Document:

Female Health Company March 28, 2007 Form 8-K

    EXHIBIT
      10.1

     

    STANDSTILL
      AGREEMENT

     

    

    This
      Standstill Agreement (the "Agreement") is made and entered into as of March
      28, 2007, by and between THE FEMALE HEALTH COMPANY, a Wisconsin corporation
      ("FHC"), and RED OAK FUND, L.P., a Delaware Limited Partnership ("Red
      Oak").

    

    RECITALS

     

    A. Red
      Oak
      desires to increase its ownership in FHC and is considering an Offer (as defined
      in Section 3 below) to acquire a portion of the issued and outstanding shares
      of
      common stock, par value $.01 per share (the "Common Stock"), of FHC, as more
      fully described in this Agreement. 

    

    B. In
      connection with the Offer rather than seeking access to FHC holders under Rule
      14d-5 under the Exchange Act (defined below), Red Oak desires to obtain access
      to certain information regarding FHC and its shareholders from FHC and its
      transfer agent, including, without limitation, the identities and addresses
      of
      FHC's shareholders, and, subject to the terms and conditions of this Agreement,
      FHC is willing to provide such information to Red Oak.

    

    C. In
      connection with the Offer and Red Oak's acquisition of shares of Common Stock,
      FHC and Red Oak wish to agree to certain terms and conditions regarding the
      Offer and Red Oak's activities relating to FHC, as more fully described in
      this
      Agreement.

    

    AGREEMENTS

     

    In
      consideration of the recitals and the mutual agreements set forth below, the
      parties agree as follows:

    

    1. Certain
      Definitions.
      For
      purposes of this Agreement, certain terms used in this Agreement but not
      otherwise defined have the meanings set forth below:

    

    (a) "13D
      Group" means any group of persons formed for the purpose of acquiring, holding,
      voting or disposing of Voting Securities which would be required under Section
      13(d) of the Exchange Act, and the rules and regulations promulgated thereunder,
      to file a statement on Schedule 13D pursuant to Rule 13d-1(a) or a Schedule
      13G
      pursuant to Rule 13d-1(c) with the SEC as a "person" within the meaning of
      Section 13(d)(3) of the Exchange Act.

    

    (b) "Affiliate"
      means a Person that directly or indirectly, through one or more intermediaries,
      controls, is controlled by, or is under common control with, the first mentioned
      Person. "Control" (including the terms "controlled by" and "under common control
      with") means the possession, directly or indirectly or as trustee or executor,
      of the power to direct or cause the direction of the management or policies
      of a
      Person, whether through the ownership of stock or as trustee or executor, by
      contract or credit arrangement or otherwise.

    
      
        
        

      

      
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    (c) "Beneficial
      owner," "beneficial ownership" and "beneficially owned" (or variations of such
      terms) shall have the meaning set forth in, and shall be determined in
      accordance with the provisions of Section 13(d) of the Exchange Act and the
      rules and regulations promulgated thereunder.

    

    (d) "Change
      of Control" means any of the following: (i) a merger, consolidation or other
      business combination or transaction to which the FHC is a party if the
      shareholders of FHC immediately prior to the effective date of such merger,
      consolidation or other business combination or transaction, as a result of
      such
      share ownership, have beneficial ownership of voting securities representing
      less than 60% of the Total Current Voting Power of the surviving or successor
      entity (or its ultimate parent company) following such merger, consolidation
      or
      other business combination or transaction; (ii) an acquisition by any person,
      entity or 13D Group of direct or indirect beneficial ownership of Voting
      Securities representing 40% or more of the Total Current Voting Power of FHC;
      (iii) a sale of all or substantially all the assets of FHC or (iv) a liquidation
      or dissolution of FHC.

    

    (e) "Exchange
      Act" means the Securities Exchange Act of 1934, as amended, and the regulations,
      rules and forms issued thereunder.

    

    (f) "Person"
      means an individual, partnership, corporation, limited liability company, trust,
      unincorporated organization, association, or joint venture or a governmental,
      agency, political subdivision, or instrumentality thereof.

    

    (g) "SEC"
      means the U.S. Securities and Exchange Commission.

    

    (h) "Short
      Sale" means any sale of a security which the seller does not own, any sale
      of a
      security which is consummated by the delivery of a security borrowed by, or
      for
      the account of, the seller, or any other hedging, collar or similar transaction
      relating to a security.

    

    (i) "Standstill
      Period" means the period commencing on the date of this Agreement and ending
      on
      the first anniversary of the date of this Agreement or, if earlier, nine months
      from the end of the offer period if the Offer is made.

    

    (j) "Total
      Current Voting Power" means, with respect to any entity, at the time of
      determination of Total Current Voting Power, the total number of votes which
      may
      be cast in the election of members of the board of directors of the entity
      if
      all securities entitled to vote in the election of such directors are present
      or
      voted (or, in the event the entity is not a corporation, the governing members,
      board or similar body of such entity). With respect to Section 2(a)(i), the
      percentage of the Total Current Voting Power represented by Voting Securities
      beneficially owned in the aggregate by Red Oak and its Affiliates shall assume
      the conversion or exchange into Common Stock of all options, warrants or other
      securities beneficially owned by Red Oak or any of its Affiliates that are
      convertible or exchangeable for Common Stock but not the conversion or exchange
      into Common Stock of any such securities that are not beneficially owned by
      Red
      Oak or any of its Affiliates.

    

    
      
        
        

      

      
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    (k) "Voting
      Securities" means securities of FHC, including the shares of Common Stock,
      with
      the power to vote with respect to the election of directors generally, including
      any securities that are convertible or exchangeable for Voting Securities,
      it
      being understood that the number of Voting Securities outstanding as of any
      time
      of determination shall be determined as though all such securities, whether
      or
      not in the money, had been converted or exchanged, in accordance with their
      terms, into or for Voting Securities immediately prior to the time of
      determination.

    

    2. Standstill
      Agreements.

    

    (a) Standstill
      by Red Oak.
      Except
      as provided below in Section 2(b), Red Oak covenants and agrees, during the
      Standstill Period, without FHC's prior written consent, neither it nor any
      of
      its Affiliates will in any manner, directly or indirectly, do any of the
      following:

    

    (i)
       acquire,
      announce an intention to acquire, offer or propose to acquire, or agree to
      acquire, directly or indirectly, by purchase or otherwise, beneficial ownership
      of any Voting Securities, or direct or indirect rights to options to acquire
      (through purchase, exchange, conversion or otherwise) any Voting Securities,
      if,
      immediately after any such acquisition or exercise of all rights to acquire,
      Red
      Oak and its Affiliates would beneficially own, in the aggregate, Voting
      Securities representing more than 15% of the Total Current Voting
      Power;

    

    (ii) seek
      representation on the Board of Directors of FHC or the removal of director
      of
      FHC or a change in the composition or size of FHC's Board of
      Directors;

    

    (iii) make
      any
      statement or proposal, whether written or oral, to the Board of Directors of
      FHC, or to any director, officer or agent of FHC, or make any public
      announcement or proposal whatsoever with respect to a merger or other business
      combination, sale or transfer of assets, recapitalization, dividend, share
      repurchase, liquidation or other extraordinary corporate transaction with FHC
      or
      any other transaction which could result in a change of control, solicit or
      encourage any other person to make any such statement or proposal, or take
      any
      action which might require FHC to make a public announcement regarding the
      possibility of any transaction referred to in this Section 2(a)(iii) or similar
      transaction, or advise, assist or encourage any other persons in connection
      with
      the foregoing;

    

    (iv) make,
      or
      in any way participate, directly or indirectly, in any "solicitation" of
      "proxies" (as such terms are defined in Rule 14a-1 under the Exchange Act)
      to
      vote any Voting Securities, seek to advise, encourage or influence any person
      or
      entity with respect to the voting of any Voting Securities, initiate or propose
      any shareholder proposal or induce or attempt to induce any other person to
      initiate any shareholder proposal, or execute any written consent with respect
      to FHC;

    

    
      
        
        

      

      
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    (v) deposit
      any Voting Securities into a voting trust or subject any Voting Securities
      to
      any arrangement or agreement with respect to the voting of any Voting Securities
      other than this Agreement;

    

    (vi) form,
      join or in any way participate in a 13D Group with respect to any Voting
      Securities unless all members of the 13D Group agree to be bound by this
      Agreement;

    

    (vii) otherwise
      act, alone or in concert with others, to seek to exercise any control or
      influence over the management, Board of Directors or policies of FHC (provided
      that this clause (vii) shall not preclude discussions with the management or
      the
      Board of Directors);

    

    (viii) request
      that FHC (or its directors, officers, shareholders, employees or agents) amend
      or waive any provision of this Section 2(a) (including this
      subsection (viii));

    

    (ix) enter
      into any agreement, plan or arrangement relating to a Short Sale of any Common
      Stock, or otherwise effect any Short Sale of any Common Stock; or

    

    (x) disclose
      any intention, plan or arrangement inconsistent with the foregoing.

    

    (b) Permitted
      Exceptions.
      Notwithstanding the terms of Section 2(a) above, the restrictions contained
      in
      Section 2(a) of this Agreement shall immediately and automatically be suspended
      upon the occurrence, and during (but only during) the continuation, of any
      of
      the following events: 

    

    (i) the
      filing with the SEC of a Schedule 13D (or any successor schedule or form) by
      any
      Person (other than any current executive officer of FHC, any member of FHC's
      Board of Directors or Red Oak or any of its Affiliates) or 13D Group (other
      than
      any 13D Group that contains among its members any current executive officer
      of
      FHC, any member of FHC's Board of Directors or Red Oak or any of its Affiliates)
      indicating that such Person or 13D Group has acquired beneficial ownership
      of
      15% or more of the outstanding Voting Securities, which Schedule 13D expresses
      an intention or possible intention of the filing party to assume control of
      FHC,
      whether by tender offer, merger, proxy contest or otherwise (provided that
      the
      foregoing shall no longer suspend such restrictions if a subsequent filing
      is
      made by such Person or 13D Group with the SEC indicating that such Person or
      13D
      Group ceases to beneficially own at least 15% of the outstanding Voting
      Securities or such Person or 13D Group subsequently makes a public announcement
      to the effect that such Person or 13D Group no longer has an intention or
      possible intention to assume control of FHC, whether by tender offer, merger,
      proxy contest or otherwise); 

    

    
      
        
        

      

      
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    (ii) the
      commencement of a tender offer by any Person (other than FHC or Red Oak or
      any
      of its Affiliates) or 13D Group (which does not include FHC or Red Oak or
      any of its Affiliates) to acquire beneficial ownership of 15% or more of the
      Total Current Voting Power (provided that the foregoing shall no longer suspend
      such restrictions after a subsequent filing is made by such Person or 13D Group
      with the SEC indicating that such Person or 13D Group ceases to beneficially
      own
      at least 15% of the Total Current Voting Power or such tender offer is
      terminated without such Person or 13D Group acquiring beneficial ownership
      of
      15% or more of the Total Current Voting Power);

    

    (iii) the
      solicitation of proxies by any Person (other than FHC, any current executive
      officer of FHC, any member of FHC's Board of Directors or Red Oak or any of
      its
      Affiliates) or 13D Group (which does not include FHC, any current executive
      officer of FHC, any member of FHC's Board of Directors or Red Oak or any of
      its
      Affiliates) to which Rules 14a-3 to 14a-15 under the Exchange Act (or any
      successor rules) apply, which proxies are intended to effect a change in the
      majority of the members of the Board of Directors of FHC (provided that the
      foregoing shall no longer suspend such restrictions after such solicitation
      is
      withdrawn, terminated or otherwise completed); or

    

    (iv) the
      entry
      by FHC into any agreement which provides for a Change of Control of
      FHC.

    

    (c) The
      expiration or termination of any suspension of restrictions pursuant to
      subsection 2(b) shall not require Red Oak to divest any Voting Security or
      rights to acquire Voting Securities obtained during the suspension.

    

    3. The
      Offer.
      During
      the Standstill Period, Red Oak may in its sole discretion commence (within
      the
      meaning of Rule 14d-2 under the Exchange Act and the rules and regulations
      promulgated thereunder) and, subject to the terms and conditions set forth
      in
      this Agreement, close one cash tender offer (within the meaning of Section
      14(d)
      of the Exchange Act) (the "Offer") to purchase up to that number of the issued
      and outstanding shares of Common Stock (each, a "Share" and, collectively,
      the
      "Shares") that may result, upon consummation of the Offer, in Red Oak
      beneficially owning not more than 15% of the outstanding Total Current Voting
      Power. 

    

    4. FHC
      Obligations.
      Upon
      Red Oak's request, FHC shall promptly make available to Red Oak FHC's transfer
      agent and information containing the names and addresses of all record holders
      of Shares and with security position listings of Shares held in stock
      depositories, each as of a recent date, together with all other available
      listings and computer files containing names, addresses and security position
      listings of record holders and beneficial owners of Shares. FHC shall furnish
      Red Oak with such additional information, including updated listings and
      computer files of shareholders, mailing labels and security position listings,
      and such other assistance as Red Oak or its agents may reasonably require in
      communicating the Offer to the record and beneficial holders of Shares. Subject
      to the requirements of applicable law, and except for such steps as are
      necessary to disseminate the offer to purchase, related letter of

    
      
        
        

      

      
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    transmittal
      and all ancillary documents relating to the Offer and any other documents
      necessary to consummate the Offer, Red Oak shall hold in confidence the
      information contained in such documents, labels, listings and files, shall
      use
      such information solely in connection with the Offer, and, if the Offer is
      terminated, shall promptly deliver or cause to be delivered to FHC all copies
      of
      such information, documents, labels, listings and files then in its possession
      or control or in the possession or control of its agents or representatives.
      FHC
      consents to any appointment by Red Oak of FHC's transfer agent to act as
      depository in connection with the Offer. Red Oak shall reimburse FHC, within
      five business days of FHC's written request, for FHC's reasonable costs and
      expenses associated with FHC's obligations under this section.

    

    5. Voting
      Agreement.
      During
      the period from the date of this Agreement until FHC's 2008 annual meeting
      of
      shareholders, except for any period of suspension pursuant to Section 2(b)
      and unless the requirements of this section are waived by FHC pursuant to a
      resolution adopted by FHC's Board of Directors, Red Oak shall, and shall cause
      its Affiliates to, promptly and timely at any meeting of the shareholders of
      the
      Company, however called, and at every adjournment thereof, or in connection
      with
      any written consent of the shareholders of the Company, vote all of Voting
      Securities beneficially owned by Red Oak or such Affiliate (a) in favor of
      the election as directors of FHC of all persons nominated by FHC's Board of
      Directors, and against the election as directors of FHC of any other person
      not
      nominated by FHC's Board of Directors, (b) in favor of any other proposal
      or matter which FHC's Board of Directors recommend that the shareholders of
      FHC
      approve and (c) against any other proposal or matter which FHC's Board of
      Directors do not recommend that the shareholders of FHC approve, except that
      Red
      Oak shall not be obligated to vote in favor of any merger, sale of assets or
      similar transaction involving FHC or of any compensation plan for which
      Institutional Shareholder Services or a similar firm recommends a “no” vote,
      provided that Red Oak or its Affiliates shall not make any public statement
      opposing any such transaction or compensation plan.

    

    6. Additional
      Agreements.

    

    (a) Compliance
      with Law.
      Red Oak
      represents and warrants to and covenants with FHC that the execution, delivery
      and performance by Red Oak of this Agreement, the conduct and consummation
      of
      the Offer and the other transactions contemplated by this Agreement will not
      contravene or conflict with or constitute the violation of any law, regulation,
      judgment, injunction, order or decree binding upon or applicable to Red Oak,
      including, without limitation, the provisions of the Exchange Act applicable
      to
      the Offer.

    

    (b) Indemnification.

    

    (i) Red
      Oak
      agrees to indemnify and hold FHC and its representatives, officers, directors,
      employees, agents, shareholders and Affiliates harmless from and against any
      and
      all loss, damage, cost or expense (including reasonable attorneys fees)
      resulting from or arising out of any breach of this Agreement by Red
      Oak.

    

    
      
        
        

      

      
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    (ii) FHC
      agrees to indemnify and hold Red Oak and its representatives, officers,
      directors, employees, agents, shareholders and Affiliates harmless from and
      against any and all loss, damage, cost or expense (including reasonable
      attorneys fees) resulting from or arising out of any breach of this Agreement
      by
      FHC.

    

    (c) State
      Takeover Laws.
      For
      avoidance of doubt, FHC and Red Oak agree that neither the execution and
      delivery of this Agreement by FHC nor any action taken by FHC or its Board
      of
      Directors in connection with this Agreement or the transactions contemplated
      by
      this Agreement shall constitute any approval by the Company or its Board of
      Directors of any acquisition of Voting Securities by Red Oak or any other
      transaction by Red Oak for purposes of, or shall create any exemption from,
      the
      requirements of any "moratorium," "control share," "fair price," "business
      combination" or other antitakeover laws of any jurisdiction applicable to FHC,
      including, but not limited to, Wisconsin Statutes Sections 180.1130 to
      180.1150.

     

    7. Miscellaneous.

    

    (a) Expenses.
      Except
      as otherwise provided in this Agreement, all costs and expenses incurred in
      connection with this Agreement and the Offer shall be paid by the party
      incurring such cost or expense.

    

    (b) Additional
      Agreements.
      Subject
      to the terms and conditions of this Agreement, each of the parties hereto agrees
      to use all reasonable efforts to take, or cause to be taken, all action and
      to
      do, or cause to be done, all things reasonably necessary, proper or advisable
      under applicable laws and regulations and which may be required under any
      agreements, contracts, commitments, instruments, understandings, arrangements
      or
      restrictions of any kind to which such party or by which such party is governed
      or bound, to consummate and make effective the transactions contemplated by
      this
      Agreement.

    

    (c) Notices.
      All
      notices and other communications given or made pursuant hereto shall be in
      writing and shall be deemed to have been duly given or made as of the date
      delivered, mailed or transmitted if delivered personally, mailed by registered
      or certified mail (postage prepaid, return receipt requested) or sent by
      overnight courier (providing proof of delivery) to the parties at the following
      addresses or sent by electronic transmission to the following facsimile numbers
      (or at such other address or facsimile number for a party as shall be specified
      by like notice):

    

    If
      to
      FHC:

    

    The
      Female Health Company

    515
      North
      State Street, Suite 2225

    Chicago,
      Illinois 60610

    Telephone:
      312-595-9123

    Facsimile:
      312-595-9122

    Attn:
      O.B. Parrish, Chief Executive Officer

    
      
        
        

      

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

    

    James
      M.
      Bedore, Esq.

    Reinhart
      Boerner Van Deuren s.c.

    1000
      North Water Street, Suite 2100

    Milwaukee,
      Wisconsin 53202

    Telephone:
      414-298-8196

    Facsimile:
      414-298-8097

    

    If
      to Red
      Oak:

    

    c/o
      Red
      Oak Partners, LLC

    145
      Fourth Avenue, Suite 15A

    New
      York,
      New York 10003

    Telephone:
      212-614-8952

    Facsimile:
      646-390-6784

    Attn:
      David Sandberg

    

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

    

    Peter
      J.
      Tennyson, Esq.

    Paul,
      Hastings, Janofsky & Walker LLP

    695
      Town
      Center Drive, Seventeenth Floor

    Costa
      Mesa, California 92626

    Telephone:
      714-668-6237

    Facsimile:
      714-668-6337

    

    (d) Headings.
      The
      headings contained in this Agreement are for reference purposes only and shall
      not affect in any way the meaning or interpretation of this
      Agreement.

    

    (e) Severability.
      If any
      term or other provision of this Agreement is invalid, illegal or incapable
      of
      being enforced by any rule of law or public policy, all other conditions and
      provisions of this Agreement shall nevertheless remain in full force and effect
      so long as the economic or legal substance of the transactions contemplated
      hereby is not affected in any manner materially adverse to any party. Upon
      such
      determination that any term or other provision is invalid, illegal or incapable
      of being enforced, the parties hereto shall negotiate in good faith to modify
      this Agreement so as to effect the original intent of the parties as closely
      as
      possible in an acceptable manner to the end that transactions contemplated
      hereby are fulfilled to the extent possible.

    

    (f) Amendments.
      This
      Agreement may not be modified, amended, altered or supplemented, except upon
      the
      execution and delivery of a written agreement executed by the parties
      hereto.

    

    
      
        
        

      

      
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    (g) Entire
      Agreement.
      This
      Agreement constitutes the entire agreement of the parties, and supersedes all
      prior agreements and undertakings, both written and oral, among the parties,
      or
      any of them, with respect to the subject matter hereof and, except as expressly
      provided herein, are not intended to confer upon any other Person any rights
      or
      remedies hereunder.

    

    (h) Assignment.
      This
      Agreement shall not be assigned by any party hereto, by operation of law or
      otherwise. 

    

    (i) Governing
      Law.
      This
      Agreement shall be construed in accordance with and governed by the law of
      Wisconsin without giving effect to the principles of conflicts of laws
      thereof.

    

    (j) Counterparts;
      Effectiveness.
      This
      Agreement may be signed in any number of counterparts, each of which shall
      be an
      original, with the same effect as if the signatures thereto and hereto were
      upon
      the same instrument. This Agreement shall become effective when each party
      hereto shall have received counterparts hereof signed by all of the other
      parties hereto.

    

    IN
      WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
      executed as of the day and year first above written.

     

    

    THE
      FEMALE HEALTH COMPANY

    

    BY  
      /s/ O.B.
      Parrish_______________

    O.B.
      Parrish, Chairman and Chief

    Executive
      Officer

    

    

    RED
      OAK
      FUND, LP

    

    BY: 
      Red Oak Partners, LLC

    General
      Partner

    

    BY 
       /s/
      David Sandberg____________

    David
      Sandberg

    Managing
      Member

     

     

    
      9Exhibit
4.5

 

THE SECURITY EVIDENCED BY THIS WARRANT AND THE
SECURITIES TO BE PURCHASED UNDER THIS WARRANT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES. THE SALE, TRANSFER OR ASSIGNMENT IS MADE IN
ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY,
STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.

 

 

	
  No.      

  	
   

  	
  Right to Purchase                

  
	
                 ,
  1997

  	
   

  	
  Shares of Series D
  Preferred Stock

  
	
  Void after Expiration
  Date (as defined herein)

  	
   

  	
   

  

 

QUARK BIOTECH, INC.

SERIES D PREFERRED STOCK PURCHASE WARRANT

Quark Biotech, Inc., a California corporation (the “Company”), hereby certifies that, for good
and valuable consideration,                                                             ,
(the “Warrant Holder”), is
entitled, subject to the terms set forth below, to purchase from the Company at
any time during the period commencing at 9:00 a.m. on                  ,
1997 and ending at 5:00 p.m. on the Expiration Date (as defined in Section 3),
up to the number of fully-paid and non-assessable shares of Series D Preferred
Stock of the Company set forth in Section 1 below for the price per share set
forth in Section 2 below, subject to adjustment as herein provided.

1.         Number
of Shares. Subject to adjustment as provided in Section 8 below, this
Warrant shall be exercisable for up to                                                                               
shares of Series D Preferred Stock of the Company (the “Shares”) or, in the event of automatic
conversion of the Company’s Series D Preferred Stock, an equivalent number of
shares of Common Stock (determined using the applicable conversion ratio at the
time of such conversion, subject to further adjustment as provided in Section
8.) As used herein, the term “Warrant Shares”
shall mean the Shares or other securities obtained on conversion of the Shares.

2.         Exercise
Price. This Warrant shall be exercisable at a price (the “Exercise Price”) equal to Four Dollars ($4.00)
per Share, in U.S. dollars, subject to adjustment as provided in Section 8
below. Notwithstanding the foregoing, in the event that this Warrant has not
been exercised contemporaneous with or prior to the closing of a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act at an offering price to

 

 

the public of at least $8.00 per share (as adjusted for stock splits,
stock dividends, recapitalization and similar events (“Recapitalizations”)) with gross proceeds
to the Company (net of underwriting commissions and discounts) of at least
$10,000,000 (a “Qualified IPO”),  then the Exercise Price shall be equal to
the per share offering price of the company’s equity securities (prior to
underwriter commissions and offering expenses) in the Qualified IPO (the “Gross IPO Price”). The Company agrees to
provide Warrant Holder with no fewer than thirty (30) days notice prior to the
closing of a Qualified IPO.

3.         Term.
This Warrant may be exercised in whole or in part, at any time after issuance
and prior to 5:00 p.m. on the date of the first to occur of the following (the
date of such occurrence being referred to herein as the “Expiration Date”):

(a)       5:00
p.m, Pacific Daylight Time, September 9, 2007; and

(b)       three
(3) years after the closing of the Qualified IPO; provided, however,
that in the event, following the closing of the Qualified IPO, the per share
closing sales price of the Company’s Common Stock (as reported by The Wall Street Journal or other widely
available reporting source) for a period of thirty (30) consecutive trading
days is at least equal to the greater of (i) $20.00 (appropriately adjusted for
Recapitalizations) or (ii) the per share Gross IPO Price multiplied by two
(appropriately adjusted for Recapitalizations), the Company shall have the
right, upon written notice to the Warrant Holder to be given within 15 days, to
declare that this Warrant shall terminate, and this Warrant shall terminate, to
the extent not exercised within thirty (30) days following receipt of such
notice.

4.         Exercise
or Conversion of Warrant.

4.1       Exercise.
During the Exercise Period, this Warrant may be exercised in whole or in part
by the Warrant Holder by executing and delivering to the Company at its
principal office the written notice of exercise in the form attached hereto as Exhibit
W-l, specifying the portion of the Warrant to be exercised and accompanied
by this Warrant, and paying to the Company the amount obtained by multiplying
the number of Warrant Shares designated in the notice of exercise by the
Exercise Price, as then in effect, (i) in cash (in immediately available
funds), (ii) where permitted by law, by cancellation of indebtedness of the
Company to the Warrant Holder, or (iii) by surrender of shares of the Company’s
Common Stock, that are clear of all liens, claims, encumbrances or security
interests (a “Surrender”).

4.2       Right
to Convert Warrants into Shares: Net Exercise. In lieu of exercising this
Warrant or any portion hereof, the Warrant Holder shall have the right to
convert this Warrant or any portion hereof during the Exercise Period into
Warrant Shares by executing and delivering to the Company at its principal
office the written notice of conversion in the form attached as Exhibit W-l,
specifying the portion of the Warrant to be converted, and accompanied by this
Warrant. The number of Warrant Shares to be issued upon such conversion shall
be that number of Warrant Shares equal to the quotient obtained by dividing (x)
the value of the converted portion of the Warrant at the

 

2

 

time the conversion right is exercised (determined by subtracting the
aggregate Exercise Price for the Warrant Shares represented by the portion of
the Warrant to be converted (the “Aggregate
Price”) from the Fair Market Value of such Warrant Shares at the
time of conversion) by (y) the Fair Market Value of one Warrant Share at such
time (a “Net Exercise”). “Fair Market Value” means, as of any date,
the value of a Warrant Share determined as follows:

(a)       if such
Warrant Share is then quoted on The Nasdaq National Market, the simple average
of the closing sale prices as reported on The Nasdaq National Market for the
ten (10) consecutive trading days prior to such date;

(b)       if such
Warrant Share is publicly traded and is then listed on a national securities
exchange, the simple average of the closing sale prices on the principal
national securities exchange on which the Warrant Share is listed or admitted
to trading for the ten (10) consecutive trading days prior to such date;

(c)       if such
Warrant Share is publicly traded but is not quoted on The Nasdaq National
Market nor listed or admitted to trading on a national securities exchange, the
simple average of the closing bid prices for the ten (10) consecutive trading
days prior to such date, as reported by The
Wall Street Journal or other widely available reporting source, for
the over-the-counter market;

(d)       if none
of the foregoing is applicable, by the Board of Directors of the Company in
good faith (without discount for restriction); or

(e)       only if
the Warrant is exercised contemporaneously with the Qualified IPO, the per
share Gross IPO Price.

Any portion of this Warrant that is converted shall be immediately
canceled.

4.3       Investment
Letter. Upon exercise or conversion of the Warrant in accordance with
Sections 4.1 or 4.2 hereof, the Warrant Holder shall either (i) execute and
deliver to the Company an investment letter in the form attached hereto as Exhibit
W-2 or (ii) deliver to the Company an opinion of counsel for the Warrant
Holder reasonably satisfactory to the Company, stating that such exercise or
conversion is exempt from the registration and prospectus delivery requirements
of such the Securities Act.

4.4       Limitation
on Exercise or Conversion. Notwithstanding Sections 4.1 and 4.2 and any
other provisions of this Warrant, the Warrant Holder’s rights to obtain shares
of Series D Preferred (or other securities that the Warrant Holder may
otherwise become entitled to receive in accordance with Section 8 below) upon
exercise or conversion of this Warrant shall be subject to the expiration or
early termination of any applicable waiting periods relating to the acquisition
of such securities by the Warrant Holder under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.

 

3

 

5.         Delivery
of Stock Certificates, Etc. As soon as practicable after the exercise or
conversion of this Warrant (in full or in part) in accordance with Section 4
above, the Company at its expense will cause to be issued in the name of and
delivered to the Warrant Holder (i) a certificate or certificates for the
number of fully paid and nonassessable Warrant Shares to which the Warrant Holder
shall be entitled upon such exercise or conversion and (ii) a new Warrant of
like tenor to purchase all of the Warrant Shares that may be purchased pursuant
to the portion, if any, of the Warrant not exercised or converted by the
Warrant Holder. The Warrant Holder shall for all purposes be deemed to have
become the holder of record of such Warrant Shares at the close of business on
the date on which this Warrant was surrendered together with a notice of
exercise or conversion and, in the case of exercise, payment of the Exercise
Price was made, irrespective of the date of delivery of such certificate or
certificates, except that, if the date of such surrender, notice and payment is
a date when the stock transfer books of the Company are closed, the Warrant Holder
shall be deemed to have become the holder of record of such Warrant Shares at
the close of business on the next succeeding date on which the stock transfer
books are open.

6.         Covenants
as to Series D Preferred. The Company covenants and agrees that all the
Shares will, upon issuance, be validly issued and outstanding, fully paid and
nonassessable, with no personal liability attaching to the ownership thereof,
and free from all taxes, liens and charges with respect to the issuance
thereof. The Company further covenants and agrees that the Company will at all
times have authorized and reserved, and free from preemptive rights, a
sufficient number of shares of Series D Preferred to provide for the exercise
of the rights represented by this Warrant, and a sufficient number of shares of
Common Stock available for conversion into Common Stock of the Series D
Preferred to be issued on exercise of this Warrant.

7.         Registration
Rights. This Warrant and the Shares issued or issuable upon the exercise or
conversion of this Warrant are subject to registration in accordance with the
registration rights in favor of the Warrant Holder as provided for in Section 2
of that certain Investor Rights Agreement dated August 28, 1997 by and among
the Company, purchasers of the Company’s Preferred Stock, certain holders of
the Company’s Common Stock and the founders of the Company (the “Investor Rights Agreement”).

8.         Adjustments.

8.1       In the
event that the Company shall (i) pay a dividend in, or make a distribution of,
shares of capital stock or other securities (including, without limitation, any
rights or options to subscribe to or purchase any additional shares of any
class of its capital stock, any evidence of its indebtedness or assets, or any
other rights or options) on its outstanding Series D Preferred (or, if all or
any portion of this Warrant is then exercisable for Common Stock, its Common
Stock), (ii) subdivide its outstanding shares of Series D Preferred (or, if all
or any portion of this Warrant is then exercisable for Common Stock, its Common
Stock) into a greater number of such shares or (iii) combine its outstanding
shares of Series D Preferred (or, if all or any portion of this Warrant is then
exercisable for Common Stock, its Common Stock) into a smaller number of such
shares, the total number of Shares or shares of Common Stock purchasable upon
the exercise of

 

4

 

this Warrant shall be adjusted so that upon the subsequent exercise of
this Warrant, the Warrant Holder shall be entitled to receive at the same
aggregate Exercise Price the number of shares of capital stock and other
securities (of one or more classes) which such holder would have owned or would
have been entitled to receive immediately following the happening of any of the
events described above had this Warrant been exercised in full immediately
prior to the record date with respect to such event. Any adjustment made
pursuant to this Section shall, in the case of a dividend or distribution of
stock or other securities, become effective as of the record date therefor and,
in the case of a subdivision or combination, be made as of the effective date
thereof. If, as a result of an adjustment made pursuant to this Section, the
Warrant Holder shall become entitled to receive shares or other units of two or
more classes of capital stock or other securities of the Company upon a
subsequent exercise hereof, the Board of Directors of the Company (whose
reasonable determination shall be conclusive and, upon request by the Warrant
Holder, shall be evidenced by a certified Board resolution delivered to the
Warrant Holder) shall determine the allocation of the adjusted Exercise Price
between or among shares of such classes of capital stock. The above provisions
of this Section 8.1 shall apply similarly to successive stock dividends,
subdivisions and combinations.

8.2       In the
event of a capital reorganization or a reclassification of the Series D
Preferred (or, if all or any portion of this Warrant is then exercisable for Common
Stock, its Common Stock) (except as provided in Section 8.1 above or Section
8.4 below), any Warrant Holder, upon exercise of this Warrant, shall be
entitled to receive, in substitution for the Series D Preferred or Common Stock
to which it would have become entitled upon exercise immediately prior to such
reorganization or reclassification, the shares (of any class or classes) or
other securities or property of the Company (or cash) that it would have been
entitled to receive at the same aggregate Exercise Price upon such
reorganization or reclassification if this Warrant had been exercised
immediately prior to the record date with respect to such event; and in any
such case, appropriate provision (as determined by the Board of Directors of
the Company, whose reasonable determination shall be conclusive and, upon
request by the Warrant Holder, shall be evidenced by a certified Board
resolution delivered to the Warrant Holder) shall be made for the application
of this Section 8.2 with respect to the rights and interests thereafter of the
Warrant Holder (including but not limited to the allocation of the Exercise
Price between or among shares of classes of capital stock or other securities),
to the end that this Section 8.2 (including the adjustments of the number of
shares of Series D Preferred or other securities purchasable and the Exercise
Price thereof) shall thereafter be reflected, as nearly as reasonably
practicable, in all subsequent exercises of this Warrant for any shares or
securities or other property (or cash) thereafter deliverable upon the exercise
hereof. The above provisions of this Section 8.2 shall apply similarly to
successive reorganizations or recapitalizations.

8.3       Whenever
the number of Warrant Shares purchasable upon exercise of this Warrant is
adjusted as provided in this Section 8, the Company will promptly deliver to
the Warrant Holder a certificate signed by an officer of the Company setting
forth the number and kind of securities or other property purchasable upon
exercise of this Warrant as so adjusted, and setting forth a brief statement of
the facts accounting for such adjustments; provided, however, that
failure

 

5

 

to deliver any notice required under this Section 8.3. or any defect
therein, shall not affect the legality or validity of any such adjustments
under this Section 8.

8.4       In the
event of any consolidation or share exchange reorganization of the Company
with, or merger of the Company into, another corporation (other than a
consolidation, share exchange, reorganization or merger which does not result
in any reclassification or change of the outstanding Warrant Shares), or in
case of any sale of all or substantially all of the assets of the Company, the
acquiring entity shall execute and deliver to the Warrant Holder a new warrant
providing that the Warrant Holder shall have the right thereafter (until the
expiration of this Warrant) to receive, upon exercise of such warrant, solely
the kind and amount of shares of stock and other securities and property (or
cash) receivable upon such consolidation, share exchange reorganization,
merger, sale or transfer by a holder of the number of shares of Warrant Shares
of the Company for which this Warrant might have been exercised immediately
prior to such consolidation, share exchange reorganization, merger, sale or
transfer. Such new warrant shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided in this
Section 8.4. The above provision of this Section 8.4 shall similarly apply to
successive consolidations, share exchange reorganizations, mergers, sales or
transfers.

8.5       Irrespective
of any adjustments in the number or kind of shares or other securities or
property issuable upon exercise of this Warrant, this Warrant and any
replacement Warrants thereafter issued may continue to express the same price
and number and kind of shares as are stated in the original Warrant.

8.6       For the
purpose of this Warrant, the term “Series D Preferred”
shall mean (i) the class of stock designated as Series D Preferred in the
Restated Articles of Incorporation of the Company, as amended, or (ii) any
other class of stock resulting from successive changes or reclassifications of
such Series D Preferred, or from the conversion of Series D Preferred into
Common Stock pursuant to the Restated Articles of Incorporation. In the event
that at any time as a result of an adjustment made pursuant to this Section 8,
the Warrant Holder shall become entitled to receive any shares of capital stock
of the Company other than shares of Series D Preferred, thereafter the number
of such other shares so receivable upon exercise of this Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Series D
Preferred contained in this Section 8, and all other provisions of this
Warrant, with respect to the Series D Preferred, shall apply on like terms to
any such other shares.

8.7       The
Company may, from time to time and to the extent permitted by law, reduce the
exercise price of this Warrant by any amount for a period of not less than
twenty (20) days. If the Company so reduces the exercise price of this Warrant,
it will give the Warrant Holder not less than fifteen (15) days’ notice of such
decrease, and shall take such other steps as may be required under applicable
law in connection with any offers or sales of securities at the reduced price.

 

6

 

8.8       Whenever
the number of Shares or other securities purchasable upon the exercise of this
Warrant is adjusted as provided in Section 8, the Exercise Price for each Share
or other security payable upon exercise shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, the
numerator of which shall be the number of Shares or other securities
purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and the denominator of which shall be the number of Shares or other
security so purchasable immediately thereafter.

9.         No
Fractional Interests. The Company shall not be required to issue any
replacement or balance Warrant evidencing a fraction of a Warrant or to issue
fractions of shares or other securities upon the exercise or conversion of this
Warrant. If any fraction (calculated to the nearest one-hundredth) of a Warrant
or of a share or other securities would, except for the provisions of this
Section 9, be issuable upon the exercise or conversion of any Warrant, the
Company shall, at its option, either purchase such fraction for an amount in
cash equal to the current value of such fraction computed on the basis of the
Fair Market Value thereof, or issue the required fractional Warrant, or share
or other security. The Warrant Holder expressly waives any right to receive a
replacement Warrant evidencing any fraction of a Warrant or to receive any
fractional share or other securities upon exercise or conversion of this Warrant,
except as expressly provided in this Section 9. Each adjustment in the number
of Warrant Shares purchasable hereunder shall be calculated to the nearest
whole share with fractional shares disregarded.

10.       No
Shareholder Rights. This Warrant, as such, shall not entitle the Warrant
Holder to vote, receive dividends or be deemed the holder of Series D Preferred
or any other securities of the Company which may at any time be issuable on the
exercise of this Warrant for any purpose whatever, nor shall anything contained
herein be construed to confer upon the Warrant Holder any of the rights of a
shareholder of the Company or any right to vote for the election of directors
or upon any matter submitted to shareholders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance or otherwise), or to
receive notice of meetings or other actions affecting shareholders or to
receive dividend or subscription rights, or otherwise, until this Warrant shall
have been exercised or converted in accordance with the provisions hereof.

11.       Transfer
and Exchange of Warrant. Subject to Section 9, this Warrant is
exchangeable, upon the surrender hereof by the Warrant Holder at the principal
office of the Company, for new Warrants of like tenor representing in the
aggregate the rights to subscribe for and purchase the number of Shares which
may be subscribed for and purchased hereunder, each of such new Warrants to
represent the right to subscribe for and purchase such number of Shares as
shall be designated by the Warrant Holder at the time of such surrender. This
Warrant and all rights hereunder may be transferred, in whole or in part, on
the books of the Company maintained for such purpose at the principal office of
the Company, by the Warrant Holder hereof in person, or by duly authorized
attorney, upon surrender of this Warrant properly endorsed and upon payment of
any necessary transfer tax or other governmental charge imposed upon such
transfer. Upon any partial

 

7

 

transfer, the Company will issue and deliver to the Warrant Holder a
new Warrant with respect to the Warrant balance not so transferred. Each taker
and holder of this Warrant or any Warrant issued upon transfer hereof, by
taking or holding the same, consents and agrees to be bound by the terms,
conditions, representations and warranties hereof (and as a condition to any
transfer of this Warrant the transferee shall upon request by the Company
execute an agreement confirming the same), and, when this Warrant shall have
been so endorsed and presented, the person in possession of this Warrant may be
treated by the Company, and all other persons dealing with this Warrant, as the
absolute owner hereof for any purpose and as the person entitled to exercise
the rights represented hereby, any notice to the contrary notwithstanding provided,
however, that until a transfer of this Warrant is duly registered on the
books of the Company, the Company may treat the Warrant Holder hereof as the
owner of this Warrant for all purposes.

12.       Lost,
Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen,
mutilated or destroyed, the Company may, on such customary and reasonable terms
as to indemnity or otherwise as it may in its discretion impose (which shall,
in the case of a mutilated Warrant, include the surrender thereof), issue a new
Warrant of like denomination and tenor as the Warrant so lost, stolen,
mutilated or destroyed.

13.       Restrictions
on Transfer.

13.1     Certificates.
Certificates representing any of the Shares acquired pursuant to the provisions
of this Warrant shall have endorsed thereon the following legends, as
appropriate.

(a)       Unless
such Shares are received in a transaction registered under the Securities Act
and qualified (if necessary) under applicable state securities laws:

“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS
MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY
TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH
ACT.”

(b)       Any
legend required to be placed thereon by any applicable state securities laws.

13.2     Compliance
with Act. The Warrant Holder, by acceptance hereof, agrees that this
Warrant and the Shares to be issued upon the exercise or conversion hereof are
being acquired

 

8

 

solely for its own account and not as a nominee for any other party and
not with a view toward the resale or distribution thereof and that it will not
offer, sell or otherwise dispose of this Warrant or any Shares to be issued
upon the exercise or conversion hereof except under circumstances which will
not result in a violation of the Securities Act or of applicable state
securities laws.

14.       Notice
of Certain Corporate Actions. In case the Company after the date hereof
shall propose (i) to offer to the holders of Series D Preferred or Common
Stock, generally, rights to subscribe to or purchase any additional shares of
any class of its capital stock, any evidences of its indebtedness or assets, or
any other rights or options or (ii) to effect any reclassification of Series D
Preferred (other than a reclassification involving merely the subdivision or
combination of outstanding shares of Series D Preferred or Common Stock) or any
capital reorganization, or any consolidation or merger to which the Company is
a party and for which approval of any stockholders of the Company is required,
or any sale, transfer or other disposition of its property and assets
substantially as an entirety, or the liquidation, voluntary or involuntary
dissolution or winding-up of the Company, then, in each such case, the Company
shall deliver to the Warrant Holder notice of such proposed action, which
notice shall specify the date on which the books of the Company shall close or
a record be taken for such offer of rights or options, or the date on which
such reclassification, reorganization, consolidation, merger, sale, transfer,
other disposition, liquidation, voluntary or involuntary dissolution or
winding-up shall take place or commence, as the case may be, and which shall
also specify any record date for determination of holders of Series D Preferred
or Common Stock entitled to vote thereon or participate therein and shall set
forth such facts with respect thereto as shall be reasonably necessary to
indicate any adjustments in the Exercise Price and the number or kind of shares
or other securities purchasable upon exercise of the Warrant which will be
required as a result of such action. Such notice shall be sent, in the case of
any action covered by clause (i) above, at least ten (10) days prior to the
record date for determining holders of the Series D Preferred or Common Stock
for purposes of such action or, if a record is not to be taken, the date as of
which the holders of shares of Series D Preferred or Common Stock of record are
to be entitled to such offering; and, in the case of any action covered by
clause (ii) above, at least twenty (20) days prior to the earlier of the date
on which such reclassification, reorganization, consolidation, merger, sale,
transfer, other disposition, liquidation, voluntary or involuntary dissolution
or winding-up is expected to become effective and the date on which it is
expected that holders of shares of Series D Preferred or Common Stock of record
on such date shall be entitled to exchange their shares for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, sale, transfer, other disposition, liquidation, voluntary or
involuntary dissolution or winding-up.

15.       Taxes.
The Company shall pay all documentary, stamp or other transactional taxes
attributable to the issuance or delivery of shares of capital stock or other
securities of the Company upon the exercise hereof.

 

9

 

16.       Miscellaneous.

16.1     Entire
Agreement. This Warrant and the related agreements referenced herein
constitute the entire agreement of the parties and supersede all prior
undertakings and agreements with respect to the subject matter hereof.

16.2     Waivers
and Amendments. This Warrant or any provision hereof may be changed,
waived, discharged or terminated only by a statement in writing signed by the
party against which enforcement of the change, waiver, discharge or termination
is sought.

16.3     Applicable
Law. This Warrant shall be governed and controlled as to validity,
enforcement, interpretation, construction, effect and in all other respects by
the internal laws (excluding conflicts of law rules) of the State of California
applicable to contracts made and performed in that State; provided, however,
that if the Company has merged into a Delaware corporation, then this Warrant
shall be governed and controlled as to validity, enforcement, interpretation,
construction, effect and in all other respects by the internal laws (excluding
conflict of law rules) of the State of Delaware applicable to contracts made
and performed in that State.

16.4     Notices.
All notices and other communications required or permitted hereunder shall be
in writing and shall be mailed by registered or certified mail, postage
prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to
the Purchaser, at the Purchaser’s address set forth on Schedule of Purchasers (including
electronic mail address), or at such other address as the Purchaser shall have
furnished to the Company in writing, with copies to Philip B. Simon at Howson
& Simon CPAs L.P., 101 Ygnacio Valley Road, Suite 310, Walnut Creek, CA
94596, facsimile (510) 977-9064, e-mail 102466.3043@compuserve.com and to
Andrew L. Dudnick, Esq. at Springs Rivin Detwiler Dudnick & Stikker, LLP,
351 California Street, Fifteenth Floor, San Francisco, CA 94104, facsimile
(415) 982-1401, e-mail dudnick@netcom.com, or (b) if to the Company, at the
address set forth on the cover page of this Agreement and addressed to the
attention of the President, or at such other address as the Company shall have
furnished to the Purchaser. Each such notice or other communication shall for
all purposes of this Agreement be treated as effective or having been given
when delivered if delivered personally or sent by telegram, telefax or telex
(receipt confirmed) or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle
for the deposit of the United States mail, addressed and mailed as aforesaid,
or if sent by electronic mail, then one business day following delivery if
receipt confirmed or two business days following delivery if followed by
certified mail or courier delivery.

 

10

 

16.5     Headings.
The headings in this Warrant are for convenience of reference only and shall
not affect the meaning or interpretation of this Warrant.

	
   

  	
  QUARK BIOTECH, INC.:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  

 

 

EXHIBIT W-1  

NOTICE OF EXERCISE OR CONVERSION

Date: ____________, 19 __

Quark Biotech, Inc.

c/o Wilson Sonsini Goodrich & Rosati

650 Page Mill Road

Palo Alto, CA 94304

Attention: ________________________

The undersigned hereby elects to exercise or convert
the enclosed Warrant dated _____________, 1997 issued to it by Quark Biotech, Inc. (the “Company”).

The undersigned elects to:

o                       Exercise
the Warrant and to purchase thereunder _____________ shares of the Series D
Preferred or Common Stock of the Company, as applicable, (the “Shares”) at an exercise price of $4.00 per
Share (subject to adjustment pursuant to Section 2 and Section 8 of the Warrant), or an aggregate purchase price of
___________ Dollars ($____________) (the “Purchase
Price”). Pursuant to the terms of the Warrant, the undersigned has
delivered the Purchase Price herewith in full, of which Purchase Price,
$___________ is to be paid by tender of ________ shares of the Company’s Series
D Preferred or Common Stock, as applicable, which are delivered herewith in
form suitable for transfer.

o                       Convert the
value of ________________________ shares of the Series D Preferred or Common
Stock, as applicable, issuable pursuant to the Warrant at the Exercise Price
(as defined in the Warrant) of $4.00 per Share (subject to adjustment pursuant
to Section 2 and Section 8 of the Warrant).

The undersigned hereby represents and warrants that
all of the representations and warranties of the undersigned set forth in
Section 13.2 of the Warrant are true and correct as of the date hereof, and
that the undersigned has executed and delivered the Investment Letter attached
as Exhibit W-2 to the Warrant.

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  Warrant Holder

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

	
  Accepted and Acknowledged:

  
	
  Quark Biotech, Inc.

  
	
  By:

  	
   

  
	
  Dated: _________________, 19__

  

 

 

EXHIBIT W-2

THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED TO QUARK BIOTECH,
INC. ALONG WITH THE SUBSCRIPTION FORM BEFORE THE SERIES D PREFERRED OR COMMON
STOCK, AS APPLICABLE, ISSUABLE UPON EXERCISE OF THE WARRANT DATED ____________,
1997 WILL BE ISSUED.

INVESTMENT LETTER

______________,19__

Quark Biotech, Inc. 

38 Tamar Street 

Omer 84965 Israel

Attention: _______________________

Dear M__________________:

The undersigned, _____________________ (“Purchaser”),  intends to acquire up to _________ shares of the Series D
Preferred or Common Stock, as applicable, (the “Stock”) of Quark Biotech, Inc. (“Quark Biotech”)
from Quark Biotech pursuant to the exercise of certain warrants to purchase
stock held by the Purchaser. The Stock will be issued to Purchaser in a
transaction not involving a public offering and pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the “1933  Act”)
and applicable state securities laws. In connection with such purchase and in
order to comply with the exemptions from registration relied upon by Quark
Biotech, Purchaser represents, warrants and agrees as follows:

The Purchaser is an accredited investor within the
meaning of Rule 501 under the 1933 Act and has such knowledge and experience in
financial and business matters that the Purchaser is capable of evaluating the
merits and risks of the purchase of the Stock and of protecting Purchaser’s
interests in connection therewith.

Purchaser is acquiring the Stock for its own account,
to hold for investment, and Purchaser shall not make any sale, transfer or
other disposition of the Stock in violation of the 1933 Act or the General
Rules and Regulations promulgated thereunder by the Securities and Exchange
Commission (the “SEC”) or in
violation of any applicable state securities law.

Purchaser has been advised that the Stock has not been
registered under the 1933 Act or state securities laws on the ground that this
transaction is exempt from registration, and that reliance by Quark Biotech on
such exemptions is predicated in part on Purchaser’s representations set forth
in this letter.

Purchaser has been informed that under the 1933 Act,
the Stock must be held indefinitely unless it is subsequently registered under
the 1933 Act or unless an exemption from such registration

 

(such as Rule 144) is available with respect to any proposed transfer
or disposition by Purchaser of the Stock. Purchaser further agrees that Quark
Biotech may refuse to permit Purchaser to sell, transfer or dispose of the
Series D Preferred (except as permitted under Rule 144) unless there is in
effect a registration statement under the 1933 Act and any applicable state
securities laws covering such transfer, or unless Purchaser furnishes an
opinion of counsel reasonably satisfactory to counsel for Quark Biotech, to the
effect that such registration is not required.

Purchaser also understands and agrees that there will
be placed on the certificate(s) for the Stock, or any substitutions therefor,
the following legend stating in substance:

“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS
MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY
TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH
ACT.”

 

2

 

Purchaser has carefully read this letter and has
discussed its requirements and other applicable limitations upon Purchaser’s
resale of the Stock with Purchaser’s counsel.

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  Purchaser

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

3

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