Document:

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                                                                  Execution Copy

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
August 22, 2003 by and between MedQuist Inc., a New Jersey corporation (the
"Company"), and R. Timothy Stack ("Employee").

                                   BACKGROUND

         The Company desires to hire Employee, and Employee desires to accept
such employment on the terms and conditions herein set forth.

         NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties hereto, intending
legally to be bound, hereby agree as follows:

         1. Employment. The Company hereby employs Employee as its President and
Chief Executive Officer upon the terms and conditions set forth in this
Agreement. In addition, so long as Employee serves as Chief Executive Officer,
the Board of Directors shall recommend Employee to the shareholders for election
to the Board of Directors at each annual or other meeting of the shareholders at
which directors are elected. Subject to Section 8 hereof, the Agreement shall be
for a five (5) year term commencing on the first day of Employee's employment
and shall automatically renew for successive one (1) year periods.

         2. Office and Duties. Employee shall render such services as are
appropriate for a person holding Employee's position and, subject to Section
8.e.ii hereof, such additional or alternative duties as may from time to time be
assigned to Employee by the Board of Directors of the Company ("Duties").

         3. Full Time Employment. Employee shall use Employee's best efforts to
carry out his Duties and other obligations hereunder and devote Employee's
entire working time to the business and affairs of the Company, and shall not,
in any advisory or other capacity, work for any other individual, firm or
corporation without the prior written consent of the Company.
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         4. No Conflicting Agreements. Employee represents and warrants to the
Company that he is not subject or a party to any agreement, non-competition
covenant, non-disclosure agreement or other agreement, covenant, understanding
or restriction which would prohibit Employee from executing this Agreement or
performing fully the Duties and other obligations hereunder, or which would in
any manner, directly or indirectly, limit or affect the Duties or other
obligations hereunder. The Company acknowledges that Employee has disclosed to
it that he is a member of the board of directors (or functional equivalent) of
certain companies and other entities. Employee acknowledges that the Company's
board of directors shall from time to time review if any such memberships (or
future memberships) conflict with any of his Duties or obligations under this
Agreement and Employee will resign from any such position upon request of the
board of directors.

         5. Base Salary; Bonus; Options; Restricted Stock.

                  a. Base Salary. Employee shall be entitled to a total base
salary of $500,000 per year, payable at such times as is consistent with the
Company's pay periods for other executives of the Company. The Compensation
Committee of the Board of Directors may, from time to time, increase but not
decrease Employee's Base Salary (as so adjusted, "Base Salary").

                  b. Signing Bonus. On the first pay period following the
commencement of his employment, Company shall pay to Employee a $135,000 signing
bonus, which Employee shall repay to the Company if Employee resigns (other than
for "good reason" as defined herein) within one (1) year after the date his
employment commences.

                  c. 2003 Cash Bonus. For calendar year 2003, Employee's bonus
shall be $187,500 so long as Employee shall not have announced his resignation
(other than for
"good reason" as defined herein) on or prior to the date payment is due.

                  d. Annual Cash Bonus. After calendar year 2003, Employee shall
be eligible for participation in the Company's annual targeted cash bonus plan
for executive officers in an amount equal to up to 75% of Base Salary. Under the
current targeted cash bonus plan for executive officers, (i) 75% of the bonus

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target will be earned upon achievement of financial objectives such as the
Company's earnings per share ("EPS") as proposed by management and approved by
the Company's compensation committee (the "Compensation Committee"); and (ii)
25% of the bonus target will be earned upon achievement of specific strategic
and tactical initiatives identified by management and approved by the
Compensation Committee. In addition, Employee may earn up to an additional 50%
of the targeted bonus based upon the sole discretion of the Compensation
Committee; provided, however, that Employee's total annual cash bonus (targeted
plus discretionary) may not exceed 100% of Base Salary.

                  e. Annual Option Bonus. Employee shall be eligible for an
annual stock option grant of the Company's common stock with a target valued at
50% of Base Salary and with an exercise price equal to the closing price of the
Company's common stock as of the date of grant. The option grant target value
shall be determined based upon accepted option pricing methodology such as Black
Scholes. Under the current plan, (i) 75% of the option target will be earned
upon achievement of financial objectives such as the Company's EPS as proposed
by management and approved by the Compensation Committee and (ii) 25% of the
option target will be earned upon achievement of specific strategic and tactical
initiatives identified by management and approved by the Compensation Committee.
This program may be changed to a restricted share program of the Company's
common stock at the option of the Compensation Committee. The value, at date of
grant, of restricted shares awarded will be equal to the value of an option
award. Options shall be awarded subject to the Company's 2002 Stock Option Plan
and options (or restricted shares) shall vest ratably over a five (5) year term.

                  f. Restricted Shares. The Company shall issue to Employee
35,000 restricted shares of the Company's common stock (the "Restricted
Shares"). Employee's right to sell or otherwise transfer the Restricted Shares
shall, subject to applicable securities laws, rules and regulations, vest in
increments of 20% on the anniversary of Employee's first day of employment and
20% on each such anniversary date thereafter. Employee may not sell, transfer,
pledge or otherwise encumber or vote any Restricted Shares until they have
vested. Employee shall forfeit and return to the Company any Restricted Shares

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that have not vested as of the date Employee ceases to be an employee of the
Company; provided, however, if Employee accepts the severance provided for
herein over an 18 month term and does not otherwise breach the terms of this
Agreement, the Restricted Shares shall continue to vest until the end of such 18
month period.

         Upon the vesting of the Restricted Shares, the Company shall deliver to
the Employee a certificate for the common stock of the Company; provided that no
such certificates will be delivered to Employee until appropriate arrangements
have been made with the Company for the withholding of any required federal,
state or local taxes of any kind with respect thereto (which arrangements may
include the settlement of the minimum required withholding obligation with
common stock of the Company, including the common stock of the Company that is
subject to this award, which common stock shall have a per share value equal to
the closing price of the Company's common stock as of the date of such vesting).
The Company shall, to the extent not otherwise satisfied and to the extent
permitted by law, have the right to deduct the amount of any such withholding
obligation from any payment of any kind otherwise due to the Employee.

         The Company may condition delivery of certificates for the Company's
common stock upon receipt from Employee of any undertakings which it may
reasonably determine are required to ensure that the certificates are being
issued in compliance with federal and state securities laws. If Employee
determines that it is necessary or desirable, in his sole discretion, to adopt a
plan that is in compliance with Rule 10b5-1 of the Securities Act of 1933, as
amended, with respect to any shares of the Company's common stock received by
Employee in connection with this award, the Company, subject to applicable law,
shall permit and facilitate such adoption.

                  g. Equitable Treatment. Employee understands that from time to
time the Compensation Committee may modify or replace the Company's incentive
bonus plans (cash, options, restricted shares and others) from time to time as
it may deem to be advisable in its discretion. The Employee shall participate in
and be subject to the terms of such incentive bonus plans in a manner that is at

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least as favorable as are offered from time to time and administered with
respect to the most senior executive officers of the Company.

         6. Other Benefits. So long as you are employed by the Company pursuant
to the terms of this Agreement, Employee will be eligible to receive the
following benefits (collectively, "Benefits"):

                  a. Savings and Retirement Plans. Participation in all savings,
pension and retirement plans and programs of the Company generally available to
other executives of the Company as in effect from time to time;

                  b. Welfare Plans. Participation in any welfare benefit plans
and programs of the Company as in effect from time to time;

                  c. Life Insurance. Life insurance maintained by the Company on
the life of Employee (naming the beneficiary of Employee's choice) in an amount
consistent with policy of the Company as in effect from time to time;

                  d. Vacation. Paid vacation (taken consecutively or in
segments) in accordance with the Company's policies (not less than 4 weeks)
generally applicable to other executives of the Company from time to time, taken
at such times as is reasonably consistent with proper performance by Employee of
Employee's Duties;

                  e. Car Allowance. A car allowance of $1,000 per month, which
shall be Employee's only reimbursement for any expenses relating to business use
of an automobile; and

                  f. Legal Fees. Employee's reasonable legal fees and expenses
incurred in connection with negotiating this Agreement; and

                  g. Relocation Benefits. Relocation benefits related to
relocating Employee's home and family to the Marlton, New Jersey area consistent
with the terms of the "Philips Relocation Policy," dated January 2002 (as
supplemented April 2002) and previously provided to Employee.

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         7. Reimbursement for Expenses. The Company shall reimburse Employee in
full for all reasonable and necessary business and travel expenses incurred by
him in connection with the performance of his Duties (collectively, "Expenses").
Notwithstanding any provision herein to the contrary, the Company shall
reimburse Employee only (a) upon presentation by Employee of written vouchers or
expense statements satisfactorily evidencing such expenses as may be reasonably
required by the Company and (b) if such expenses are in accordance with the
Company's policies generally applicable to executives of the Company.

         8. Resignation; Termination; and Severance Benefits.

                  a. Resignation. Subject to Section 8.e. below, Employee may
resign his employment at any time by providing thirty (30) days' prior written
notice of resignation to the Company. The Company may waive the notice
requirement and immediately terminate Employee's employment upon receipt of
notice.

                  b. Death or Disability. Subject to Section 8.e. below, this
Agreement shall terminate immediately upon Employee's death. Subject to Section
8.e. below, the Company may terminate Employee's employment hereunder in the
event of physical or mental incapacity or disability which renders Employee
unable to perform the Duties for a period of one hundred twenty (120) days or
more during any period of twelve (12) consecutive months ("Disability").

                  c. Termination Without Cause; Resignation for Good Reason.
Subject to Section 8.e. below, the Company may terminate Employee's employment
at any time without cause immediately upon giving notice to Employee. In
addition, if Employee resigns for "good reason" as defined below, the
termination shall be treated hereunder as if it were without cause.

                  d. Termination for Cause. Subject to Section 8.e. below, the
Company may terminate Employee's employment hereunder at any time for cause
after providing Employee notice and opportunity to cure pursuant to Section
11.a. hereof. Termination for "cause" shall mean discharge of the Employee by
the Company on any of the following grounds: (i) willful and continued failure

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to substantially perform his Duties after a written demand for substantial
performance is delivered to the Employee identifying the manner in which the
Company believes that the Employee has not substantially performed his Duties,
or (ii) willful misconduct which is materially economically injurious to the
Company or to any entity in control of, controlled by or under common control
with Company (an "Affiliate"), including, but not limited to, any breach of
confidentiality provisions or restrictive covenant provisions to which the
Employee is bound, or (iii) Employee's conviction of, or plea of guilty or nolo
contendere to, a felony or other crime involving moral turpitude, or (iv) drug
or alcohol abuse by the Employee or (v) conduct by Employee that fails to comply
in all material respects with the Company's codes of ethics or other similar
policies as in place from time to time.

                  e. Company's Obligations Upon Termination.

                        i. Termination for Cause; Resignation; Death or
Disability. If the Company terminates Employee's employment hereunder for cause,
or if Employee resigns (other than for "good reason" as defined below), or if
Employee dies or suffers a Disability, the Company shall have no further
obligations to Employee hereunder other than for the payment of (a) accrued but
unpaid salary prorated through the date of termination or effective date of
resignation ("Accrued Salary"), (b) any Benefits vested as of such date ("Vested
Benefits") and (c) unreimbursed Expenses incurred prior to such date.

                        ii. Termination Without Cause; or Resignation for Good
Reason. If (a) the Company terminates Employee's employment hereunder without
cause or (b) if the Employee voluntarily terminates his employment for good
reason, the Company shall have no further obligation to Employee hereunder other
than for the payment or provision, as applicable, of (1) Accrued Salary, (2)
eighteen (18) months (as defined below) severance payable in equal installments
on the Company's regular paydates; (3) any Vested Benefits and continued
provision of Benefits described in Sections 6.a., 6.b. and 6.c. for such
eighteen (18) month period and (4) unreimbursed Expenses incurred prior to the

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date of termination. In addition, any restricted shares or options granted
pursuant to Sections 5.e. and 5.f. hereof shall continue to vest during such
eighteen (18) month period. Notwithstanding the foregoing, Employee may elect to
take the severance pay described in clause (2) above in a lump sum, in which
case the Benefits described in clause (3) above (other than Vested Benefits)
shall terminate and vesting of any restricted shares or options shall cease as
of the date of his termination of employment.

                              For purposes of this Agreement:

                              (aa) a "month" of severance shall be equal to (1)
the sum of all cash compensation awarded to the Employee in the fiscal year
immediately prior to termination, or if compensation was higher or would be
higher on an annualized basis, in the fiscal year in which such termination
takes place; divided by (2) 12;

                              (bb) Resignation for "good reason" shall mean: (1)
required relocation of Employee's principal place of business by more than 50
miles, or (2) failure of the Company to pay any compensation authorized by this
Agreement, provided the Employee has given the Company notice of such breach and
the Company has failed to cure such breach within thirty days after receipt of
such notice, or (3) a material change in the title or a substantial diminution
of Employee's Duties so long as Employee objects to same within thirty (30)
days' after any such change or (4) a "change in control" of the Company in which
Employee is terminated without cause or resigns for good reason (as defined in
subsection 1-3 above) within twelve months after such change-in-control or (5) a
transaction in which, without Employee's prior consent, Koninklijke Philips
Electronics, N.V. and its affiliates acquire all of the issued and outstanding
voting stock of the Company.

                              (cc) "change in control" shall mean (1) any
liquidation of the Company, (2) the sale of all or substantially all of the
assets of the Company, (3) the acquisition by any person or group of beneficial
ownership of securities representing more than 50% of the combined voting power

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in the election of directors of the Company (after giving effect to the exercise
of any options, warrants or other convertible securities held by such person or
group), (4) approval of a merger, consolidation or other business combination by
the Company's shareholders in which a majority of the Board of the surviving
corporation (or its ultimate parent) are not members of the board of directors
prior to such merger, or (5) commencement of a tender offer to purchase
securities representing more than 50% of the combined voting power in the
election of directors of the Company (after giving effect to the exercise of any
options, warrants or other convertible securities held by such person or group).

                  f. Employee's Obligations In the Event Severance is Due. In
order to be eligible for severance pursuant to the foregoing, the Employee must
execute an employment release in favor of the Company in form and substance
reasonably satisfactory to the parties and may not be claiming entitlement to
severance or similar compensation from the Company under any other agreement,
plan or program.

         9. Restrictive Covenants and Confidentiality; Injunctive elief.

                  a. As a condition to the performance by the Company of its
obligations hereunder so long as Employee remains an employee of the Company,
and for a period of eighteen (18) months thereafter, Employee shall not, without
the prior written approval of the Board of Directors of the Company, directly or
indirectly through any other person, firm or corporation, whether individually
or in conjunction with any other person, or as an employee, agent,
representative, partner or holder of any interest in any other person, firm,
corporation or other association:

                        (i) solicit, entice or induce any person, firm or
corporation who or which presently is, within eighteen (18) months prior hereto
was, or at any time during the term of his Employment (the "Term") shall be, a
client or customer of the Company or any of its subsidiaries to either cease
doing business with the Company or to do business with a competitor of the
Company and Employee shall not approach any such person, firm or corporation for
such purpose or authorize or knowingly approve the taking of such actions by any
other person; or

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                        (ii) solicit, entice, induce or hire any person who
presently is, within eighteen (18) months prior hereto was, or at any time
during the term hereof shall be an employee of the Company or any of its
subsidiaries to become employed by any other person, firm or corporation, and
Employee shall not approach any such employee for such purpose or authorize or
knowingly approve the taking of such actions by any other person; or

                        (iii) compete with, or encourage or assist others to
compete with, or solicit orders or otherwise participate in business
transactions in the electronic transcription services and other health
information management solutions services businesses in which the Company is
engaged anywhere within the United States or in any area outside of the United
States in which Employee provides services to the Company (each, a "Competing
Business"); or

                        (iv) lend any credit or money for the purposes of
establishing or operating or assisting any Person to establish or operate a
Competing Business, or otherwise give aid or advice to any other person or
entity engaging in any Competing Business; or

                        (v) knowingly lend or allow his professional skill,
knowledge or experience to be so used by any person or entity which is engaged
in a Competing Business.

         Employee acknowledges that his responsibilities for the Company will
extend to the entire United States and not just be limited to a local geographic
territory.

         Nothing in the foregoing shall prohibit Employee from engaging in any
business that is not a Competing Business after termination of Employee's
employment with the Company, or investing in the securities of any corporation
(including a Competing Business) having securities listed on a national security
exchange, provided that such investment does not exceed 5% of any class of
securities of any corporation engaged in business in competition with the
Company, and provided that such ownership represents a passive investment and
that neither Employee nor any group of persons including Employee, in any way,
either directly or indirectly, manages or exercises control of any such

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corporation, guarantees any of its financial obligations, otherwise takes any
part in its business, other than exercising Employee's rights as a shareholder,
or seeks to do any of the foregoing.

                  b. Employee acknowledges that during the Term, Employee will
have access to confidential and proprietary information of the Company and its
affiliates not available to the public or in the public domain, including,
without limitation, proprietary software, trade secrets, Developments (as
defined below) plans for future developments, information about costs,
customers, potential customers, profits, markets, sales, products, key
personnel, pricing policies, operational methods, technical processes and other
business affairs and methods (collectively, "Confidential Information"). As to
trade secrets, Employee covenants and agrees that Employee will not use or
disclose such trade secrets other than in the Company's business so long as the
Company's trade secrets remain trade secrets, but in no event for less than two
(2) years following termination of employment. With respect to all other
Confidential Information, Employee covenants to keep secret all such
Confidential Information and to not, directly or indirectly, either during the
Term or at any time within two (2) years thereafter, disclose or disseminate to
anyone or make use of, for any purpose whatsoever, any Confidential Information.
Employee acknowledges that all copies of documents which contain Confidential
Information are and shall remain the property of the Company. Upon termination
of Employee's employment, Employee will promptly deliver to the Company all
tangible materials containing Confidential Information (including all copies
thereof, whether prepared by Employee or others) which Employee may possess or
have under Employee's control.

                  c. Employee represents (i) that Employee's experience and
capabilities are such that the restrictions contained herein will not prevent
Employee from obtaining employment or otherwise earning a living at the same
general economic benefit as reasonably required by Employee and (ii) that
Employee has, prior to the execution of this Agreement, reviewed this Agreement
thoroughly with Employee's legal counsel.

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                  d. Employee acknowledges that the services to be rendered by
Employee are special, unique and extraordinary, that the restrictions contained
in this Section 8 are reasonable and necessary to protect the legitimate
business interests of the Company and that the Company and Parent would not have
entered into this Employment Agreement in the absence of such restrictions. By
reason of the foregoing, Employee consents and agrees that if Employee violates
any of the provisions of this Section 9, the Company would sustain irreparable
harm and, therefore, irrevocably and unconditionally agrees that in addition to
any other remedies which the Company may have under this Agreement or otherwise,
all of which remedies shall be cumulative, the Company shall be entitled to
apply to any court of competent jurisdiction for preliminary and permanent
injunctive relief and other equitable relief. In the event that any of the
provisions of this Section 8 hereof should ever be adjudicated to exceed the
time, geographic, service, or other limitations permitted by applicable law in
any jurisdiction, then such provisions shall be deemed reformed in such
jurisdiction to the maximum time, geographic, service, or other limitations
permitted by applicable law.

                  e. Employee agrees that the Company may provide a copy of this
Agreement to any business or enterprise (i) which the Employee may directly or
indirectly own, manage, operate, finance, join, control or participate in the
ownership, management, operation, financing, or control of, or (ii) with which
Employee may be connected with as an officer, director, employee, partner,
principal, agent, representative, consultant or otherwise, or in connection with
which Employee may use or permit Employee's name to be used. Employee will
provide the names and addresses of any of such persons or entities as the
Company may from time to time reasonably request.

                  f. In the event of any breach or violation of the restriction
contained above, the period therein specified shall abate during the time of any
violation thereof and that portion remaining at the time of commencement of any
violation shall not begin to run until such violation has been fully and finally
cured.

                  g. Employee acknowledges that the Company shall be the sole
owner of all the results and proceeds of Employee's services hereunder,

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including but not limited to, all inventions, developments, enhancements,
discoveries and other improvements relating to equipment, methods or processes
connected with or useful to the Company's and its subsidiaries' businesses,
(collectively, the "Developments"), which Developments Employee, by himself or
in conjunction with any other person or entity, may conceive, make, acquire,
acquire knowledge of, develop or create in connection with and during the term
of or prior, to Employee's employment hereunder, free and clear of any claims by
Employee (or any successor or assignee of Employee) of any kind or character
whatsoever other than Employee's right to compensation hereunder. Employee
hereby assigns and transfers his right, title and interest in and to all such
Developments, and agrees that he shall, at the request of the Company, execute
such assignments, certificates or other instruments, and do any and all other
acts, as the Company from time to time reasonably deems necessary or desirable
to evidence, establish, maintain, perfect, protect, enforce or defend the
Company's right, title and interest in or to any such Developments. Employee
acknowledges that any Development which may be copyrightable shall be deemed to
be "work for hire."

         10. Survival. Any provisions that by their terms are intended to
survive the termination of this Agreement shall so survive, including, without
limitation, Section 9.

         11. Miscellaneous.

                  a. Any notice authorized or required to be given or made by or
pursuant to this Agreement shall be made in writing and either personally
delivered or mailed by overnight express mail to the respective address of the
party to receive such notice, which address is the one designated below the
signature of such party hereto, or to such other address as a party may specify
by notice to the other parties hereto. In the event that the Company desires to
terminate Employee for cause pursuant to Section 7.b. of this Agreement, the
Company shall provide Employee with prompt written notice of such termination
and, if requested by Employee, afford Employee a reasonable opportunity to cure
such default within sixty (60) days after receipt of such notice.

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                  b. All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of Employee
hereunder are of a personal nature and shall not be assignable or delegatable in
whole or in part by Employee.

                  c. If any provision of this Agreement or application thereof
to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction.

                  d. No remedy conferred upon any party by this Agreement is
intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to any other remedy given hereunder
or now or hereafter existing at law or in equity. No delay or omission by any
party in exercising any right, remedy or power hereunder or existing at law or
in equity shall be construed as a waiver thereof, and any such right, remedy or
power may be exercised by the party possessing the same from time to time and as
often as may be deemed expedient or necessary by such party in its sole
discretion.

                  e. This Agreement may be executed in several counterparts,
each of which is an original. It shall not be necessary in marking proof of this
Agreement or any counterpart hereof to produce or account for any of the other
counterparts.

                  f. In the event of a lawsuit by either party to enforce any
provisions of this Agreement, the prevailing party shall be entitled to recover
reasonable costs, expenses and attorney's fees from the other party.

                  g. The validity, interpretation, construction, performance and
enforcement of this Agreement shall be governed by the laws of the State of New

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Jersey, without reference to principles of conflicts of laws. The parties fully
agree that the exclusive venue of any action arising out of this Agreement and
the employee's employment or termination thereof shall be in the Superior Court
of Camden or Burlington County, New Jersey, any other court in New Jersey having
jurisdiction over an action arising out of this Agreement, or the United States
District Court for the District of New Jersey. Each party consents to service of
process with respect to any such matter by certified mail.

                  h. In this Agreement, words of gender may be read as
masculine, feminine, or neuter, as required by context. Words of number may be
read as singular or plural, as required by context.

                  i. Certain Additional Payments. Anything in this Agreement to
the contrary notwithstanding, in the event it shall be determined that any
payment, award, benefit or distribution (or any acceleration of any payment,
award, benefit or distribution) by the Company (or any of its affiliated
entities) to or for the benefit of Employee (whether pursuant to the terms of
this Agreement or otherwise, but determined without regard to any additional
payments required under this Section 11.i. (the "Payments") would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), or any interest or penalties are incurred by Employee with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Company shall pay to Employee an additional payment (a "Gross-Up Payment")
in an amount such that after payment by Employee of all taxes (including any
Excise Tax) imposed upon the Gross-Up Payment, Employee retains an amount of the
Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the
Payments and (y) the product of any deductions disallowed because of the
inclusion of the Gross-Up Payment in Employee's adjusted gross income and the
highest applicable marginal rate of federal income taxation for the calendar
year in which the Gross-Up Payment is to be made. For purposes of determining
the amount of the Gross-Up Payment, the Employee shall be deemed to (i) pay
federal income taxes at the highest marginal rates of federal income taxation

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for the calendar year in which the Gross-Up Payment is to be made, (ii) pay
applicable state and local income taxes at the highest marginal rate of taxation
for the calendar year in which the Gross-Up Payment is to be made, net of the
maximum reduction in federal income taxes which could be obtained from deduction
of such state and local taxes and (iii) have otherwise allowable deductions for
federal income tax purposes at least equal to those which could be disallowed
because of the inclusion of the Gross-Up Payment in the Employee's adjusted
gross income. Notwithstanding the foregoing, this Section 11.i. shall not apply
to any stock option grant if the result of the application of such Section 11.i.
would be to alter the basis on which compensation expense is measured for
purposes of APB Opinion Number 25.

                  Subject to the provisions of Section 11.i., all determinations
required to be made under this Section 11.i., including whether and when a
Gross-Up Payment is required, the amount of such Gross-Up Payment, and the
assumptions to be utilized in arriving at such determinations, shall be made by
the public accounting firm that is retained by the Company as of the date
immediately prior to the Change in Control (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and Employee within
fifteen (15) business days of the receipt of notice from the Company or the
Employee that there has been a Payment, or such earlier time as is requested by
the Company (collectively, the "Determination"). In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Change in Control, Employee may appoint another
nationally recognized public accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Company and the Company shall enter into any agreement requested
by the Accounting Firm in connection with the performance of the services
hereunder. The Gross-Up Payment under this Section 11.i. with respect to any
Payments shall be made no later than thirty (30) days following such Payment. If
the Accounting Firm determines that no Excise Tax is payable by Employee, it
shall furnish Employee with a written opinion to such effect, and to the effect
that failure to report the Excise Tax, if any, on Employee's applicable federal

                                      -16-
<PAGE>

income tax return will not result in the imposition of a negligence or similar
penalty. The Determination by the Accounting Firm shall be binding upon the
Company and Employee. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the Determination, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made ("Underpayment") or Gross-Up Payments are made by the Company which should
not have been made ("Overpayment"), consistent with the calculations required to
be made hereunder. In the event that the Employee thereafter is required to make
payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the
benefit of Employee. In the event the amount of the Gross-Up Payment exceeds the
amount necessary to reimburse the Employee for his Excise Tax, the Accounting
Firm shall determine the amount of the Overpayment that has been made and any
such Overpayment (together with interest at the rate provided in Section
1274(b)(2) of the Code) shall be promptly paid by Employee (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. Employee shall cooperate,
to the extent his expenses are reimbursed by the Company, with any reasonable
requests by the Company in connection with any contests or disputes with the
Internal Revenue Service in connection with the Excise Tax.

                                      -17-
<PAGE>

         IN WITNESS WHEREOF, Employee has hereunto set Employee's hand and the
Company has caused this instrument to be duly executed as of the day and year
first above written.

                                            EMPLOYEE

                                            /s/ R. Timothy Stack
                                            ----------------------------------
                                            R. Timothy Stack

                                            MEDQUIST INC.

                                            By: /s/ John M. Suender
                                            ----------------------------------
                                            John M. Suender, Executive Vice
                                            President and CLO
                                            Five Greentree Centre
                                            Suite 311
                                            Marlton, New Jersey 08053

                                      -18-exv10w2

 

EXHIBIT 10.2

REGEN BIOLOGICS, INC.

SERIES C CONVERTIBLE PREFERRED STOCK

PURCHASE AGREEMENT

Dated as of September 30, 2003

 

 

REGEN BIOLOGICS, INC.

SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT

     This Agreement, dated as of September 30, 2003, is entered into by and
among ReGen Biologics, Inc., a Delaware corporation (the “Company”), and
the individuals and entities listed on Exhibit A hereto (each a
“Purchaser” and collectively, the “Purchasers”).

     In consideration of the mutual promises and covenants contained in this
Agreement, the parties agree as follows:

     1. Authorization and Sale of Shares and Warrants.

       1.1 Authorization. The Company has, or before the Closing (as
defined in Section 2) will have, duly authorized the sale and issuance,
pursuant to the terms of this Agreement, of up to 5,133,451 million shares of
its Series C Convertible Preferred Stock, $0.01 par value per share (the
“Series C Preferred”), having the rights, restrictions, privileges and
preferences set forth in the Certificate of Designations, Preferences and
Rights of Series C Convertible Preferred Stock of the Company attached hereto
as Exhibit B (the “Certificate of Designations”). The Company
has, or before the Closing will have, adopted and filed the Certificate of
Designations with the Secretary of State of the State of Delaware.

       1.2 Sale of Shares and Warrants. Subject to the terms and
conditions of this Agreement, at the Closing the Company will sell and issue to
each of the Purchasers, and each of the Purchasers will purchase from the
Company, (i) the number of shares of Series C Preferred set forth opposite such
Purchaser’s name on Exhibit A for the purchase price of $0.4481 per
share (the “Purchase Price”) such number of shares to be determined by
rounding down any fractional shares to the nearest whole number; and (ii) a
warrant, substantially in the form attached hereto as Exhibit C (a
“Warrant”), to purchase its pro rata portion of an aggregate of 479,967 shares
of common stock, par value $0.01 per share of the Company (the “Common Stock”),
such pro rata portion will be determined according to such Purchaser’s
percentage of participation in the Closing as defined in Section 2 hereof. The
shares of Series C Preferred sold under this Agreement are referred to as the
“Shares.” The Company’s agreement with each of the Purchasers is a
separate agreement, and the sale of Shares to each of the Purchasers is a
separate sale.

     2. The Closing. The closing (the “Closing”) of the sale and
purchase of the Shares under this Agreement shall take place at the offices of
Shaw Pittman LLP, 1650 Tysons Blvd., McLean, Virginia, at such time, date and
place and in such manner, including via facsimile or electronic delivery, as
are mutually agreeable to the Company and the Purchasers, but in no

 

 

event later than September 30, 2003. At the Closing, the Company shall
deliver to each of the Purchasers a certificate for the number of Shares and a
Warrant being purchased at the Closing by such Purchaser, registered in the
name of such Purchaser and a Warrant, against payment to the Company of the
Purchase Price, by wire transfer or other method acceptable to the Company.
The date of the Closing is hereinafter referred to as the “Closing
Date.” The Company may sell up to the balance of the authorized number of
shares of Series C Preferred not sold at the Closing to additional purchasers
at a price not less than $0.4481 per share.

     3. Representations, Warranties and Covenants of the Company.
Except as and to the extent set forth in the Disclosure Schedule delivered to
the Purchasers concurrently herewith, the Company represents and warrants as
follows:

          3.1 Organization and Good Standing. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full corporate power and corporate authority to carry
on its business as it is now being conducted or is proposed to be conducted,
and to own the properties and assets that it now owns. The Company is duly
qualified and authorized to do business, and is in good standing as a foreign
corporation, in each jurisdiction where the nature of its activities and of its
properties makes such qualification necessary and where a failure to so qualify
would have a material adverse effect on the Company’s business or properties.
Copies of the Company’s original Certificate of Incorporation, as amended and
restated to date (the “Certificate of Incorporation”), and its bylaws,
as amended and restated to date (the “Bylaws”), heretofore delivered to
the Purchasers, are complete and correct copies of such instruments as
presently in effect. The Company has no subsidiaries other than those listed
in Section 3.6 and does not otherwise own or control any equity interest in any
corporation or other business entity.

          3.2 Power and Authority; Enforceability.

               (a) The Company has full corporate power and authority to enter into this
Agreement to issue the Shares and Warrants hereunder and to carry out the
transactions contemplated hereby. The Company and its stockholders have, or by
the Closing will have, taken all action required by law, its Certificate of
Incorporation or its Bylaws to authorize the execution and delivery of this
Agreement, the issuance of the Shares and Warrants pursuant to the terms
hereof, and the consummation of the transactions contemplated hereby. This
Agreement and the Registration Rights Agreement, as defined in Section 5.4,
have been duly executed and delivered by the Company and, assuming the valid
authorization, execution and delivery of this Agreement by the Purchasers, are
valid and binding agreements of the Company, enforceable in accordance with its
terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors, as well as judicial principles respecting
election of remedies or limiting the availability of specific performance,
injunctive relief and other equitable remedies.

2

 

               (b) The Shares, when issued in compliance with the provisions of this
Agreement, and the shares of Common Stock issuable upon conversion of the
Series C Preferred and exercise of the Warrants (the “Underlying Shares”), when
issued upon such conversion in accordance with the terms of the Certificate of
Incorporation (i) will be validly issued, fully paid and nonassessable, and
(ii) will be free of any liens or encumbrances, other than any liens or
encumbrances created by or imposed upon the holders thereof through no action
of the Company; provided, however, that the Shares and the
Underlying Shares will be subject to restrictions on transfer under state
and/or federal securities laws. There are no rights of first refusal held by
any stockholders of the Company with respect to the issuance of the Shares.
The Shares are not subject to any preemptive rights.

          3.3 No Conflicts or Violation. Neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby,
will violate any provision of the Certificate of Incorporation or the Bylaws,
or violate or be in conflict with, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under, or
result in the termination of or accelerate the performance required by, or
cause the acceleration of the maturity of any debt or obligation pursuant to,
or result in the creation or imposition of any security interest, lien or other
encumbrance upon any property or assets of the Company under, any agreement or
commitment to which the Company is a party or by which the Company is bound, or
to which the property of the Company is subject, which would materially
adversely affect the financial condition of the Company, or, to the best
knowledge of the Company, violate any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental authority.

          3.4 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for the compliance with notice filing
and other requirements under federal and applicable state securities laws,
which compliance will have occurred within the appropriate time periods
therefor.

          3.5 Capitalization. At the Closing, the authorized capital stock
of the Company will consist of 117,900,000 shares of Common Stock, and
60,000,000 shares of preferred stock (the “Preferred Stock”), of which
15,298,351 shares will have been designated Series A Convertible Preferred
Stock (the “Series A Stock”), of which 15,298,351 shares are
outstanding, 30,000,000 shares of which will have been designated as the Series
C Preferred, of which 17,112,702 shares are outstanding. All currently issued
and outstanding shares have been issued in compliance with applicable state and
federal securities laws. As of the Closing, the Company has reserved for
issuance, pursuant to its currently active Stock Option Plans, 8,450,000 shares
of Common Stock and has reserved for issuance pursuant to its currently
inactive Stock Option Plans 8,443,528 shares of Common Stock. As of the
Closing, there are

3

 

outstanding options and warrants to purchase 12,791,540 and 7,273,554 shares of
Common Stock, respectively. Except as contemplated herein, or as set forth on
Section 3.5 of the Disclosure Schedule, (i) there are no commitments as
of the date hereof pursuant to which the Company is or may become obligated to
issue any of its capital stock, (ii) there are no preemptive or similar rights
to purchase or otherwise acquire from the Company any shares of capital stock
pursuant to any provision of law, the Certificate of Incorporation or Bylaws of
the Company, or any agreement to which the Company is a party or otherwise, and
(iii) there is no agreement, restriction or encumbrance with respect to the
sale or voting of any outstanding shares of the Company’s capital stock.
Neither the execution and delivery of this Agreement, nor the consummation of
the transactions contemplated hereby will result in any antidilution adjustment
for the holders of the Company’s capital stock or for the holder of any options
or warrants to acquire shares of the Company’s capital stock.

          3.6 Subsidiaries. The Company is the sole holder of the issued and
outstanding shares of capital stock of RBio, Inc. and MetaContent, Inc. (each a
“Subsidiary” and collectively, the “Subsidiaries “), and the Company holds of
record and beneficially owns all of the capital stock of each Subsidiary free
and clear of any hypothecation, assignment, deposit arrangement, Lien,
preference, priority or other security agreement, warrant, attachment, right of
first refusal, preemptive right, conversion, put, call or other restriction on
transfer (other than restrictions imposed by federal and state securities
laws), or preferential arrangement of any kind or nature whatsoever. There are
no proxies, voting rights, stockholders agreements or other agreements or
understandings with respect to the voting or transfer of the capital stock of
the Subsidiaries. There are no commitments pursuant to which any Subsidiary is
or may become obligated to issue any of its capital stock.

          3.7 No Undisclosed Liabilities. Neither the Company nor any of its
Subsidiaries has any material liabilities or obligations of any nature (whether
absolute, accrued, contingent or otherwise) of the type that would be required
to be set forth on financial statements in accordance with GAAP, which are not
fully reflected on the financial statements which are a part of the Company’s
annual report on Form 10K/A for the year ended December 31, 2002, filed with
the commission on April 14, 2003 or the financial statements which are a part
of the quarterly report on Form 10-Q for the quarter ended June 30, 2003, filed
with the Commission on August 14, 2003 (collectively, the “Financial
Statements”) and there are no undisclosed loss contingencies (as such term is
used in Statement of Financial Accounting Standards No. 5 (“Statement No.
5”) issued by the Financial Accounting Standards Board in March, 1975)
which are not adequately provided for in the Financial Statements as required
by Statement No. 5.

          3.8 Absence of Changes. Except as set forth in Section 3.8
of the Disclosure Schedule, since June 30, 2003, there has not been (a) any
material adverse change in the financial condition, results of operations,
assets, liabilities or business of the Company or any Subsidiary, (b) any
material increase in the liabilities or obligations of the Company or any

4

 

Subsidiary of any nature whatsoever (contingent or otherwise), (c) any asset or
property of the Company or any Subsidiary made subject to a lien of any kind,
(d) any waiver of any valuable rights of the Company, or the cancellation of
any debts or claims held by the Company or any Subsidiary, (e) any payment of
dividends on, or other distributions with respect to, or any direct or indirect
redemption or acquisition of, any shares of the capital stock of the Company or
any Subsidiary, or any agreement or commitment therefor, (f) any issuance of
any stock, bonds or other securities of the Company or any Subsidiary other
than pursuant to or in connection with transactions described herein or
contemplated by this Agreement, (g) any mortgage, pledge, sale, assignment or
transfer of any tangible or intangible assets of the Company or any Subsidiary,
(h) any loan by the Company or any Subsidiary to any officer, director,
employee or stockholder of the Company or any Subsidiary, or any agreement or
commitment therefor, (i) any damage, destruction or loss (whether or not
covered by insurance) adversely affecting the assets, property or business of
the Company or any Subsidiary, (j) any extraordinary increase in the aggregate
amount of salaries or other compensation paid or payable to employees or agents
of the Company or any Subsidiary, (k) any change in the accounting methods or
practices followed by the Company or any Subsidiary or any theretofore adopted,
(l) any capital expenditure in excess of US $75,000, or (m) any commitments
with respect to any of the foregoing.

          3.9 Encumbrances. Except as set forth in Section 3.9 of the
Disclosure Schedule, the Company or its Subsidiaries own outright all the
property and assets, real, personal or mixed, tangible or intangible, reflected
in the Financial Statements, or not so reflected because not required to be
reflected but which are used or useful in the business of the Company or its
Subsidiaries, or acquired by the Company or any Subsidiary since June 30, 2003
(in each case other than assets disposed of in the ordinary course of business
since June 30, 2003), subject to no mortgages, liens, security interests,
pledges, charges or other encumbrances of any kind.

          3.10 Litigation. There is no action, suit, customer claim,
proceeding or investigation at law or in equity, or by or before any
governmental instrumentality or other agency, now pending or threatened against
or affecting the Company or any Subsidiary nor, to the best knowledge of the
Company, does there exist any basis for any such pending or threatened action,
suit, customer claim, proceeding or investigation. Neither the Company nor any
of its Subsidiaries is a party to or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or governmental agency or
instrumentality.

          3.11 No Defaults. As of the date hereof, neither the Company nor
any of its Subsidiaries is in default (a) under its Certificate of
Incorporation as currently in effect or Bylaws, (b) under any indenture,
mortgage, lease, purchase or sales order or any other contract, agreement or
instrument to which the Company or any Subsidiary is a party or by which it is
bound, or any order, writ, injunction, judgment or decree of any court or
governmental agency or instrumentality. There exists no condition, event or
act which constitutes, or which after notice or lapse of time or both would
constitute, a default under any of the foregoing.

5

 

          3.12 Compliance with Laws. To the best of its knowledge, the
Company and each of its Subsidiaries is in compliance with laws, rules,
ordinances, governmental regulations and orders of all governmental authorities
and/or jurisdictions currently applicable to the conduct of its business as
conducted or proposed to be conducted and has all permits, licenses,
certificates and authorizations required for the conduct of such business.

          3.13 Title to Properties and Assets; Liens, Etc. The Company and
each of its Subsidiaries has good and marketable title to its material
properties and assets, and has good title to all its leasehold interests, in
each case subject to no mortgage, pledge, lien, lease, encumbrance or charge,
other than for taxes not yet due or payable or as set forth in the Financial
Statements or the notes thereto or in Section 3.13 of the Disclosure
Schedule.

          3.14 Copyrights, Patents and Other Intangible Assets.

               (a) Except as set forth in Section 3.14 of the Disclosure Schedule,
neither the Company nor its Subsidiaries is obligated to make any payments by
way of royalties, fees or otherwise to any owner of, licensor of, or other
claimant to, any patent, trademark, proprietary process, trade name, copyright
or other intangible asset, with respect to the use thereof or in connection
with its business as currently conducted or as proposed to be conducted or
otherwise and it has not granted any licenses or manufacturing publication or
production rights with respect to its business as currently conducted or as
proposed to be conducted.

               (b) Except as set forth in Section 3.14 of the Disclosure Schedule,
the Company and each of its Subsidiaries owns or has the right to use, free and
clear of all liens, claims and restrictions, all patents, trademarks,
proprietary processes, service marks, trade names, copyrights (and licenses
with respect to the foregoing) necessary to its business as now conducted and
as proposed to be conducted. Such rights are described in Section 3.14
of the Disclosure Schedule and may be used in the conduct of its business as
now conducted or as proposed to be conducted without, to the best of the
Company’s or applicable Subsidiary’s knowledge, infringing upon or otherwise
acting adversely to the right or claimed right of any person under or with
respect to any of the foregoing.

               (c) Each employee of the Company and its Subsidiaries has signed a
proprietary information agreement, each of which agreements will be in full
force and effect as of the Closing. Neither the Company nor any of its
Subsidiaries, after reasonable investigation, is aware that any of its
employees is or will be in violation thereof, and the Company and each of its
Subsidiaries will use its best efforts to prevent any such violation.

               (d) Neither the Company nor any of its Subsidiaries has received any
communications alleging that the Company or any Subsidiary has violated or, by
conducting its

6

 

business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights of
any other person or entity, nor is the Company or any Subsidiary aware of any
third party violation of any of the Company’s patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights.
Except as set forth in Section 3.14 of the Disclosure Schedule, neither
the Company nor any of its Subsidiaries is aware that any of its employees (or
any person whom the Company or any Subsidiary presently intends to hire) is
obligated under any contract (including licenses, covenants or commitments of
any nature) or agreement, or subject to any judgment, decree or order of any
court or administrative agency, that would conflict with his obligation to use
such employee’s best efforts to promote the interests of the Company or any
Subsidiary.

               (e) Except as set forth in Section 3.14 of the Disclosure Schedule,
neither the carrying on of the Company’s business or any Subsidiary’s business
by the employees of the Company or any Subsidiary (or persons whom the Company
presently intends to hire), nor the conduct of the Company’s or any
Subsidiary’s business as currently conducted or as proposed to be conducted,
will, to the Company’s or any Subsidiary’s knowledge, conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such persons is
now obligated. Except as set forth in Section 3.14 of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries believe it is or will
be necessary to utilize any inventions of any of its employees (or persons it
currently intends to hire) made or owned prior to their employment by the
Company or any Subsidiary or that it is or will be necessary to utilize any
other assets or rights of any of its employees (or persons it currently intends
to hire) made or owned prior to their employment with the Company or any
Subsidiary in violation of any limitations or restrictions to which any such
person is a party or to which any of such assets or rights may be subject.

          3.15 Material Agreements. Except as set forth in Section
3.15 of the Disclosure Schedule, neither the Company nor any of its
Subsidiaries is a party to any written or oral contract not made in the
ordinary course of business and, whether or not made in the ordinary course of
business, neither the Company nor any of its Subsidiaries is a party to any
written or oral (a) contract with any labor union; (b) contract for the future
purchase of fixed assets or for the future purchase of materials, supplies or
equipment in excess of US $75,000 per year; (c) contract for the employment of
any officer, individual employee or other person on a full-time basis (other
than an at-will employment contract) or any contract with any person on a
consulting basis; (d) bonus, pension, profit-sharing, retirement, stock
purchase, stock option, hospitalization, medical insurance or similar plan,
contract or understanding in effect with respect to employees or any of them or
the employees of others; (e) agreement or indenture relating to the borrowing
of money or to the mortgaging, pledging or otherwise placing a lien on any
assets of the Company or any of its Subsidiaries; (f) guaranty by the Company
or any of its Subsidiaries of any obligation for borrowed money or otherwise;
(g) lease or agreement under which the Company or any of its Subsidiaries is
lessee of or holds or operates any property, real

7

 

or personal, owned by any other party; (h) lease or agreement under which the
Company or any of its Subsidiaries is lessor of or permits any third party to
hold or operate any property, real or personal, owned or controlled by the
Company or any of its Subsidiaries; (i) agreement or other commitment for
capital expenditures; (j) contract, agreement or commitment under which the
Company or any of its Subsidiaries is obligated to pay any brokers fees,
finder’s fees or any such similar fees to any third party; (k) contract,
agreement or commitment under which the Company or any of its Subsidiaries has
issued, or may become obligated to issue any shares of capital stock of the
Company or any of its Subsidiaries , or any warrants, options, convertible
securities or other commitments pursuant to which the Company or any of its
Subsidiaries is or may become obligated to issue any of its securities except
as are referred to in this Agreement; or (1) any other contract, agreement,
arrangement or understanding which is material to the business of the Company
or any of its Subsidiaries or which is material to, and which a prudent
investor would need to review in order to make, an informed investment decision
with respect to the purchase of the Shares hereunder.

          3.16 Registration Rights; Co-Sale Rights. Except as set forth in
the Section 3.16 of the Disclosure Schedule, neither the Company nor any
of its Subsidiaries is under any contractual obligation to register for sale
under the Securities Act of 1933, as amended (the “Act”), any of its
presently outstanding securities or any of its securities which may hereafter
be issued. Assuming the accuracy of the Purchasers’ representations to the
Company, no registration of the Series C Preferred Stock issued and sold
pursuant to this Agreement will be required. Except as set forth in Section
3.16 of the Disclosure Schedule, and except as limited by state and Federal
law, there are no obligations, contractual arrangements or other understandings
with respect to the alienability or voting of the Company’s or any of its
Subsidiaries’ Common Stock or Preferred Stock.

          3.17 Brokers or Finders; Other Offers. Except for fees payable to
Harris Nesbitt Gerard, Inc. and Vail Securities Investment, Inc., neither the
Company nor any of its Subsidiaries has incurred, or will incur, directly or
indirectly, as a result of any action taken by the Company or any of its
Subsidiaries, any liability for brokerage or finders’ fees or agents’
commissions or any similar charges in connection with the offering of the
Series C Preferred.

          3.18 Tax Returns and Payments. The Company and each of its
Subsidiaries have accurately prepared and timely filed all tax returns
(federal, state and local) required to be filed by it. All taxes shown to be
due and payable on said returns, any assessments, fees or charges and all other
taxes due and payable by the Company or any Subsidiary on or before the date
hereof have been paid prior to the Company or any of its Subsidiaries becoming
delinquent. No deficiency assessment or proposed adjustment of the Company’s
or any of it Subsidiaries’ federal, state or local taxes is pending, and
neither the Company nor any of its Subsidiaries has knowledge of any proposed
liability for any tax to be imposed upon it, its properties or assets for which
it does not have an adequate reserve reflected in the Financial Statements. To
the best of

8

 

the Company’s or any of its Subsidiaries knowledge, none of the federal or
state income tax returns or state franchise tax returns of the Company or any
Subsidiary has ever been audited by federal or state tax officials,
respectively.

          3.19 Insurance. The Company and each of its Subsidiaries maintains
insurance coverage reasonably adequate for the operation of its business
(taking into account the cost and availability of such insurance).

          3.20 Environmental and Safety Laws. To the best of its knowledge,
neither the Company nor any of its Subsidiaries is in violation of any
applicable statute, law or regulation relating to the environment or
occupational health and safety, and to the best of its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation.

          3.21 Commission Documents.

               (a) The Company has filed all required reports, schedules, forms,
statements and other documents (including exhibits and all other information
incorporated therein) with the Commission since December 31, 2002 (the “Company
SEC Documents”). As of their respective dates, the Company SEC Documents
complied in all material respects with the requirements of the Act or the
Securities Exchange Act of 1934, as amended and the Regulations (as defined in
Section 4.4), as the case may be, and none of the Company SEC Documents when
filed (unless amended or superseded by a Company Filed SEC Document filed prior
to the date hereof, then on the date of such later filing) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. Except to the
extent that information contained in a Company SEC Document has been revised or
superseded in a subsequently filed Company SEC Document, none of the Company
SEC Documents contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading.

          (b) The Financial Statements of the Company included in the Company SEC
Documents complied as to form, as of their respective dates of filing with the
Commission, in all material respects with applicable accounting requirements
and the published rules and regulations of the Commission with respect thereto
(the “Accounting Rules”), have been prepared in accordance with GAAP (except,
in the case of unaudited statements, as permitted by Form 10-Q of the
Commission) applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto) and fairly present, in all material
respects, the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended

9

 

(subject, in the case of unaudited statements, to normal recurring non-material
year-end audit adjustments).

          3.22 Full Disclosure. This Agreement, the representations and
warranties by the Company contained herein, the Disclosure Schedule and the
Exhibits hereto, and all certificates expressly required to be delivered or to
be furnished to the Purchasers pursuant to this Agreement, when read together,
do not contain any untrue statement of material fact or omit to state a
material fact necessary in order to make the statements contained herein or
therein not misleading.

     4. Representations, Warranties and Covenants of the Purchasers.
Each Purchaser severally represents, warrants and agrees as follows:

          4.1 Information. Each Purchaser represents that it has had an
opportunity to ask questions of the principal officers of the Company and to
obtain any additional information necessary to permit an informed evaluation of
the benefits and risks associated with the investment made hereby. Each
Purchaser has made its own independent investigation of the Company and is
aware of the Company’s proposed business and financial condition. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 3 herein or the right of the Purchasers to rely
thereon.

          4.2 Accredited Investors. Each Purchaser represents that it is an
accredited investor within the meaning of the Act and Regulation D thereunder,
or by reason of its business or financial experience, or the business or
financial experience of its professional advisor, it has the capacity to
protect its own interests in connection with this transaction.

          4.3 Experience. Each Purchaser represents that it has had
sufficient experience in business, financial and investment matters to evaluate
the merits and risks involved in the investment made hereby and further
represents that it is able to bear the economic risk of such investment for an
indefinite period of time or to lose the entire investment made hereby, and has
the capacity to protect its own interests in connection with the transactions
contemplated herein.

          4.4 Investment Intent. Each Purchaser represents that it is
acquiring the Shares for its own account and not with a view to any sale or
distribution thereof within the meaning of the Act, and the rules and
regulations of the Securities and Exchange Commission (the “Commission”)
thereunder as amended from time to time (the “Regulations”), except to
the extent permitted by the Act and the Regulations. Each Purchaser agrees
that it will make no sale, offer to sell or transfer of any Shares in violation
of the Act, the Regulations or any other federal or state securities law, and
each Purchaser understands that certificates representing the same will bear a
legend to such effect.

10

 

          4.5 Restriction on Transfer. Each Purchaser understands that none
of the Shares nor the offer and sale thereof, has been registered under the Act
or the securities laws of any state and there is at the date hereof no public
market for such securities. Each Purchaser further understands and agrees that
none of the Shares may be sold, offered for sale or transferred in any manner
for an indefinite period of time unless and until (a) a registration statement
with respect thereto is in effect under the Act and applicable state laws, or
(b) it has been established to the reasonable satisfaction of the Company and
its counsel that the proposed transaction is exempt from registration under the
Act and applicable state laws or that registration under the Act and applicable
state laws is not required.

          4.6 Binding Effect, etc. Each Purchaser represents that (a) such
Purchaser has full power and authority to purchase such Shares, (b) such
Purchaser’s agreement to purchase the Shares constitutes a valid and binding
agreement enforceable in accordance with its terms, and (c) the purchase of the
Shares as contemplated hereby will not conflict with or otherwise violate any
charter documents or any other obligations of such Purchaser.

     5. Conditions to the Obligations of the Purchasers. The obligation
of each of the Purchasers under Section 1.2 of this Agreement is subject to the
fulfillment, or the waiver by such Purchaser, of each of the following
conditions on or before the Closing:

          5.1 Accuracy of Representations and Warranties. Each
representation and warranty contained in Section 3 shall be true on and as of
the Closing Date with the same effect as though such representation and
warranty had been made on and as of that date.

          5.2 Performance. The Company shall have performed and complied
with all agreements and conditions contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.

          5.3 Certificates and Documents. The Company shall have delivered
to the Purchasers:

               (a) The Certificate of Incorporation of the Company, as amended and
restated and in effect as of the Closing Date (including Certificates of
Designations), certified by the Secretary of State of the State of Delaware;

               (b) The Bylaws of the Company, as amended and restated and in effect as of
the Closing Date, certified by its Secretary as of the Closing Date; and

               (c) Resolutions of the Board of Directors of the Company, authorizing and
approving all matters in connection with this Agreement and the transactions
contemplated hereby, certified by the Secretary of the Company as of the
Closing Date.

11

 

          5.4 Registration Rights Agreement. The Company shall have entered
into an Amended and Restated Registration Rights Agreement (each a
“Registration Rights Agreement” and collectively, the “Registration Rights
Agreements”) with each Purchaser substantially in the form attached hereto as
Exhibit D.

          5.6 Compliance Certificates. The Company shall have delivered to
the Purchasers a certificate, executed by the President of the Company, dated
the Closing Date, certifying to the fulfillment of the conditions specified in
paragraphs 5.1, 5.2 and 5.3 of this Agreement.

          5.7 Other Matters. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchasers and their counsel, and the
Purchasers and their counsel shall have received all such counterpart originals
or certified or other copies of such documents as they may reasonably request.

     6. Condition to the Obligations of the Company. The obligations of
the Company under Section 1.2 of this Agreement are subject to the fulfillment,
or the waiver by the Company, of the following condition on or before the
Closing:

          6.1 Accuracy of Representations and Warranties. The
representations and warranties of the Purchasers contained in Section 4 shall
be true on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of that date.

     7. Transfer of Shares.

          7.1 Restricted Shares. “Restricted Shares” means (i) the
Shares, (ii) the shares of Common Stock issued or issuable upon conversion or
exercise of the Shares or the Warrants, (iii) any shares of capital stock of
the Company acquired by the Purchasers pursuant to any other agreement or
instrument, and (iv) any other shares of capital stock of the Company issued in
respect of such shares (as a result of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events).

          7.2 Requirements for Transfer.

               (a) Restricted Shares shall not be sold or transferred unless either (i)
they first shall have been registered under the Act, or (ii) the Company first
shall have been furnished with an opinion of legal counsel, reasonably
satisfactory to the Company, to the effect that such sale or transfer is exempt
from the registration requirements of the Act.

12

 

               (b) Notwithstanding the foregoing, no registration or opinion of counsel
shall be required for (i) a transfer by a Purchaser which is a corporation to a
wholly owned subsidiary of such corporation, a transfer by a Purchaser which is
a partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner, or a transfer by a Purchaser which is a limited
liability company to (a) a member or officer of such limited liability company,
(b) a retired member who resigns after the date hereof or to the estate of any
such member or (c) a retired member; provided that the transferee in
each case agrees in writing to be subject to the terms of this Section 7 to the
same extent as if it were the original Purchaser hereunder, or (ii) a transfer
made in accordance with Rule 144 under the Act.

          7.3 Legend. Each certificate representing Restricted Shares shall
bear a legend substantially in the following form:

	  	 “THE SHARES REPRESENTED BY THIS
      CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED
      OR HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE REGISTERED UNDER SUCH ACT
      OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO THE
      EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.” 	 

The foregoing legend shall be removed from the certificates representing any
Restricted Shares, at the request of the holder thereof, at such time as they
become eligible for resale pursuant to Rule 144(k) under the Act.

     8. Miscellaneous.

          8.1 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. This Agreement, and the rights and obligations of each
Purchaser hereunder, may be assigned by such Purchaser to any person or entity
to which Shares are transferred by such Purchaser, and such transferee shall be
deemed a “Purchaser” for purposes of this Agreement; provided
that the transferee provides written notice of such assignment to the Company.
The Company may not assign its rights under this Agreement.

          8.2 Confidentiality. Each Purchaser agrees that he, she or it will
keep confidential and will not disclose, divulge or use for any purpose other
than to monitor his, her or its investment in the Company any confidential,
proprietary or secret information which such Purchaser may obtain from the
Company pursuant to financial statements, reports and other

13

 

materials submitted by the Company to such Purchaser pursuant to this
Agreement or otherwise (“Confidential Information”), unless such
Confidential Information is known, or until such Confidential Information
becomes known, to the public (other than as a result of a breach of this
Section 8.2 by such Purchaser); provided, however, that a
Purchaser may disclose Confidential Information (i) to such Purchaser’s
attorneys, accountants, consultants and other professionals to the extent
necessary to obtain their services in connection with monitoring its investment
in the Company, (ii) to any prospective purchaser of any Shares from such
Purchaser, provided that such prospective purchaser agrees in writing to
be bound by the provisions of this Section 8.2, (iii) to any affiliate of such
Purchaser or to a partner, stockholder or subsidiary of such Purchaser,
provided that such affiliate agrees in writing to be bound by the
provisions of this Section 8.2, or (iv) as may otherwise be required by law,
provided that the Purchaser takes reasonable steps to minimize the
extent of any such required disclosure. Notwithstanding any other provisions
of this Section 8.2, a Purchaser shall be free to use the Residuals (as defined
below) of any Confidential Information for any purpose, subject only to any
patents or copyrights of the Company in such Confidential Information. The
term “Residuals” shall mean any information in non-tangible form which
is retained in the memory of a Purchaser or any partner, officer, employee or
representative of a Purchaser.

          8.3 Survival of Representations and Warranties. All agreements,
representations and warranties contained herein shall survive the execution and
delivery of this Agreement and the Closing of the transactions contemplated
hereby until thirty (30) days following the date on which the Form 10-K for
ReGen Biologics for the fiscal year ended December 31, 2003 shall have been
filed with the Commission; provided, however, that the
representation and warranties of Section 3.2 of this Agreement shall survive
indefinitely.

          8.4 Expenses. The Company shall pay, at the Closing, the
reasonable fees, up to a maximum of US $ 25,000 including fees, expenses and
disbursements, related to the representation of the Purchasers, such
representatives to be designated by the Purchasers, in connection with the
preparation of this Agreement and the other agreements contemplated hereby and
thereby and the closing of the transactions contemplated hereby and thereby.

          8.5 Brokers. Each Purchaser represents and warrants to the other
parties hereto that he, she or it has not retained a finder or broker in
connection with the transactions contemplated by this Agreement, and the
Company and each of the Purchasers agrees that such party will indemnify and
save the other parties harmless from and against any and all claims,
liabilities or obligations with respect to brokerage or finders’ fees or
commissions, or consulting fees in connection with the transactions
contemplated by this Agreement asserted by any person on the basis of any
statement or representation alleged to have been made by such indemnifying
party.

14

 

          8.6 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.

          8.7 Specific Performance. In addition to any and all other
remedies that may be available at law in the event of any breach of this
Agreement, each Purchaser shall be entitled to specific performance of the
agreements and obligations of the Company hereunder and to such other
injunctive or other equitable relief as may be granted by a court of competent
jurisdiction.

          8.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware
(without reference to the conflicts of law provisions thereof).

          8.9 Notices. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:

	 	If to the Company, at:

	 	509 Commerce Street, East Wing

Franklin Lakes, NJ 07417

Facsimile: (201) 651-5141

Attention: Gerald E. Bisbee, Jr., Ph.D,

          or at such other address or addresses as may have been furnished in
writing by the Company to the Purchasers;

     If to a Purchaser, at the address set forth on Exhibit A for such
Purchaser, or at such other address or addresses as may have been furnished to
the Company in writing by such Purchaser.

     Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.

          8.10 Complete Agreement. This Agreement (including its Exhibits
and the Disclosure Schedule delivered in accordance herewith) constitutes the
entire agreement and

15

 

understanding of the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter.

          8.11 Amendments and Waivers. Except as otherwise expressly set
forth in this Agreement, any term of this Agreement may be amended or
terminated and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of at
least 50% of the shares of Common Stock issued or issuable upon conversion of
the Shares. Notwithstanding the foregoing, this Agreement may be amended with
the consent of the holders of less than all of the shares of Common Stock
issued or issuable upon conversion of the Shares only in a manner which applies
to all such holders in the same fashion and any amendment, termination or
waiver effected in accordance with this Section 8.11 shall be binding upon each
holder of any Shares (including shares of Common Stock into which such Shares
have been converted) even if they do not execute such consent, each future
holder of all such securities and the Company. No waivers of or exceptions to
any term, condition or provision of this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.

          8.12 Pronouns. Whenever the context may require, any pronouns used
in this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns and pronouns shall include the plural,
and vice versa.

          8.13 Counterparts; Facsimile Signatures. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original, and all of which shall constitute one and the same document. This
Agreement may be executed by facsimile signatures.

          8.14 Section Headings. The section headings are for the
convenience of the parties only and in no way alter, modify, amend, limit, or
restrict the contractual obligations of the parties.

[Signature Page to Follow]

16

 

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

	 	 ReGen Biologics, Inc. 
    

	 	 By:

      

      Name:

      Title:	

      _______________________________

      Gerald E. Bisbee, Jr., Ph.D.

      President, Chief Executive Officer and Chairman 

	 	PURCHASERS:

	 	If Individual:

	 	Print Name:  	 
	 	 	

	 	 	 
	 	Signature:  	 
	 	 	

  	 	 	 

	 	Contact Information:  
	 	 	

	 	 
	 	

	 	Dollar Amount Purchased:  
	 	 	

	 	 

	 	 If Corporation, Partnership,
      Limited Liability
      Company or Other Entity:  

	 	 	 
	 	Print Name of Entity:
       

	 	 	

	 	 	 
	 	 Signature By: 
    
	 	 	

	 	 
	 	Contact Information:  
	 	 	

	 	 	 
	 	

	 	 	 
	 	Dollar Amount Purchased:  
	 	 	

 

 

EXHIBIT A

Purchasers

  	 	 	 	 	 	 	 	 	 
	Name
	 	Number of Shares
        of	 	Dollar Amount
	 	 	Series C Preferred	 	Purchased
	 	 	 	 	

        	 	 	 	

        
	 	 	 	 	

        	 	 	 	

        
	 	 	 	 	

        	 	 	 	

        
	 	 	 	 	

        	 	 	 	

        
	 	 	 	 	

        	 	 	 	

        

 

 

EXHIBIT B  

Certificate of Designations

 

 

EXHIBIT C

Warrant

 

 

EXHIBIT D

Registration Rights Agreement

Document #: 1252864 v.1

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