDA shall consider, at its own discretion, whether to
                     subsidize or to cause the State of Israel to subsidize the
                     products sold to the IDF or to any other security force.

              8.2.4  It is agreed that subject to the availability of plasma
                     supplied by MDA and provided that the demand for Licensed
                     Products shall not exceed the manufacturing capability of
                     OMRIX, OMRIX shall maintain an inventory of the Licensed
                     Products equivalent to one month of sales by OMRIX of such
                     Licensed Products in Israel.

       8.3    OMRIX shall submit to MDA quarterly reports, no later than 14 days
              prior to the designated date of the convening of each meeting of
              the Tripartite Committee to be established under sub-section 12.1
              hereinbelow (hereinafter: "THE REPORTS").

              The Reports shall be brought before the Tripartite Committee, and
              shall be discussed within the framework of its quarterly meetings,
              as provided for in section 12 hereinbelow.

              Each report shall describe in detail, inter alia, the following
              matters: The estimate of the Israeli market for each of the
              following products : Albumin, Factor VIII and IVGG, as well as
              OMRIX's sales forecast in the Israeli market for the forthcoming
              period for each of said products;

              The expected share of OMRIX in the entire Israeli market;
              The actual production in the Plant and the sales in units of the
              Licensed Products in Israel during the period of the Report;
              In cases whereby it shall be apparent from the Report that OMRIX
              has substantially failed to meet the forecasts for the period to
              which such Report relates, the Report shall specify also the
              average prices for which OMRIX sold the various Licensed Products
              to the various sectors of customers in the Israeli market during
              the period of such Report;
              If the sales in Israel did not meet OMRIX's forecast - what were
              the reasons for the difference between the forecast and actual
              sales, in OMRIX's opinion;
              The division of the sales in Israel among the IDF and other
              Israeli Security forces on the one hand, and the rest of the
              Israeli market on the other hand.

       8.4    For the avoidance of any doubt it is hereby declared and agreed
              that OMRIX shall not pay MDA any royalties nor any other payments
              in respect of the products manufactured by OMRIX in the Plant and
              the only amounts payable to MDA by OMRIX will be the Rent and
              Lease Fee as well as the Total Bonus or any part thereof, as
              relevant, as well as the Increased Rent and Lease Fee, including
              the Commissions (if applicable), as well AS partial reimbursement
              for the cost of the Supplies and the participation in the cost of
              the operation and the maintenance of the Systems and the
              participation in the cost of the employment of the Facility
              Engineer, as provided for in sections 2.6, 2.7, 2.7.A above and

<PAGE>
                                     - 20 -

              8.5 below, as well as payments for plasma purchased by OMRIX, as
              provided for in section 10 hereunder.

              Should any third party such as, for example, Minhal Mekarke'ei
              Israel, raise any financial demands against OMRIX or MDA as a
              result of the Lease of the Premises and/or the operation of the
              Plant by OMRIX, MDA shall settle any such demand and shall hold
              OMRIX harmless from any such claim or demand.

       8.5    The aforesaid in this section 8 shall not affect the obligation of
              OMRIX to purchase from MDA plasma and to pay for such plasma as
              per section 10 below.

       8.6    OMRIX shall bear all the direct as well as indirect costs involved
              in the operation of the plant, including the salaries of its
              employees, cost of raw materials as well as the applicable part of
              the cost of maintenance, electricity, water, telephone, and
              municipal taxes.

9.     EMPLOYEES - DELETED

10.    PURCHASE OF PLASMA

       10.1   OMRIX undertakes to purchase from MDA, during the Term of this
              Agreement, all the plasma MDA will have from time to time which
              meets the specifications as set forth in section 10.2 below, up to
              a total quantity of 32,000 liters per annum, out of which not more
              than 25% will be Liquid Plasma. Subject to availability and unless
              otherwise requested by OMRIX, MDA shall supply the Plasma to OMRIX
              in a more or less steady pace throughout each calendar year, i.e.
              approximately one twelfth of the annual quantity each month. For
              the avoidance of doubt it is hereby stated and agreed that the
              above quantity specifically refers to plasma derived from whole
              blood donations collected in Israel by MDA. OMRIX shall not be
              obliged to purchase from MDA any other type of plasma.

       10.2   OMRIX shall purchase from MDA only the plasma which shall be
              extracted from whole blood collected by MDA in Israel, in the
              regular course of business, from donors, provided such plasma
              complies with all specifications set forth in SCHEDULE "D"
              attached hereto, as maybe amended from time to time by any
              authorized agency of the European Community.

       10.3   Subject to availability of suitable plasma FROM MDA (i.e. - plasma
              which meets the criteria indicated in section 10.2 above and the
              specifications set forth in Schedule D), OMRIX shall not purchase,
              for the manufacture of the Licensed Products for the Israeli
              market, plasma from sources in Israel other than MDA.

       10.4   The parties shall execute the Standard Contract required by the
              European Community Authorities pertaining to the Quality and
              Safety of Plasma of

<PAGE>
                                     - 21 -

              Human Origin in the form attached hereto AS SCHEDULE "E". In the
              future, the parties will execute any such additional/new standard
              Agreements pertaining to the Quality of Plasma as may be required,
              from time to time, by the authorities of the EC and the
              authorities in the USA, if and to the extent MDA gets FDA
              approval for plasma from whole blood or for plasma collected by
              plasmapheresis.

       10.5   Without derogating from any of the aforesaid in this section 10,
              the Parties hereby agree, that MDA shall not be obligated to
              provide OMRIX with plasma with a concentration of Factor 8
              exceeding 0.7 International Units per I ML, unless such
              specification becomes a requirement of the US and/or EU authority.

       10.6   MDA currently does not perform NAT testing on the plasma which it
              supplies to OMRIX with regard to the Hepatitis C Virus ("HCV").
              Should the authorities of any country to which OMRIX shall sell
              the products manufactured in the Plant from plasma supplied to
              OMRIX by MDA, require that the plasma pool used in the production
              of such Products be NAT tested for HCV, OMRIX shall inform MDA
              in writing of such requirement. In order to meet such
              requirements, OMRIX shall perform NAT testing of the plasma pool
              supplied to OMRIX by MDA. Should ANY such pool be found to be
              positive for HCV, MDA shall be entitled to retest said pool in an
              attempt to invalidate the positive results. Failing such
              invalidation, MDA shall credit OMRIX for the price of the plasma
              pool. OMRIX will provide MDA with a copy of the Bleeding List of
              such plasma pool. The same procedures will apply for any future
              plasma pool testing requirements by an EU authority for which MDA
              does not test the plasma units it supplies to OMRIX.

       10.7   As of the year 2007 (unless OMRIX exercises its right of early
              termination as per sections 5.1 or 5.2), the following shall apply
              to purchase of plasma by OMRIX:. In the year 2007, OMRIX
              undertakes to purchase from MDA 33,00 liters of plasma. This
              quantity shall be increased by 1,000 liters each year so that in
              the course of the year 2014 OMRIX undertakes to purchase from MDA
              40,000 liters of plasma. The above quantities of plasma shall
              include not more than 25% of Liquid Plasma.

       10.8   Should OMRIX decide at any point of time, to manufacture all three
              Licensed Products for the Israeli market from quantities of plasma
              exceeding the minimum quantities indicated in this section 10
              above, OMRIX shall purchase any additional quantities of plasma it
              may require for such additional quantities of Licensed Products
              from MDA, subject to the availability of such additional
              quantities from MDA. If MDA shall not be able to supply such
              additional quantities of PLASMA, OMRIX shall be free to
              manufacture such additional quantities of the Licensed Products
              for the Israeli market from plasma purchased by OMRIX from foreign
              sources.

              OMRIX shall have the right of first refusal to purchase from MDA
              any quantities of plasma that MDA will be in position to supply in
              access of the minimum quantities indicated in section 10 above.

<PAGE>
                                     - 22 -

11.    PRICE OF PLASMA

       11.1   OMRIX shall pay MDA for the PLASMA supplied by MDA to OMRIX in
              accordance with Section 10 above, the price in US Dollars paid on
              average in the U.S. for equivalent plasma of the same
              specifications, quality and conditions. Such price of the plasma
              shall be established, for the purpose of the accounting between
              the parties hereto, twice a year, in accordance with the average
              prices paid in the U.S. during the preceding six (6) month period
              in respect of any relevant category (specifications) of plasma
              purchased by OMRIX from MDA. Such average price shall be
              determined, twice a year, by the Marketing Research Bureau Inc.,
              of Orange City, Connecticut, U.S.A.

              It is hereby agreed, that due to the fact that the plasma used in
              Israel is not required by the Israeli Ministry of Health to
              undergo the test known as P24 Antigen test (hereinafter: THE
              TEST"), while the U.S. price of plasma as should be determined by
              the Marketing Research Bureau Inc. of Orange City, Connecticut,
              USA, relates to plasma which does undergo the Test, OMRIX shall be
              entitled to deduct the estimated total cost of the Test from the
              equivalent U.S. reference price of each liter, insofar as the U.S.
              price for the plasma includes the cost of the Test.

              The price of the Test shall be established twice a year,
              simultaneously and in a way similar to the establishment of the
              price of the plasma itself, as provided hereinabove. If the price
              of the Test cannot be establish the price shall be deemed to be
              U.S. *** per liter of plasma.

              Notwithstanding the foregoing in this section 11.1, and due to the
              fact that it is not possible to derive Factor VIII from Liquid
              Plasma ("LP") - it is hereby agreed that the price which shall be
              paid by OMRIX for LP shall be 2/3 (two thirds) of the full price
              (including the Test) established with regard to FFP (fresh frozen
              plasma) as aforesaid (as such shall be from time to time), from
              which 2/3 of the price of the Test (as shall be established from
              time to time) shall be deducted ("PRICE OF LP").

              For example: if the full price established with regard to FFP
              shall be $ *** per liter, and the price of the Test shall be $***,
              then the Price of LP shall be: (*** 2/3) - (*** *2/3)=***$.

              It is further agreed, that the aforesaid specific arrangement with
              regard to the Price of LP, shall only apply to LP purchased by
              OMRIX later than January 1ST, 1999.

       11.2   OMRIX shall pay for the plasma supplied by MDA no later than 180
              (one hundred and eighty) days after the Date of Supply of the
              plasma to OMRIX.

              "THE DATE OF Supply" shall mean the 15th day of each calendar
              month during which any such supplies were MADE.

<PAGE>
                                     - 23 -

       11.3   The invoiced quantity of plasma for which OMRIX shall be obligated
              to pay MDA, shall be based upon the net weight of the plasma
              determined subsequent to the receipt of the bags of plasma by
              OMRIX, prior to the emptying of the bags into OMRIX's pool, less
              the weight of the bags of plasma, as described in SCHEDULE "F"
              attached hereto.

       11.4   MDA hereby waives all claims it may have, pertaining to accrued
              interest, which remains outstanding and unpaid by OMRIX, with
              regard to all plasma supplied to OMRIX until the date of execution
              of this Agreement. OMRIX hereby waives all claims it may have,
              pertaining to amounts, which OMRIX believes it has been
              overcharged by MDA, with regard to plasma supplied to OMRIX until
              December 31st, 1998.

12.    COMMITTEES

       12.1   The parties shall form a Tripartite Committee whose members shall
              be one representative of each IMDAC, MDA and OMRIX and which
              shall be headed by the Director General of MDA.

              The Tripartite Committee shall observe the adherence to the
              policies and the objectives established by the friends of MDA and
              the Donors who made possible the erection of the Building and the
              Plant, AS provided for in the preamble to this Agreement, as well
              as in sections 8.1,8.2, and 10 above, i.e. that:

       (i)    Priority is being given by OMRIX to the manufacture, from plasma
              collected in Israel and donated by donors, for local use in
              Israel, of the Licensed Products, and that OMRIX is making its
              best endeavors in good faith to sell in Israel the Licensed
              Products manufactured by it at fair and competitive prices, as
              provided for in section 8.2.3 above.

       (ii)   That the Licensed Products designated for the Israeli market are
              manufactured, as far as possible, from plasma supplied by MDA, as
              provided for in section 8.2.1 above, subject to the provisions of
              section 10 herein.

       (iii)  That OMRIX is not offering and/or bidding and/or quoting to the
              IDF prices for the Licensed Products without obtaining the prior
              WRITTEN approval of MDA for such offer and/or for such prices, as
              indicated in section 8.2.3.

       (iv)   That OMRIX is purchasing the plasma from MDA in accordance with
              the terms provided for in section 10 above.

       (v)    That the objectives of this Agreement are carried out by both
              parties.

       12.2   In addition to the Tripartite Committee, the parties hereto shall
              establish a Coordinating Committee, which shall comprise of the
              Manager of MDA Blood Services and a representative of OMRIX. The
              role of the Coordinating Committee shall be to resolve all the
              accounting disputes

<PAGE>
                                     - 24 -

              and points of friction between the parties resulting from the fact
              that the parties share the Building and the Systems.

       12.3   In addition to the two abovementioned committees, the parties
              hereto shall establish a Steering Committee, whose members shall
              be the Director General of MDA and the Chairman of OMRIX. The
              Steering Committee shall decide and resolve all the issues,
              questions and disputes which were attended to by the Tripartite
              Committee and/or the Coordinating Committee and which the above
              committees were unable to resolve. In addition, the Steering
              Committee will attend to any issue arising from this Agreement and
              shall supervise the implementation of the decisions made by the
              Tripartite Committee.

       12.4   The committees shall meet as frequently as required, but it is
              expected to be not less than once every quarter, i.e. - four times
              per annum. Each member of any of the Committees may call for a
              meeting of such Committee by giving due notice.

13.    INSURANCE

       13.1   OMRIX shall insure itself in the framework of an appropriate
              Product Liability Insurance Policy providing coverage of DM.
              10,000,000.- per annum and DM. 3,000,000.- per case. OMRIX shall
              name MDA as co-insured in the above Policy. The Policy shall
              provide for the re-establishment of the full annual amount of
              coverage in the event of payment for an Insurance Event pursuant
              to any claim against OMRIX and/or MDA.

       13.2   Subject to anything stipulated to the contrary in this agreement,
              MDA shall continue insuring the Building, the Premises and the
              Equipment for their full reasonable value and shall name OMRIX in
              the Insurance Policy as a co-insured. OMRIX shall be entitled to
              add a Rider to the above Policy insuring OMRIX against loss of
              profits and/or business interruption. OMRIX shall bear the costs
              of such Rider. In the event any new equipment shall be added to
              the Plant by OMRIX in the framework of Discretionary Investments
              including the CEP as specified in Section 15 below, any such
              additional equipment shall be insured by OMRIX and the cost of
              such insurance shall be borne by both parties pro rata to their
              title/ownership rights in such equipment.

       13.3   OMRIX shall at all times insure itself against any and all
              liabilities it may have as an Employer. OMRIX shall further insure
              itself at all times against any liabilities it may have toward any
              third party whatsoever, in connection with its being a Lessee
              and/or an operator of the Plant.

       13.4   The parties hereto shall jointly bear, in equal parts between
              them, the cost of insurance of the Systems.

14.    COMPULSORY INVESTMENTS IN THE PLANT

       14.1   If, as a result of new law, regulations, directives, requirements
              or instructions by the competent authorities, investments will
              have to be

<PAGE>
                                     - 25 -

              made in the Premises / Plant in order to preserve its license
              and/or the right to market its Products in the various markets
              ("COMPULSORY INVESTMENTS") such Compulsory Investments shall be
              borne by MDA and/or OMRIX as provided below.

              14.1.1 In the event OMRIX shall be able to increase the prices of
                     its Products because of the Compulsory Investment(s), such
                     Compulsory Investment(s) shall be borne in full by OMRIX.
                     Subject to section 14.5.3 hereunder, any such
                     equipment/investment shall be sold by OMRIX to MDA upon the
                     termination of this Agreement for its net dollar book value
                     on such date.

              14.1.2 In the event OMRIX shall not be able to increase the prices
                     of its Products as a result of the Compulsory
                     Investment(s), such Compulsory Investment(s) shall be borne
                     by OMRIX and MDA in equal parts between them or at any
                     other ratio as may be agreed upon by the Steering
                     Committee. While deciding about the split of the Compulsory
                     Investment(s) between the parties, the Steering Committee
                     shall take into account, among others, the following
                     considerations:

                     (i)    the time at which such Compulsory Investment(s) is
                            required, i.e.- the nearer the date of such
                            investment to the expiration of the Agreement, the
                            larger the part of MDA and vice versa.

                     (ii)   if the Compulsory Investment(s) is the result of new
                            requirements of the Health Authorities in a certain
                            country of minor importance, MDA's share in such
                            investment(s) shall be smaller than if the
                            requirements are made by the EC or US Authorities.

              14.1.3 Notwithstanding the aforesaid in sections 14.1.1 and
                     14.1.2, it is hereby agreed that MDA shall bear 100% of the
                     costs of any Compulsory Investment that will have to be
                     made as a result of a demand by a competent Israeli
                     Authority(s) due to the fact that the Plant is located in
                     proximity to the MDA Blood Services and/or is located
                     within the perimeter of the Tel Hashomer Hospital and/or
                     the fact that the Plant is located in proximity to an urban
                     area.

       14.2   Should any Compulsory Investment(s) be required as provided for in
              Section 14.1.2 and/or 14.1.3 above, OMRIX shall finance such
              Compulsory Investment(s), and shall off-set MDA's part of any
              such Compulsory Investment(s) against the Rent and Lease Fee
              and/or the Increased Rent and Lease Fee and/or the Annual Bonus
              and/or Commission due to MDA, subject to the provisions set
              forth in section 14.5 hereunder.

       14.2A  In the event OMRIX carries out the Compulsory Investment in stead
              of MDA, prior, during and after any such Compulsory Investment,
              OMRIX

<PAGE>
                                     - 26 -

              shall submit to MDA plans, time schedules, price lists and the
              like AND the terms of Section 15A.4 shall apply mutatis mutandis.

       14.3   In the event that the required Compulsory Investment(s) will be of
              a substantial magnitude and/or during the second part of the Term
              (i.e. - after January 1st, 2006), OMRIX shall be entitled to
              refuse to finance and/or to bear the cost of its part of any such
              Compulsory Investment(s).

              Should OMRIX refuse to finance and/or bear the cost of any part of
              the Compulsory Investment(s) in the events described in this
              section 14.3, MDA shall be entitled to finance and bear the full
              cost of any such Compulsory Investment(s).

              Refusal of MDA to finance and/or bear the cost of such Compulsory
              Investment(s), shall entitle OMRIX to bring this Agreement to an
              end.

              MDA shall be entitled to refuse to participate in any Compulsory
              Investment of a substantial magnitude and/or if such Compulsory
              Investment is required during the second part of the Term, even
              whereby OMRIX is prepared to finance the entire Compulsory
              Investment (including MDA's share), upon the occurrence of the
              following cumulative conditions:

              (1)    The requirement for such Compulsory Investment was not
                     issued by an Israeli Competent Authority; and

              (2)    MDA'S part in such Compulsory Investment exceeds the
                     Determined Amount as hereinbelow defined.

              "THE DETERMINED AMOUNT" shall mean - in a given time, and with
              respect to a certain investment - the accumulated balance of US
              $1.2 Million per year (being the Rent and Lease Fee together with
              the average estimated indexation to the CPI during the Term of
              this Agreement), per each year until December 31st 2014, as well
              as an additional amount of US $0.5 Million in respect of each year
              as from January 1st 2007 until December 31st 2011, as well as the
              Commissions which had been accumulated until such time as the
              reserve fund referred to in section 14.5.3 hereunder, after
              deducting therefrom the amount of $1 Million US per annum until
              31st December 2006, and deducting the amount of $1.25 Million US
              per annum as from January 1st 2007 until 31st December 2014.

              Notwithstanding the aforesaid in this definition hereinabove, the
              "Determined Amount" in respect of Compulsory Investments made
              prior to December 31st", 2006 shall be calculated only until
              December 31st 2006 unless it is made after July 1st 2005 and OMRIX
              did not exercise until then its right of Termination under Section
              5.2

              In case MDA refuses to participate in any Compulsory Investment
              due to the occurrence of the above conditions, OMRIX shall have
              the right to terminate the Agreement or to carry out the
              Compulsory Investment, and

<PAGE>
                                     - 27 -

              then it shall be entitled to offset MDA's part of the Compulsory
              Investment against the Rent and Lease Fee and/or the Annual Bonus
              and/or the Increased Rent and Lease Fee and/or Commission due to
              MDA, provided however, that the right of OMRIX hereunder to setoff
              shall be in respect of amounts exceeding each calendar year until
              31st December 2006 1$ Million US and thereafter $1.25 Million US
              until 31st December 2014. The aforesaid shall also be subject to
              the provisions of section 14.5 hereunder.

       14.4   Should MDA invest on its own the amounts required as Compulsory
              Investment(s) (without the participation of OMRIX) the Rent and
              Lease Fee shall be increased, as from that date onwards, at the
              rate representing the percentage of such amount invested by MDA
              ("THE NEW INVESTMENT") in relation to the total initial investment
              in the Plant - which is estimated, for this purpose, to be
              US$15,000,000(fifteen million United States Dollars) ("THE INITIAL
              INVESTMENT"). The Initial Investment shall be adjusted in
              accordance with the change in the Consumer Price Index in the
              U.S.A. between the Effective Date and the date of the relevant
              accounting between the parties.

              For the sake of clarity and exemplification: If, after a few
              years, the Initial Investment adjusted to the CPI in the U.S.A. is
              equivalent to US$16,000,000.-(sixteen million United States
              Dollars), and the New Investment will be US$320,000.-,the Rent and
              Lease Fee (as it shall be at such time, in accordance with the
              terms of this Agreement) shall be increased, as from that date
              onwards, by two (2%) percent.

       14.5   Without derogating from all of the provisions set forth in this
              section 14 (pertaining to the parties' respective shares in any
              Compulsory Investment, their respective rights not to participate
              in Compulsory Investments under certain circumstances, etc.), it
              is agreed that the following shall apply to actual payment by MDA
              (by way of set off by OMRIX), of MDA's share in the Compulsory
              Investments:

              14.5.1 Until December 31st, 2006 - OMRIX shall finance, on its
                     own, all required Compulsory Investments, including MDA's
                     share (if any), in such Compulsory Investments. OMRIX shall
                     be entitled to offset such part of MDA'S share in such
                     Compulsory Investments (against the Rent and Lease Fee
                     payable to MDA), provided that annul payments, which MDA
                     shall actually receive as Rent and Lease Fee and/or Annual
                     Bonus, shall not be less than the amount of $1 Million US
                     (net) in the course of any year during said period.

                     Without derogating from the above, during said period,
                     OMRIX shall only be entitled to offset any part of MDA'S
                     share in such Compulsory Investments, if and to the extent
                     that the balance due to MDA after the set off of MDA's
                     participation in the CEP as hereinafter defined, in a
                     certain calendar year is not less than $ 1 Million US.

<PAGE>
                                     - 28 -

              14.5.2 If OMRIX exercises its right of early termination as per
                     section 5.2 of this Agreement, and therefore this Agreement
                     comes to an end on December 31st, 2006, then:

                     Upon termination of the Agreement as aforesaid, AS part of
                     the final accounting between the parties, MDA shall pay
                     OMRIX any outstanding part of MDA's share in the
                     Compulsory Investments which had been made until such time,
                     and which had not been set-off during the course of the
                     Agreement, in accordance with the terms of subsection
                     14.5.1 above.

             14.5.2A Upon Termination of the Agreement as aforesaid in section
                     14.5.2, OMRIX to leave in the Plant also its part in the
                     Compulsory Investments made until the date of termination.
                     Immediately thereafter, the parties hereto shall start bona
                     fidea negotiations as to the price and the terms of payment
                     in respect of such investment. If such an agreement is not
                     reached regarding the price and/or the terms of payment,
                     the dispute will be referred to an arbitrator, who will be
                     an expert in the field of blood fractionation.

              14.5.3 If OMRIX shall not exercise its right of early termination
                     as per section 5.2 of this Agreement, then as of the year
                     2007, OMRIX shall be entitled to offset MDA's part in any
                     compulsory Investments (including any outstanding part, if
                     any, remaining from the period until December 31st, 2006),
                     only against any income payable to MDA (as Increased Rent
                     and Lease Fee and/or Commissions) over the amount of $ 1.25
                     Million US per annum.

                     As of the year 2007 - any amounts out of MDA'S income (from
                     Increased Rent and Lease Fee and/or Commissions), over the
                     amount of $ 1.25 Million per annum, which shall remain
                     following any offsets made by OMRIX (in accordance with the
                     aforesaid in this subsection 14.5.3) - shall be designated
                     by MDA for its future participation in any Compulsory
                     Investments (if any), and shall be presented as a special
                     reserve in MDA's financial reports. Should there be any
                     Compulsory Investments in subsequent years, in which MDA
                     shall be required to participate in accordance with the
                     terms of this section 14, then MDA shall use any such
                     designated amounts in order to pay its share in such
                     Compulsory Investments.

                     At the end of the Term of this Agreement, i.e. December
                     31st 2014, MDA shall not be required to pay OMRIX any
                     outstanding part of MDA's share in the Compulsory
                     Investments which had been made until such time, which had
                     not been set-off during the course of the Agreement, in
                     accordance with the aforesaid terms. The aforesaid shall be
                     subject to section 14.6 hereunder.

              14.5.4 For the avoidance of doubt, the right of OMRIX to set off
                     against amounts payable to MDA, in accordance with this
                     section 14 (except after the termination of this
                     agreement), shall be limited to

<PAGE>
                                     - 29 -

                     amounts due to MDA as Rent and Lease Fee and/or Increased
                     Rent and Lease Fee and/or Commissions and/or the Annual
                     Bonus only, and shall not apply to any other payments due
                     to MDA pursuant to the terms of this Agreement.

              14.5.5 Upon termination of the Agreement as aforesaid in Section
                     14.5.3, namely, if OMRIX does not exercise its option under
                     section 5.2, OMRIX shall leave free of charge OMRIX's part
                     in the Compulsory Investments in the plant.

       14.6

              14.6.1 Notwithstanding any of the aforesaid in this section 14,
                     MDA shall solely bear the cost of any Compulsory Investment
                     which shall be a result of a demand made subsequent to
                     January 1st, 2012, by competent authorities of Israel
                     and/or the US and/or the EU.

              14.6.2 MDA's obligation as aforesaid in this section 14.6 shall
                     not exceed the total amount of US $4.5 million with regard
                     to the entire period as of January 1st, 2012 and until the
                     end of the Term.

              14.6.3 Any Compulsory Investments referred to in this section
                     14.6, shall be financed by OMRIX, and OMRIX shall be
                     entitled to offset same against any amounts due to MDA from
                     OMRIX as Increased Rent and Lease Fee and/or Commissions.
                     The terms of section 14.5.3 above shall not apply to the
                     Compulsory Investments referred to in this section 14.6.
                     For the avoidance of doubt, this section 14.6 shall not
                     derogate from any of the terms of this section 14
                     (including those of section 14.5.3 above), regarding any
                     Compulsory Investments which do not fall under the
                     conditions elaborated in sections 14.6.1, 14.6.2 above.

15.    DISCRETIONARY INVESTMENTS IN THE PLANT

       Should OMRIX decide to install in the Plant new items of equipment and/or
       make any other investments in the Plant which shall not be essential in
       order to preserve the operational licenses of the Plant and/or its
       ability to export the Products made therein to the various markets
       ("DISCRETIONARY INVESTMENTS"), OMRIX shall bear all the costs of any such
       Discretionary Investments.

       Upon the termination of the Agreement and unless otherwise agreed upon by
       the parties, OMRIX shall, at its option, remove from the Plant, or sell
       to MDA at net dollar book value at the effective date of termination, any
       such new equipment being installed in the framework of Discretionary
       Investments. In the event OMRIX shall be willing to sell said equipment
       to MDA as aforesaid, it will offer MDA to purchase same as provided for
       above.
       MDA will inform OMRIX within 30 (thirty) days whether it chooses to
       purchase all of the above equipment or not.

       The aforesaid in this section 15 shall refer only to items of equipment,
       instrumentation and/or machinery, which can be easily dismantled and
       removed from the Plant. In case OMRIX makes any Discretionary
       Investments, pertaining to any items of equipment, instrumentation,
       machinery, Systems and/or

<PAGE>
                                     - 30 -

       upgrading of Systems, which have become an integral and/or inseparable
       part of the Plant, MDA shall purchase same at a price which shall be
       negotiated in good faith by the parties; Should the parties fail to reach
       agreement as to the price of such items, the dispute shall be referred to
       an Arbitrator, who will be an expert in the field of blood fractionation.
       In order to determine the price of such items, said Arbitrator shall be
       presented with the following assumptions:

       (l)    The duty of OMRIX to return the Plant to MDA properly maintained
              and in a fully operational condition, as set forth in section 16
              hereunder;

       (2)    The value to MDA of the Systems and/or items installed and/or
              built and/or improved in the framework of this section 15, as a
              going concern.

       MDA shall be released from its obligation to purchase the integral or
       inseparable parts of the Systems in the event MDA (or any third party)
       shall not operate the Plant as a fractionation Plant in the course of a
       period of 5 years after OMRIX shall vacate the Plant and the premises.

       In the event MDA shall notify OMRIX, prior to the expiration of the
       agreement as aforesaid, about its intentions not to operate the Plant as
       a fractionation Plant, OMRIX shall be entitled to remove from the Plant,
       free of charge, in coordination with MDA, any such item or part of the
       Systems.

       The aforesaid in this section 15 shall not derogate from the terms set
       forth in section 15A hereunder.

15A.   THE CAPACITY EXPANSION PROGRAM

       15A.1. Within the framework of Discretionary Investments, as set forth in
              section 15 above, OMRIX hereby declares that it intends to expand
              the capacity of the Plant, thereby enabling the Plant to process a
              quantity of approximately 100,000 liters of plasma per annum,
              consequently increasing the manufacturing capability of the
              Licensed Products as well as that of the Biological Glue and/or
              any other products ("THE CAPACITY EXPANSION PROGRAM" or the
              "CEP"). OMRIX hereby further represents, that the CEP shall not
              require any additional exterior construction works and/or
              enlarging the area of the Plant in any way.

       15A.2  OMRIX estimates that the investment required in order to implement
              the CEP shall be in excess of $5,000,000 US.

              Based on the aforesaid representations, and subject to the terms
              set forth hereunder, MDA hereby agrees to the implementation of
              the CEP, and MDA further agrees to participate in the investments
              necessary with regard to said implementation.

       15A.3  It is acknowledged that OMRIX has already begun implementation of
              the first stage of the CEP, the cost of which is estimated by
              OMRIX to be US$ 1.5 million, and has carried out the works set
              forth in SCHEDULE "G" attached hereto.

<PAGE>
                                     - 31 -

       15A.4  Prior to the implementation of any investment other than the one
              referred to in sub-Section 15A.3 above, including the ordering of
              equipment and/or materials and/or carrying out any works within
              the CEP, OMRIX shall submit to MDA a time schedule as well as a
              list of any further plans and/or equipment ("THE SCHEDULE" and
              "THE LIST", respectively) required for the implementation of the
              CEP. MDA shall provide OMRIX with its comments pertaining to the
              Schedule and/or the List, within 14 days of their submission by
              OMRIX. In case of Failure by MDA to provide such comments within
              said period, the Schedule and/or the List (as the case may be)
              shall be deemed approved. Not later than 120 days after completion
              of the CEP, OMRIX shall provide MDA with "as made" plans of the
              CEP.

              Should MDA provide OMRIX with comments as aforesaid, OMRIX shall
              give said comments its due consideration, but shall not be
              required to adopt any recommendations included therein provided,
              however, that if MDA raises issues pertaining to the adverse
              affect which any such works may have with regard to the Plant
              and/or the Systems and/or the Building - the parties shall refer
              such comments for review by the Consultant Engineer. In the event
              the remarks and/or recommendations or instructions of the
              Consultant Engineer shall not be acceptable to either party, and
              the parties will not be able to sort out such differences in an
              amicable way, such dispute shall be referred to the legal counsels
              of the parties, whose decision shall be final and binding upon the
              parties.

              During the works required for the implementation of the CEP, OMRIX
              shall submit to MDA once every 90 days, a progress report,
              detailing the works undertaken during the period of the report and
              the equipment installed during such period.

       15A.5  MDA's share in the investment required within the CEP, shall be
              deducted by OMRIX from the Annual Bonus to which MDA may be
              entitled pursuant to section 7.4 of this Agreement. For the
              avoidance of doubt, it is hereby agreed that MDA shall have no
              obligation to participate in the investments in the framework of
              the CEP in any given year in respect of which MDA shall not be
              entitled to the Annual Bonus.

       15A.6. Subject to the aforesaid in section 15A.5, MDA shall bear 50% of
              the investments required within the implementation of the CEP up
              to investments totaling US$ 4,000,000. It is agreed, however,
              that MDA's participation shall in no case exceed the total amount
              of $2,000,000 US. MDA's participation in the CEP investments shall
              be made only by and shall be limited to means of set off only
              against the Annual Bonuses to which MDA shall become entitled.

      15A.6.1 In the event that MDA shall not become entitled to the Annual
              Bonus or in the event the Total Bonus to which MDA shall be
              entitled, falls short of US$ 2 million (except in the event of a
              breach by MDA which has caused the delay of the FDA Approval), MDA
              shall be deemed to have fully fulfilled its payment obligations in
              respect of investment in the CEP, by allowing OMRIX to offset the
              Annual Bonuses against MDA's share in the CEP investment,

<PAGE>
                                     - 32 -

       15A6.2 Should OMRIX exercise its right of early termination as stipulated
              in section 5.2 above, then in such case the investments made by
              MDA within the CEP shall be MDA's property only. All investments
              made by OMRIX within the CEP, shall be considered as Discretionary
              Investments to which, in addition to the provisions of section 15
              above, the following shall apply:

              (1)    In the event that MDA did not invest any amount on account
                     of its share in the implementation of the CEP, by way of
                     offset or otherwise, the entire investments made by OMRIX
                     for the implementation of the CEP shall be deemed
                     Discretionary Investments.

              (2)    In the event that by January 1st, 2007, MDA invested on
                     account of its share in the implementation of the CEP, 25%
                     or more of the total cost of the implementation of the CEP
                     - MDA shall have the option to acquire OMRIX's share in the
                     CEP, in accordance with the provisions of section 15 above,
                     i.e. - applying the price determination mechanisms
                     described therein with regard to equipment which can be
                     easily dismantled/removed from the Plant, as well as those
                     with regard to equipment which has become an
                     integral/inseparable part of the Plant.

              (3)    In the event that by January 1st, 2007, MDA invested on
                     account of its share in the implementation of the CEP, less
                     than 25% of the total cost of the implementation of the
                     CEP - OMRIX shall have the option either to purchase MDA's
                     share in the CEP or to offer MDA to purchase OMRIX's share
                     in the CEP, in accordance with the provisions of section 15
                     above, i.e. - applying the price determination mechanisms
                     described therein with regard to equipment which can be
                     easily dismantled/removed from the Plant, as well as those
                     with regard to equipment which has become an
                     integral/inseparable part of the Plant. In case neither
                     party shall be prepared to purchase the other party's share
                     in the CEP, all of the items of equipment, installation
                     etc. shall be removed from the Plant and sold to the
                     highest bidder, and the proceeds thereof shall be divided
                     between the parties according to the relative share of
                     their actual investments in the CEP.

       15A.7  In the event that OMRIX does not exercise its rights of early
              termination as per sections 5.1 and 5.2 above, and therefore
              continues leasing and operating the Plant until the end of the
              Term - all items of equipment etc. acquired and/or installed
              and/or built within the framework of the CEP shall become the
              property of MDA without any further payment on the part of MDA by
              the end of the Term.

       15A.8 The terms of this section 15.4 shall apply in addition to the
             terms of section 15 above, provided that in any case of
             contradiction between the terms of this section 15A and the terms
             of section 15 - the terms of this section 15A shall prevail.

16.    STATE OF THE PLANT AT THE END OF THE AGREEMENT

<PAGE>
                                     - 33 -

       16.1   Upon the expiration or termination of the Agreement OMRIX shall
              return the Plant to MDA, properly maintained and in a good
              operational condition, subject to reasonable wear and tear.

       16.2   OMRIX shall leave in the Plant the Equipment, as well as any other
              items of equipment, systems etc., which were installed by OMRIX
              during the course of the Agreement, and which were acquired by MDA
              and/or became the property of MDA in accordance with the
              provisions of this Agreement. For the avoidance of doubt, the
              obligation of OMRIX under subsection 16.1 above, shall apply also
              in the event that OMRIX is entitled under the terms of this
              Agreement to remove items of equipment owned by it due to the CEP,
              Compulsory Investments and/or Discretionary Investments.

       16.3   In the event MDA shall not be required, under the circumstances,
              to spent the entire amount of US $4.5 million as provided for in
              sections 14.6.1 and 14.6.2, MDA shall pay OMRIX, upon the
              expiration of this agreement on January 1st 2015, a Grant
              amounting to the part of the unused budget of US$4.5 million as
              provided for in sections 14.6.1 and 14.6.2, provided however that
              such a Grant shall not exceed the amount of $2 million.

              The right of OMRIX to the Grant is conditioned upon its
              fulfillment of its obligations in the course of termination or
              expiration of this agreement and the smooth handing over of the
              Plant with the 'Know How' related thereto, including the training
              of the MDA personnel provided for in section 18.1.

17.    LICENSE AND KNOW-HOW TRANSFER

       17.1   In case OMRIX does not exercise its rights pursuant to sections
              5.1 and 5.2 of this Agreement, then as of the end of the Term, MDA
              shall have a royalty free, non transferable license to
              manufacture, in the Plant, all of the Licensed Products, based on
              the OCTAPHARMA Know How, as well as any New Products, and to
              market and sell same in Israel, for The Israel market. Such
              License granted to MDA shall not be limited in time.

       17.2   In case OMRIX exercises its right pursuant to section 5.2 of this
              Agreement, then as of December 31st, 2006, MDA shall have a
              royalty free, non transferable license to manufacture, in the
              Plant, all of the Licensed Products, based on OCTAPHARMA Know How
              and to market and sell same in Israel, for the Israeli market.
              Additionally, MDA shall have a nontransferable license to
              manufacture, market and sell in Israel, for the Israel market, all
              of the New Products (including the Biological Glue) all the rights
              to which are owned by OMRIX, against payment of royalties to
              OMRIX, as follows:

              With regard to Factor VIII, IVIG, IMIG - royalties at the rate of
              *** of net sales to an unaffiliated party;

              With regard to Biological Glue - royalties at the rate of *** of
              net sales to an unaffiliated party:

<PAGE>
                                     - 34 -

              With regard to Aibumin - royalties at the rate of *** of net sales
              to an unaffiliated party.

              It is understood that no right is being granted by OMRIX in this
              Agreement that permits MDA to contract manufacture products for
              other parties using OMRIX know-how or New Products technologies.

              MDA shall pay OMRIX the royalties on a quarterly basis, within 45
              days as of the end of each calendar quarter in respect of which
              the royalties are being paid. Within 180 days as of the end of
              each calendar quarter, MDA shall submit to OMRIX an annual sales
              report detailing the sales of each of the products in respect of
              which royalties are payable. Such annual sales reports shall be
              certified by MDA's external auditors. OMRIX shall have the right
              to appoint its own CPA who shall check the accuracy of such annual
              sales reports.

              Said Licenses granted to MDA shall not be limited in time.

              It is hereby clarified, that OMRIX does not grant MDA any right or
              authorization to manufacture the above products while using OMRIX
              know how or New Product technologies, for the manufacture of the
              products as a subcontractor for a third party.

              MDA shall be entitled to the licenses as set forth in this section
              17.2, also in any case of premature termination of this Agreement
              by OMRIX, at any time after December 31st, 2006, for any reason
              which is not under the control of MDA. In such event, the above
              licenses shall come into effect as of the date of such
              termination.

              In this section - "LICENSED PRODUCTS BASED ON OCTAPHARMA KNOW HOW"
              shall include any improvement thereon made by OCTAPHARMA until the
              date of assignment (i.e. September 5, 1995), and any improvement
              thereon made by OMRIX thereafter, which does not amount to a New
              Product.

              "NEW PRODUCT" - shall mean a product based on OMRIX know how which
              may be registered either as a new patent or as a new
              pharmaceutical product with the Registrar of Medical Preparations
              in the Israeli Ministry of Health, provided such new registration
              is not in respect of a product which has the same formulation and
              is produced while using the same manufacturing technology as the
              currently registered Licensed Products based on OCTAPHARMA Know
              How.

       17.3   Upon the expiration or termination of this Agreement, provided
              such termination or expiration is after December 31st 2006, and
              should MDA so desire, OMRIX shall favorably consider granting MDA
              a License to manufacture and sell to end users in the Israel
              market only, any additional products that were manufactured by
              OMRIX at the Plant and in respect of which OMRIX will have the
              full rights to License MDA. The parties shall negotiate in good
              faith the terms of any such possible License.

<PAGE>
                                     - 35 -

       17.4   Upon the expiration or termination of this Agreement, provided
              such termination or expiration is not before November 30, 2010,
              and should MDA so desire, OMRIX shall favorably consider granting
              MDA a License to manufacture any product(s) that were manufactured
              by OMRIX at the Plant in respect of which OMRIX will be entitled
              and free to license MDA for sale in country(ies) in which OMRIX
              doesn't market same or where OMRIX did not enter into exclusive
              marketing / distribution agreements. The parties shall negotiate
              in good faith the terms of any such possible License.

       17.5   Without derogating from the aforesaid in sections 17.1 - 17.4,
              upon expiration of this Agreement (whether on December 31st 2006
              or December 31st 2014) or upon its termination for any reason
              other than its material breach by MDA, which was not rectified by
              MDA in spite of a 30 day written demand by OMRIX to do so, MDA
              shall be fully entitled to continue operating the Plant, and
              producing the Licensed Products therein, and to obtain all
              manufacturing licenses from OMRIX for the Licensed Products as
              provided for in sub-section 17.1 above, by itself and/or through
              its subsidiaries.

              In order to enable MDA to take over the production at the Plant
              as aforesaid, and in order to ensure such transfer, the following
              shall apply:

              17.5.1 Within 30 days from the date of this Agreement, OMRIX shall
                     present to MDA's Director of Blood Services ("THE
                     DIRECTOR"), a full and updated set of documents, in hard
                     copy or in electronic form, pertaining to the production in
                     the Plant of the Licensed Products ("THE DOCUMENTATION").
                     The Director shall be permitted to appoint an expert on its
                     behalf in order to examine the Documentation so as to
                     assure that the manufacturing of the Licensed Products can
                     be completed when relying on the Know-How contained in
                     the Documentation, provided that no copies of the
                     Documentation shall be made by MDA, whether by electronic
                     media, photocopy etc.

                     The aforementioned expert shall be required to execute a
                     confidentiality agreement satisfactory to OMRIX, prior to
                     reviewing the Documentation. OMRIX shall have the right to
                     object to the appointment of any expert who, in the
                     reasonable opinion of OMRIX, may potentially disclose its
                     secrets or in any other way endanger the interests of
                     OMRIX.

                     If OMRIX shall give MDA an affidavit signed by Mr. Robert
                     Taub accompanying the Documentation, stating that the
                     documents contained in the Documentation which relate to
                     the production of the Licensed Products are the full
                     manufacturing file of the Licensed Products, then in such
                     case the Director shall not refer the matter to examination
                     by an expert as aforesaid.

              17.5.2 The Documentation shall be such, that will cover all
                     aspects involved with the production of each of the
                     Licensed Products,

<PAGE>
                                     - 36 -

                     including, without limitation, the necessary diagrams - if
                     and to the extent available, quantities, safety
                     precautions, complete manufacturing files and all of the
                     Standard Operating Procedures (Hereinafter: "S.O.P.'S")
                     with regard to all production procedures at the Plant, of
                     the Licensed Products.

                     In addition to the Documentation, it is hereby agreed that
                     upon termination of this Agreement, OMRIX shall hand over
                     to MDA all documents in the possession of OMRIX which
                     relate to the operation of the Plant and the manufacturing
                     in the Plant of the Licensed Products including, without
                     limitation, all the results of quality control tests as
                     well as all repair and maintenance reports etc., whether
                     documented on paper and/or on computer discs and/or on
                     microfilm and/or using any method of recording.
                     Additionally at such time that MDA shall have the right to
                     manufacture the Biological Glue in accordance with the
                     terms of this Agreement, such documentation shall also
                     include information relating to the Biological Glue.

                     MDA agrees to maintain and store all such Documentation
                     received by it upon termination as aforesaid, in accordance
                     with applicable pharmaceutical regulations, and shall make
                     such documentation available to OMRIX upon OMRIX's written
                     request.

              17.5.3 Following the review of the Documentation by The Director
                     or as otherwise provided for in section 17.5.1, the
                     Documentation shall be deposited in escrow with a Trust
                     Company of one of the major Israeli banks, at MDA's
                     discretion (Hereinafter: "THE TRUST COMPANY").

              17.5.4 Once every year, OMRIX shall submit to the Director or as
                     otherwise provided for in section 17.5.1., a set of updated
                     documents of whichever of the documents contained in the
                     Documentation which have been updated in the previous year
                     (Hereinafter: "THE ANNUAL UPDATING DOCUMENTS").

                     Following the review of the Annual Updating Documents by
                     the Director and/or as otherwise provided for in section
                     17.5.1 above, OMRIX shall deposit the Annual Updating
                     Documents with the Trust Company.

              17.5.5 Together with the Documentation, OMRIX shall deposit with
                     the Trust Company a letter in respect of each of its
                     employees working in the Plant, in the form attached hereto
                     as SCHEDULE "H", stating that upon the expiration of this
                     Agreement or the termination thereof for any reason, other
                     than reasons caused by MDA, OMRIX waives all of its rights
                     arising from such employees' employment agreement, with
                     regard to secrecy clauses and/or non competition clauses,
                     only as far as MDA is concerned, and only insofar as the
                     production of the Licensed Products and the Biological Glue
                     are concerned, in accordance

<PAGE>
                                     - 37 -

                     with the licenses granted to MDA pursuant to the terms of
                     this section 17.

                     Such letters shall further provide, that OMRIX has no
                     objection whatsoever, that the employees shall be employed
                     at the Plant by MDA, as of the termination of the
                     Agreement.

                     OMRIX hereby undertakes, that should it hire and employ,
                     during the Term, new employees at the Plant, whether
                     instead or in addition to its current employees, it shall
                     deposit with the Trust Company a letter as aforesaid, with
                     regard to any such new employee at the Plant, immediately
                     upon hiring such employee.

              17.5.6 Along with the Documentation and the aforesaid letters,
                     OMRIX shall submit with the Trust Company an irrevocable
                     letter of instructions, in the form attached to this
                     agreement as SCHEDULE "I", instructing the Trust Company as
                     to the circumstances upon which it shall, be required to
                     transfer the Documentation, along with all Annual Updating
                     Documents and the letters, to MDA.

              17.5.7 In addition to the aforesaid, OMRIX hereby undertakes to
                     take all necessary actions and sign all necessary
                     documents, required for enabling MDA to realize its rights
                     hereunder upon termination of this Agreement.

                     A list of such documents is attached hereto as SCHEDULE
                     "J".

18.    TRAINING OF MDA'S EMPLOYEES

       18.1   Without derogating from the provisions of section 17 above, it is
              hereby agreed that during the last year of operation of the Plant
              by OMRIX, as might be required under the circumstances, OMRIX
              shall train, at MDA's cost, and for a period to be agreed between
              the parties, a few of MDA'S key personnel in the operation of the
              Plant, in order to allow MDA to continue operating the Plant
              immediately after the vacation thereof by OMRIX.

              It is hereby clarified that such MDA's employees shall only be
              trained to manufacture the Licensed Products as well as the
              Biological Glue (subject to the provisions of sub-Section 17.2
              above) and they shall be required to execute a Confidentiality
              Agreement in favor of OMRIX in a form to OMRIX's satisfaction in
              respect of the technology, formulae etc., pertaining to other
              Products manufactured by OMRIX in the Plant.

              Should the parties reach an agreement as to the manufacture by MDA
              of any additional Products at the Plant upon the termination of
              this Agreement, OMRIX shall train MDA's employees to also
              manufacture any such additional Products.

       18.2   In addition to the aforesaid and in case of early termination of
              this agreement as a result of a breach of this agreement by OMRIX,
              OMRIX, hereby undertakes an obligation to train, at MDA's cost, a
              suitable

<PAGE>
                                     - 38 -

              substitute plant manager on behalf of MDA, whose identity shall
              be chosen by MDA (Hereinafter: "THE SUBSTITUTE MANAGER").

              The training of the Substitute Manager shall commence, if
              possible, at least three months before the date of termination (in
              case of an unexpected termination for any reason whatsoever).

              The Substitute Manager shall be trained by OMRIX intensively, for
              a period of no less than three consecutive months, covering all
              aspects related with the management and operation of the Plant.
              OMRIX undertakes to employ in the training of the Substitute
              Manager the General Manager of the Plant and the Scientific Person
              in charge of production and/or QC.

19.    REPAYMENT BY MDA OF THE ADVANCE

       DELETED

20.    ACQUISITION OF GOODS IN PROCESS

       DELETED

21.    ACCOUNTING BETWEEN THE PARTIES

       The parties have accounted between them in the framework of an
       agreement dated April 12th, 1998, a copy of which is attached hereto as
       SCHEDULE "K".

22.    NAME OF MDA ON THE PACKAGES

       To the extent it will be legally and politically possible and as long as
       it will not adversely affect the marketing efforts of OMRIX and/or its
       relations with various third parties worldwide, OMRIX shall endeavor to
       indicate MDA as the owner of the Plant on the packages of the Products
       manufactured by OMRIX at the Plant.

23.    OMRIX SIGNS

       OMRIX shall be entitled to place, in co-ordination with the management of
       the Tel Hashomer Hospital, its directional signs at the various
       intersections within the Tel Hashomer perimeter.

       OMRIX shall not be entitled to put its signs on the outer side of the
       Building, but will be entitled to do so, in coordination with MDA inside
       the Building, including at the entrance to the Plant.

24.    INSPECTION OF THE PLANT AND THE PREMISES

       24.1   MDA's Manager of Blood Services shall be entitled to reasonably
              visit the Plant during working hours for the sole purpose of
              verifying the compliance of OMRIX with the provisions of this
              Agreement, after giving OMRIX 2 hours notice ahead of time of
              his/hers intention to do

<PAGE>
                                     - 39 -

              so. It is agreed, however, that OMRIX will be entitled to deny
              access during periods of secret R&D or manufacturing processes.
              The Manager of MDA`s Blood Services shall be allowed access to the
              Plant only subject to exercising a Confidentiality Agreement
              satisfactory to OMRIX. Two (2) other representatives of MDA shall
              be also entitled to visit the Plant during working hours in order
              to verify the compliance of OMRIX with the provisions of this
              Agreement, after giving OMRIX 48 hours notice ahead of time of
              their intention to do so provided, however, that such visits shall
              not be more frequent than four (4) times in each calendar year,
              and provided such representatives shall also be required to
              execute a confidentiality agreement satisfactory to OMRIX in favor
              of OMRIX prior to visiting the Plant.

       24.2   OMRIX hereby declares, that it shall allow delegations of MDA's
              friends and/or donors to visit the Plant, provided that such
              visits shall be coordinated in advance with OMRIX's authorized
              representatives, and provided that such delegations shall not
              include visitors who may represent and/or have commercial contacts
              with OMRIX's competitors, whereby such visitors are involved with
              the manufacture and/or sale and/or engineering of blood derived
              products.

25.    EXCHANGE RATE

       Any amount indicated or referred to in this Agreement and quoted in US
       Dollars shall be payable in NIS according to the representative exchange
       rate of the US Dollars to the NIS on actual date of payment.

26.    SECURITIES

       In order to assure the fulfillment by OMRIX of its obligations pursuant
       to this agreement, OMRIX shall provide MDA the following securities:

       26.1   OMRIX shall provide MDA within thirty (30) days as of the
              execution of this agreement with an autonomous unconditional Bank
              Guarantee satisfactory to MDA, in the amount in NIS equivalent to
              US DOLLARS 250,000 linked to the exchange rate of the US Dollar,
              in order to secure the payment by OMRIX of the amounts that shall
              be due to MDA from time to time for the supply of plasma and/or as
              Rent and Lease Fee. Such Bank Guarantee shall be in force for
              consecutive 12 month periods until a date being 6 (six) months
              after the evacuation of the Plant by OMRIX. Each such extension
              of the Bank Guarantee will be made by OMRIX not later than 4
              (four) months before the relevant expiration date of any such Bank
              Guarantee.

              The above guarantee shall be deposited in trust with MDA's
              attorney - Advocate AMI OSNAT, who shall be entitled to hand over
              the Bank Guarantee to MDA upon the following conditions:

              (i). He gives OMRIX a fifteen (15) days written notice about his
              intention to do so; and

<PAGE>
                                     - 40 -

              (ii) He attaches a Sworn Affidavit by MDA'S Director General or
              Treasurer specifying the amounts due to MDA from OMRIX which were
              not paid on time in spite of a written demand to do so.

       26.2   The parent Company of OMRIX, OMRIX BIOPHARMCEUTICALS S.A. of
              200 Chausse de Waterloo B- 1640 Rhode St. Genese, Belgium (Fax:
              003223599149), hereby guarantees the undertakings of OMRIX as
              stipulated in Section 16, and shall place its signature at the
              bottom of this agreement in order to give effect to said
              guarantee.

       26.3   In addition to the aforesaid in this section 26, OMRIX shall
              provide MDA with a first degree floating charge over all of
              OMRIX's inventory of uncompleted products (including the Licensed
              Products and the Biological Glue), as well as all of OMRIX's
              inventory of raw materials, including plasma. In order to give
              effect to said floating charge, the parties shall sign, upon the
              execution of this agreement, a debenture in the form attached
              hereto as SCHEDULE "L"; The parties shall sign any additional
              documents required in order to give effect to said floating
              charge, and shall take any actions necessary in order to register
              the floating charge with the Israeli Registrar of Companies.

              Said floating charge shall secure, inter alia, OMRIX's
              obligations to pay the Deferred Rent and Lease Fee as per section
              7.3.2 of this Agreement, as well as any outstanding liability
              pertaining to the supply of plasma to OMRIX by MDA, as well as any
              future payments due from OMRIX to MDA which are not settled by
              OMRIX in a timely manner.

27.    RESPONSIBILITY AND LIABILITY

       27.1   In its capacity as the owner of the Building, including the
              adjacent areas and surfaces as well as the Plant, MDA shall be
              fully responsible and liable for any damage caused at and/or by
              and/or to the Building and/or the Systems, all of which are
              maintained by MDA or anybody on its behalf.

       27.2   In its capacity as the Lessee of the Premises and the Plant
              (excluding external walls), OMRIX shall be fully responsible and
              liable for any damage caused at and/or by and/or to the premises
              or the Plant including the Equipment installed therein, all of
              which are maintained by OMRlX or anybody on its behalf, with the
              exception of any damage caused due to structural deficiency or
              mistakes and/or poor workmanship of MDA's contractors in the
              process of the erection of the Premises or the Plant.

       27.3   MDA shall be fully responsible and liable for any damage caused by
              any of its employees, sub-contractors or any third party acting on
              its behalf.

       27.4   OMRIX shall be fully responsible and liable for any damage caused
              by any of its employees, sub-contractors or any third party acting
              on its behalf in the Premises.

<PAGE>
                                     - 41 -

       27.5   OMRIX shall be fully responsible and liable for any damage caused
              by any of the Products manufactured by OMRIX. MDA shall be fully
              responsible and liable for any damage caused by the Plasma
              supplied by it to OMRIX.

       27.6   In the event legal proceedings shall be initiated by any third
              party ("Third Party") against one of the parties hereto (the
              "Defendant"), for deeds or misdeeds which are the liability of the
              other party hereto (the "Liable Party"), the Defendant shall
              immediately inform the Liable Party of any such proceedings and
              will allow the Attorneys of the Insurance Company of the Liable
              Party to participate in the defense in such proceedings or, at the
              discretion of the Defendant, to take over the entire defense in
              such proceedings. The Liable party shall, within 15 (fifteen) days
              of the request by the Defendant to do so, fully indemnify the
              Defendant for any expense, damage or payment incurred by the
              Defendant as a result of the deeds or misdeeds of the Liable
              Party.

28.    LAW AND JURISDICTION

       This Agreement shall be governed by the Laws of the State of Israel. With
       the exception of the matters specifically referred herein to arbitration,
       the competent Courts in Tel Aviv / Jaffa shall have the sole jurisdiction
       in any matters arising hereunder.

29.    ACTS OF GOD AND FORCE MAJEURE

       Neither party shall be liable for any failure or delay in the performance
       of its obligations under this Agreement whereby such failure or delay is
       caused by an act of God, Force Majeure, riot or civil commotion, strike,
       lockout or other labor disturbances, fire, act and/or any other order of
       government, flood, war, peril of sea, or any other cause or peril whether
       of the same and/or of another nature beyond reasonable control.

30.    COMMERCIAL TRANSACTION

       MDA states and confirms the transaction contemplated in this Agreement is
       made by it as a transaction of a purely commercial nature and not in
       the framework of MIA's statuary activities.

31.    ASSIGNMENT OF RIGHTS

       31.1   MDA confirms that it has been informed by OMRIX that OMRIX may
              wish to introduce certain changes in this Agreement, as provided
              below, in order to enjoy certain benefits to which it might be
              entitled by law. Toward this end OMRIX may wish to split the Lease
              and Rent hereof between OMRIX and an additional company being an
              affiliate of OMRIX so that the duties and the rights of OMRIX, as
              per this Agreement, shall be split between OMRIX and such other
              affiliate company of OMRIX. MDA shall not object to such
              amendment of the

<PAGE>
                                     - 42 -

              Agreement provided it shall guarantee the performance of any
              undertakings of such affiliate company towards MDA.

       31.2   Subject to the provisions of section 31.1 above; any other
              assignment by OMRIX of its rights or duties, shall require the
              prior written consent of MDA, which shall not be unreasonably
              withheld.

       31.3   OMRIX shall give MDA 14 days prior written notice about any
              contemplated transaction as a result of which Mr. Taub's
              shareholdings in OMRIX Biopharmaceuticals S.A. and/or his voting
              rights and/or his rights to appoint directors shall drop below 20%
              and/or whereby the shareholdings/voting rights in OMRIX
              Biopharmaceuticals S.A. of any other single shareholder (and/or
              group of shareholders who are parties to any shareholders/voting
              agreements), whether directly or indirectly, will become larger
              than those of Mr. Taub.

32.    MISCELLANEOUS

       With regard to any works which shall be carried out by OMRIX in the Plant
       and/or the Premises and/or outside thereof, in accordance with the
       terms of this agreement, whether as Discretionary Investments and/or
       Compulsory Investments and/or otherwise (e.g. as stipulated in section
       2.13 above), MDA shall be entitled to employ and consult an engineer on
       its behalf, who shall be authorized to supervise all such works and
       approve the execution of any such works (as set forth in this agreement).
       It is acknowledged that such engineer, at the time of the execution of
       this agreement, is Mr. Doron who will be required to execute a
       confidentiality agreement satisfactory to OMRIX. Any future appointment
       of such an engineer will be made by mutual agreement of the Parties.

33.    NOTICES

       The addresses of the parties for the purposes of this Agreement, subject
       to any change of address, notice of which was given by one party to the
       other, are as first hereinabove written and any notice hereunder shall be
       deemed properly served when delivered by personal delivery and if posted
       - five (5) days after the notice, properly addressed as above and duly
       stamped is posted by registered mail from a Post Office in Israel.

34.    WAIVERS

       The waiver by either party of any breach or alleged breach of any
       provision hereunder shall not be construed to be a waiver of any
       concurrent, prior or succeeding breach of same provision or any other
       provision herein.

35.    AMENDMENTS IN WRITING

       Any amendment of this Agreement must be in writing and signed by all the
       parties hereto.

<PAGE>
                                     - 43 -

36.    APPROVAL OF THE AGREEMENT

       This Agreement was duly approved by the Board of Directors of OMRIX and
       any other competent organ of OMRIX on the one hand, and by the Executive
       Committee and any other competent organ of MDA on the other hand, and
       upon, execution thereof it shall be fully binding upon the parties
       hereto.

IS WITNESS WHEREOF, THIS AGREEMENT IS HEREBY SIGNED BY THE PARTIES HERETO AS OF
THE DAY AND YEAR FIRST ABOVE WRITTEN.

(OMRIX Biopharmaceuticals Stamp)

/s/ Robert Taub           /s/ Nissim Mashiach
-------------------------------------------------------
OMRIX BIOPHARMACEUTICALS LTD.
by Mr. Robert Taub - Chairman of the Board
and by Mr. Nissim Mashiach - General Manager

(Stamp)

/s/ Yohanan Gur           /s/ Avi Zohar
-------------------------------------------------------
MAGEN DAVID ADOM
By Mr. Yohanan Gur - Chairman of the Executive Committee
and by Mr. Avi Zohar - Director General

We, the undersigned, OMRIX BIOPHARMACEUTICALS S.A., of 200, Chausee de
Waterloo B-1640 Rhode-St-Genese, Belgium, being the parent company of OMRIX
BIOPHARMACEUTICALS Ltd. ("OMRIX"), do hereby guarantee the full performance by
OMRIX of OMRIX's obligations pursuant to section 16 of the above Agreement. Our
undertaking as aforesaid shall be jointly and severally with that of OMRIX.

/s/ Robert Taub           /s/ Nissim Mashiach
-------------------------------------------------------
OMRIX BIOPHARMACEUTICALS S.A.
by Robert Taub - Chairman of the Board

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