exv10w18



 





Exhibit 10.18

 





LOAN AND SECURITY AGREEMENT

ZARS, INC.




 










1









 











TABLE OF CONTENTS




	 	 	 	 	 
	 	 	Page
	1 ACCOUNTING AND OTHER TERMS
	 	 	4	 
	 
	 	 	 	 
	2 LOAN AND TERMS OF PAYMENT
	 	 	4	 
	2.1 Promise to Pay
	 	 	4	 
	2.2 Termination of Commitment to Lend
	 	 	4	 
	2.3 [Intentionally omitted]
	 	 	5	 
	2.4 Interest Rate, Payments
	 	 	5	 
	2.5 Fees
	 	 	5	 
	 
	 	 		 
	3 CONDITIONS OF LOANS
	 	 	5	 
	3.1 Conditions Precedent to Initial Credit Extension
	 	 	5	 
	3.2 Conditions Precedent to all Credit Extensions
	 	 	5	 
	 
	 	 	 	 
	4 CREATION OF SECURITY INTEREST
	 	 	6	 
	4.1 Grant of Security Interest
	 	 	6	 
	4.2 Authorization to File
	 	 	6	 
	 
	 	 	 	 
	5 REPRESENTATIONS AND WARRANTIES
	 	 	6	 
	5.1 Due Organization and Authorization
	 	 	6	 
	5.2 Collateral
	 	 	6	 
	5.3 Litigation
	 	 	7	 
	5.4 No Material Adverse Change in Financial Statements
	 	 	7	 
	5.5 Solvency
	 	 	7	 
	5.6 Regulatory Compliance
	 	 	7	 
	5.7 Investments in Subsidiaries
	 	 	8	 
	5.8 Full Disclosure
	 	 	8	 
	 
	 	 	 	 
	6 AFFIRMATIVE COVENANTS
	 	 	8	 
	6.1 Government Compliance
	 	 	8	 
	6.2 Financial Statements, Reports, Certificates
	 	 	8	 
	6.3 Inventory; Returns
	 	 	9	 
	6.4 Taxes
	 	 	9	 
	6.5 Insurance
	 	 	9	 
	6.6 Primary Accounts
	 	 	9	 
	6.7 FDA Approval and Payment Covenants
	 	 	10	 
	6.8 Registration of Intellectual Property Rights
	 	 	10	 
	6.9 Further Assurances
	 	 	10	 
	 
	 	 	 	 
	7. NEGATIVE COVENANTS
	 	 	10	 
	7.1 Dispositions
	 	 	10	 
	7.2 Changes in Business, Ownership, Management or Locations of Collateral
	 	 	10	 
	7.3 Mergers or Acquisitions
	 	 	11	 
	7.4 Indebtedness
	 	 	11	 
	7.5 Encumbrance
	 	 	11	 
	7.6 Distributions; Investments
	 	 	11	 
	7.7 Transactions with Affiliates
	 	 	11	 
	7.8 Subordinated Debt
	 	 	11	 
	7.9 Compliance
	 	 	11	 
	 
	 	 	 	 
	8 EVENTS OF DEFAULT
	 	 	12	 
	8.1 Payment Default
	 	 	12	 
	8.2 Covenant Default
	 	 	12	 
	8.3 Attachment
	 	 	12	 
	8.4 Insolvency
	 	 	12	 
	8.5 Other Agreements
	 	 	12	 
	8.6 Judgments
	 	 	13	 
	8.7 Misrepresentations
	 	 	13	 






2









 







	 	 	 	 	 
	8.8 Continued Investor Support
	 	 	13	 
	8.9 Lien Priority
	 	 	13	 
	 
	 	 	 	 
	9 BANK’S RIGHTS AND REMEDIES
	 	 	13	 
	9.1 Rights and Remedies
	 	 	13	 
	9.2 Power of Attorney
	 	 	14	 
	9.3 Bank Expenses
	 	 	14	 
	9.4 Bank’s Liability for Collateral
	 	 	14	 
	9.5 Remedies
Cumulative
	 	 	14	 
	9.6 Demand Waiver
	 	 	14	 
	 
	 	 	 	 
	10 NOTICES
	 	 	15	 
	 
	11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
	 	 	15	 
	 
	 	 	 	 
	12 GENERAL PROVISIONS
	 	 	15	 
	12.1 Successors and Assigns
	 	 	15	 
	12.2 Indemnification
	 	 	15	 
	12.3 Time of Essence
	 	 	15	 
	12.4 Severability of Provision
	 	 	15	 
	12.5 Amendments in Writing, Integration
	 	 	15	 
	12.6 Counterparts
	 	 	16	 
	12.7 Survival
	 	 	16	 
	12.8 Confidentiality
	 	 	16	 
	12.9 Attorneys’ Fees, Costs and Expenses
	 	 	16	 
	12.10 Joint and Several Obligations
	 	 	16	 
	 
	 	 	 	 
	13 DEFINITIONS
	 	 	16	 
	13.1 Definitions
	 	 	16	 






3









 





     This LOAN AND SECURITY AGREEMENT dated as of the Effective Date, between SILICON VALLEY BANK
(“Bank”), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and ZARS, INC.
(“Borrower”), whose address is 1142 West 2320 South, Suite A, Salt Lake City, UT 84119 provides the
terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties agree as
follows:



1 ACCOUNTING AND OTHER TERMS




     Accounting terms not defined in this Agreement will be construed following GAAP. Calculations
and determinations must be made following GAAP. The term “financial statements” includes the notes
and schedules. The terms “including” and “includes” always mean “including (or includes) without
limitation,” in this or any Loan Document.



2 LOAN AND TERMS OF PAYMENT




2.1 Promise to Pay.




     Borrower promises to pay Bank the unpaid principal amount of all Credit Extensions and
interest on the unpaid principal amount of the Credit Extensions.



2.1.1 Equipment Advances.




     (a) Through September ___, 2006 (the “Equipment Availability End Date”), Bank will make
advances (“Equipment Advance” and, collectively, “Equipment Advances”) not exceeding the Committed
Equipment Line. The Equipment Advances may only be used to finance or refinance Equipment
purchased on or after 90 days before the date of each Equipment Advance and may not exceed 100% of
the equipment invoice excluding taxes, shipping, warranty charges, freight discounts and
installation expense; however, the first Equipment Advance may be used to finance or refinance
Equipment purchased on or after January 1, 2004. Software, leasehold improvements and other soft
costs, including sales taxes, freight and installation expenses may constitute up to 50% of each
Equipment Advance. Each Equipment Advance must be for a minimum of $50,000. The number of
Equipment Advances is limited to 6.



     Interest accrues from the date of each Equipment Advance at the rate in Section 2.4 and is
payable monthly until the Equipment Availability End Date occurs. Equipment Advances outstanding
on the Equipment Availability End Date are payable in 36 equal monthly installments of principal,
plus accrued interest, beginning on the last day of each month following the Equipment Availability
End Date and ending on September___, 2009 (the “Equipment Maturity Date”), when the remaining
outstanding balance of principal and accrued interest shall be paid in full. If Borrowers select
the Fixed Rate Option, the 36 monthly installments shall be paid in equal monthly payments of
principal and interest. If Borrowers select the Floating Rate Option, the 36 monthly installments
shall be paid in equal principal payments each month, plus accrued interest. Equipment Advances
when repaid may not be reborrowed. Equipment Advances may be prepaid in whole or in part without
any prepayment fee or charge.



     (b) To obtain an Equipment Advance, Borrower must notify Bank (the notice is irrevocable) by
facsimile no later than 12:00 p.m. Pacific Time 1 Business Day before the day on which the
Equipment Advance is to be made. The notice in the form of Exhibit B (Payment/Advance Form) must
be signed by a Responsible Officer or designee and include a copy of the invoice for the Equipment
being financed.



2.2 Termination of Commitment to Lend.




     Bank’s obligation to lend the undisbursed portion of the Obligations will terminate if, in
Bank’s sole discretion, there has been a Material Adverse Change.



2.3 [Intentionally omitted]




2.4 Interest Rate, Payments.




     (a) Interest Rate. Equipment Advances accrue interest on the outstanding principal balance at
a per annum rate of .25 percentage point above the Prime Rate from the Effective Date through the
Equipment Availability End Date, and interest accrues thereafter at the Fixed Rate Option or
Floating Rate Option, as selected by Borrower on or before the Equipment Availability End Date.
The term “Floating Rate Option” is defined as a per annum rate of .25 percentage point above the
Prime Rate. The term “Fixed Rate Option” is defined as a fixed rate per annum of



4









 




2.25 percentage points above the Treasury Rate, which shall be determined as of the earlier of
the Equipment Availability End Date or the first business day thereafter. After an Event of
Default, Obligations accrue interest at 3 percent above the rate effective immediately before the
Event of Default. At Bank’s sole option, the increased rate of interest may be modified if the
Event of Default is waived by Bank or cured to its satisfaction. The interest rate increases or
decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual
number of days elapsed.




     (b) Payments. Interest due on the Equipment Advances is payable on the last day of each
month. Payments received after 12:00 noon Pacific Time are considered received at the opening of
business on the next Business Day. When a payment is due on a day that is not a Business Day, the
payment is due the next Business Day and additional interest shall accrue.



2.4.1 Request to Debit Accounts.




     Bank may debit any of Borrower’s deposit accounts including Account Number
                                                             for principal and interest payments or any amounts Borrower owes Bank when
due. Bank will notify Borrower when it debits Borrower’s accounts. These debits are not a
set-off.



2.5 Fees.




     Borrower will pay:



     (a) Facility Fee. A fully earned, non-refundable Facility Fee of $5,000 for the Committed
Equipment Line due on the Effective Date; and



     (b) Bank Expenses. All Bank Expenses (including reasonable attorneys’ fees and reasonable
expenses) incurred through and after the date of this Agreement, are payable when due.



3 CONDITIONS OF LOANS




3.1 Conditions Precedent to Initial Credit Extension.




     Bank’s obligation to make the initial Credit Extension is subject to the condition precedent
that it receive the agreements, documents and fees it requires.



3.2 Conditions Precedent to all Credit Extensions.




     Bank’s obligations to make each Credit Extension, including the initial Credit Extension, is
subject to the following:



     (a) timely receipt of any Payment/Advance Form; and



     (b) the representations and warranties in Section 5 must be materially true on the date of the
Payment/Advance Form and on the effective date of each Credit Extension and no Event of Default may
have occurred and be continuing, or result from the Credit Extension. Each Credit Extension is
Borrower’s representation and warranty on that date that the representations and warranties of
Section 5 remain true.



4 CREATION OF SECURITY INTEREST




4.1 Grant of Security Interest.




     Borrower grants Bank a continuing security interest in all presently existing and later
acquired Collateral to secure all Obligations and performance of each of Borrower’s duties under
the Loan Documents. Except for Permitted Liens, any security interest will be a first priority
security interest in the Collateral. If this Agreement is terminated, Bank’s lien and security
interest in the Collateral will continue until Borrower fully satisfies its Obligations.



5









 





4.2 Authorization to File.




     Borrower authorizes Bank to file financing statements without notice to Borrower, with all
appropriate jurisdictions, as Bank deems appropriate, in order to perfect or protect Bank’s
interest in the Collateral.



5 REPRESENTATIONS AND WARRANTIES




     Borrower represents and warrants as follows:



5.1 Due Organization and Authorization.




     Borrower and each Subsidiary is duly existing and in good standing in its state of formation
and qualified and licensed to do business in, and in good standing in, any state in which the
conduct of its business or its ownership of property requires that it be qualified, except where
the failure to do so could not reasonably be expected to cause a Material Adverse Change. Borrower
has not changed its state of formation or its organizational structure or type or any
organizational number (if any) assigned by its jurisdiction of formation.



     The execution, delivery and performance of the Loan Documents have been duly authorized, and
do not conflict with Borrower’s formation documents, nor constitute an event of default under any
material agreement by which Borrower is bound. Borrower is not in default under any agreement to
which or by which it is bound in which the default could reasonably be expected to cause a Material
Adverse Change.



5.2 Collateral.




     Borrower has good title to the Collateral, free of Liens except Permitted Liens or Borrower
has Rights to each asset that is Collateral. Borrower has no other deposit account, other than the
deposit accounts described in the Schedule. The Accounts are bona fide, existing obligations, and
the service or property has been performed or delivered to the account debtor or its agent for
immediate shipment to and unconditional acceptance by the account debtor. The Collateral is not in
the possession of any third party bailee (such as at a warehouse). In the event that Borrower,
after the date hereof, intends to store or otherwise deliver the Collateral to such a bailee, then
Borrower will receive the prior written consent of Bank and such bailee must acknowledge in writing
that the bailee is holding such Collateral for the benefit of Bank. Borrower has no notice of any
actual or imminent Insolvency Proceeding of any account debtor whose accounts are an Eligible
Account in any Borrowing Base Certificate. All Inventory is in all material respects of good and
marketable quality, free from material defects. Borrower is the sole owner of the Intellectual
Property, except for non-exclusive licenses granted to its customers in the ordinary course of
business and in instances in which the Borrower develops Intellectual Property for a particular end
user and grants an exclusive license to such end user to use the Intellectual Property as so
developed. Each Patent is valid and enforceable and no part of the Intellectual Property has been
judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of
the Intellectual Property violates the rights of any third party, except to the extent such claim
could not reasonably be expected to cause a Material Adverse Change.



     Except as noted on the Schedule to Loan and Security Agreement, Borrower is not a party to,
nor is bound by, any material license or other material agreement with respect to which the
Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a security
interest in Borrower’s interest in such license or agreement or any other property. Borrower will
provide written notice to Bank within ten days of entering or becoming bound by any such license or
agreement which is reasonably likely to have a material impact on Borrower’s business or financial
condition (other than over-the-counter software that is commercially available to the public).
Borrower shall take such steps as Bank reasonably requests to obtain the consent of, authorization
by, or waiver by, any person whose consent or waiver is necessary for all such licenses or contract
rights to be deemed “Collateral” and for Bank to have a security interest in it that might
otherwise be restricted or prohibited by law or by the terms of any such license or agreement (such
consent or authorization may include a licensor’s agreement to a contingent assignment of the
license to Bank if the Bank determines that is necessary in its good faith judgment), whether now
existing or entered into in the future.



5.3 Litigation.




     Except as shown in the Schedule, there are no actions or proceedings pending or, to the
knowledge of Borrower’s Responsible Officers, threatened by or against Borrower or any Subsidiary
in which a likely adverse decision could reasonably be expected to cause a Material Adverse Change.



6









 





5.4 No Material Adverse Change in Financial Statements.




     All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank
fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s
consolidated results of operations. There has not been any material deterioration in Borrower’s
consolidated financial condition since the date of the most recent financial statements submitted
to Bank.



5.5 Solvency.




     The fair salable value of Borrower’s assets (including goodwill minus disposition costs)
exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital
after the transactions in this Agreement; and Borrower is able to pay its debts (including trade
debts) as they mature.



5.6 Regulatory Compliance.




     Borrower is not an “investment company” or a company “controlled” by an “investment company”
under the Investment Company Act. Borrower is not engaged as one of its important activities in
extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of
Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards
Act. Borrower has not violated any laws, ordinances or rules, the violation of which could
reasonably be expected to cause a Material Adverse Change. None of Borrower’s or any Subsidiary’s
properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s
knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any
hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes, except those being
contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to do so could not reasonably be expected to cause a
Material Adverse Change.



5.7 Investments in Subsidiaries.




     Borrower does not own any stock, partnership interest or other equity securities except for
Permitted Investments.



5.8 Full Disclosure.




     No written representation, warranty or other statement of Borrower in any certificate or
written statement given to Bank (taken together with all such written certificates and written
statements to Bank) contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained in the certificates or statements not misleading.
It being recognized by Bank that the projections and forecasts provided by Borrower in good faith
and based upon reasonable assumptions are not viewed as facts and that actual results during the
period or periods covered by such projections and forecasts may differ from the projected and
forecasted results.



6 AFFIRMATIVE COVENANTS




     Borrower will do all of the following for so long as Bank has an obligation to lend, or there
are outstanding Obligations:



6.1 Government Compliance.




     Borrower will maintain its and all Subsidiaries’ legal existence and good standing in its
jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to
so qualify would reasonably be expected to cause a material adverse effect on Borrower’s business
or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances
and regulations to which it is subject, noncompliance with which could have a material adverse
effect on Borrower’s business or operations or would reasonably be expected to cause a Material
Adverse Change.



7









 





6.2 Financial Statements, Reports, Certificates.




     (a) Borrower will deliver to Bank: (i) as soon as available, but no later than 30 days after
the last day of each month, a company prepared consolidated balance sheet and income statement
covering Borrower’s consolidated operations during the period certified by a Responsible Officer
and in a form acceptable to Bank; (ii) beginning with the fiscal year ending in 2005, as soon as
available, but no later than 150 days after the last day of Borrower’s fiscal year, audited
consolidated financial statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified public accounting
firm reasonably acceptable to Bank; (iii) a prompt report of any legal actions pending or
threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or
any Subsidiary of $100,000 or more; (iv) budgets, sales projections, operating plans or other
financial information Bank reasonably requests; and (v) prompt notice of any material change in the
composition of the Intellectual Property, including any subsequent ownership right of Borrower in
or to any Copyright, Patent or Trademark or knowledge of an event that materially adversely affects
the value of the Intellectual Property.



     (b) Within 30 days after the last day of each month, Borrower will deliver to Bank with the
monthly financial statements a Compliance Certificate signed by a Responsible Officer in the form
of Exhibit C.



     (c) Allow Bank to audit Borrower’s Collateral at Borrower’s expense if an Event of Default has
occurred and is continuing.



6.3 Inventory; Returns.




     Borrower will keep all Inventory in good and marketable condition, free from material defects.
Returns and allowances between Borrower and its account debtors will follow Borrower’s customary
practices, as they exist at execution of this Agreement. Borrower must promptly notify Bank of all
returns, recoveries, disputes and claims that involve more than $50,000.



6.4 Taxes.




     Borrower will make, and cause each Subsidiary to make, timely payment of all material federal,
state, and local taxes or assessments and will deliver to Bank, on demand, appropriate certificates
attesting to the payment.



6.5 Insurance.




     Borrower will keep its business and the Collateral insured for risks and in amounts, as Bank
may reasonably request. Insurance policies will be in a form, with companies, and in amounts that
are satisfactory to Bank in Bank’s reasonable discretion. All property policies will have a
lender’s loss payable endorsement showing Bank as an additional loss payee and all liability
policies will show the Bank as an additional insured and provide that the insurer must give Bank at
least 20 days notice before canceling its policy. At Bank’s request, Borrower will deliver
certified copies of policies and evidence of all premium payments. Proceeds payable under any
policy will, at Bank’s option, be payable to Bank on account of the Obligations.



WARNING




          Unless you provide us with evidence of the insurance coverage as required by our contract
or loan agreement, we may purchase insurance at your expense to protect our interest. This
insurance may, but need not, also protect your interest. If the collateral becomes damaged, the
coverage we purchase may not pay any claim you make or any claim made against you. You may later
cancel this coverage by providing evidence that you have obtained property coverage elsewhere.




          You are responsible for the cost of any insurance purchased by us. The cost of this insurance
may be added to your contract or loan balance. If the cost is added to your contract or loan
balance, the interest rate on the underlying contract or loan will apply to this added amount. The
effective date of coverage may be the date your prior coverage lapsed or the date you failed to
provide proof of coverage.




          This coverage we purchased may be considerably more expensive than insurance you can obtain on
your own and may not satisfy any need for property damage coverage or any mandatory liability
insurance requirements imposed by applicable law.




8









 








6.6 Primary Accounts.




     Borrower will maintain its primary depository and operating accounts with Bank, by depositing
with Bank or investing through Bank’s Affiliate the following: (a) on or immediately after the
Effective Date Borrower shall deposit with Bank not less than $2,000,000; (b) within 45 days after
the Effective Date, Borrower shall transfer to and deposit with Bank the rest of its operating
accounts; and (c) within six (6) months after the Effective Date, Borrower shall deposit with Bank
or invest through Bank’s Affiliate the lesser of (i) 50% of its investment accounts, or (ii)
$10,000,000 in investments.



6.7 FDA Approval and Payment Covenants.




     Borrower will achieve the following FDA approval and investor milestones:



          (i) Borrower shall have met all requirements to obtain payment from and shall have received
from its partner, joint venturer or other third party a milestone payment in the minimum amount of
not less than $5,000,000 by December 31, 2005, with respect to the S-Caine Patch; and




          (ii) The U.S. Federal Drug Administration shall approve Borrower’s New Drug Application
(“NDA”) for the TetraPeel, and Borrower shall have met all requirements to obtain payment from and
shall have received from OrthoNeutrogena minimum amount of not less than $5,000,000 by September
30, 2006.




6.8 Registration of Intellectual Property Rights.




     Borrower shall provide written notice to Bank if Borrower registers any Copyrights or Mask
Works within 30 days of any such registration. Borrower shall provide written notice to Bank of
any application filed by Borrower in the United States Patent
Trademark Office for a patent or to
register a trademark or service mark within 30 days of any such filing.



     Borrower will (i) protect, defend and maintain the validity and enforceability of the
Intellectual Property and promptly advise Bank in writing of material infringements and (ii) not
allow any Intellectual Property to be abandoned, forfeited or dedicated to the public without
Bank’s written consent.



6.9 Further Assurances.




     Borrower will execute any further instruments and take further action as Bank reasonably
requests to perfect or continue Bank’s security interest in the Collateral or to effect the
purposes of this Agreement.



7 NEGATIVE COVENANTS




     For so long as Bank has an obligation to lend or there are any outstanding Obligations.
Borrower shall not, without Bank’s prior written consent (which shall be a matter of its good faith
business judgment), do any of the following:



7.1 Dispositions.




     Convey, sell, lease, transfer or otherwise dispose of (collectively “Transfer”), or permit any
of its Subsidiaries to Transfer, all or any part of its business or
property, except for Transfers
(i) of Inventory in the ordinary course of business; (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of
business; or (iii) of worn-out or obsolete Equipment.



7.2 Changes in Business, Ownership, Management or Locations of Collateral.




     Engage in or permit any of its Subsidiaries to engage in any business other than the
businesses currently engaged in by Borrower or reasonably related thereto or have a material change
in its ownership or management of greater than 25% (other than by the sale of Borrower’s equity
securities in a public offering or to venture capital investors so long as Borrower identifies the
venture capital investors prior to the closing of the investment). Borrower will not, without at
least 30 days prior written notice, relocate its chief executive office, change its state of
formation (including reincorporation), change its organizational number or name or add any new
offices or business locations (such as warehouses) in which Borrower maintains or stores over
$20,000 in Collateral.



9









 





7.3 Mergers or Acquisitions.




     Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any
other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of
the capital stock or property of another Person, except where (i) no Event of Default has occurred
and is continuing or would result from such action during the term of this Agreement and (ii) such
transaction would not result in a decrease of more than 25% of Tangible Net Worth. A Subsidiary
may merge or consolidate into another Subsidiary or into Borrower.



7.4 Indebtedness.




     Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so,
other than Permitted Indebtedness.



7.5 Encumbrance.




     Create, incur, or allow any Lien on any of its property, or assign or convey any right to
receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so,
except for Permitted Liens, or permit any Collateral not to be subject to the first priority
security interest granted here, subject to Permitted Liens.



7.6 Distributions; Investments.




     Directly or indirectly acquire or own any Person, or make any Investment in any Person, other
than Permitted Investments, or permit any of its Subsidiaries to do so. Pay any dividends or make
any distribution or payment or redeem, retire or purchase any capital stock.



7.7 Transactions with Affiliates.




     Directly or indirectly enter into or permit to exist any material transaction with any
Affiliate of Borrower except for transactions that are in the ordinary course of Borrower’s
business, upon fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person.



7.8 Subordinated Debt.




     Make or permit any payment on any Subordinated Debt, except under the terms of the
Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without
Bank’s prior written consent.



7.9 Compliance.




     Become an “investment company” or a company controlled by an “investment company,” under the
Investment Company Act of 1940 or undertake as one of its important activities extending credit to
purchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards
Act or violate any other law or regulation, if the violation could reasonably be expected to have a
material adverse effect on Borrower’s business or operations or would reasonably be expected to
cause a Material Adverse Change, or permit any of its Subsidiaries to do so.



8 EVENTS OF DEFAULT




     Any one of the following is an Event of Default:



8.1 Payment Default.




     If Borrower fails to pay any of the Obligations within 5 days after their due date, however,
during such period no Credit Extensions will be made;



8.2 Covenant Default.




     (a) If Borrower fails to perform any obligation under Sections 6.2 or 6.7 or violates any of
the covenants contained in Section 7 of this Agreement, or



10









 





     (b) If Borrower fails or neglects to perform, keep, or observe any other material term,
provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank and as to any
default under such other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within ten (10) days after the occurrence thereof; provided, however,
that if the default cannot by its nature be cured within the ten (10) day period or cannot after
diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely
to be cured within a reasonable time, then Borrower shall have an additional reasonable period
(which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to have cured such default shall not be deemed an Event of
Default (provided that no Credit Extensions will be made during such cure period);



8.3 Attachment.




     If any material portion of Borrower’s assets is attached, seized, levied on, or comes into
possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days,
or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part
of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower’s
assets, or if a notice of lien, levy, or assessment is filed against any of Borrower’s assets by
any government agency and not paid within 10 days after Borrower receives notice. These are not
Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit
Extensions will be made during the cure period);



8.4 Insolvency.




     If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency
Proceeding is begun against Borrower and not dismissed or stayed within 45 days (but no Credit
Extensions will be made before any Insolvency Proceeding is dismissed);



8.5 Other Agreements.




     If there is a default in any agreement between Borrower and a third party that gives the third
party the right to accelerate any Indebtedness exceeding $100,000 or that could cause a Material
Adverse Change;



8.6 Judgments.




     If a money judgment(s) in the aggregate of at least $50,000 is rendered against Borrower and
is unsatisfied and unstayed for 10 days (but no Credit Extensions will be made before the judgment
is stayed or satisfied);



8.7 Misrepresentations.




     If Borrower or any Person acting for Borrower makes any material misrepresentation or material
misstatement now or later in any warranty or representation in this Agreement or in any writing
delivered to Bank or to induce Bank to enter this Agreement or any Loan Document; or



8.8 Continued Investor Support.




     Bank determines, in its good faith judgment, that it is the clear intention of Borrower’s
investors to not continue to fund the Borrower in the amounts and timeframe necessary to enable
Borrower to satisfy the Obligations as they become due and payable.



8.9 Lien Priority.




     There is a material impairment in the priority of Bank’s security interest in the Collateral,




9 BANK’S RIGHTS AND REMEDIES




9.1 Rights and Remedies.




     When an Event of Default occurs and continues Bank may, without notice or demand, do any or
all of the following:



11









 





     (a) Declare all Obligations immediately due and payable (but if an Event of Default described
in Section 8.4 occurs all Obligations are immediately due and payable without any action by Bank);



     (b) Stop advancing money or extending credit for Borrower’s benefit under this Agreement or
under any other agreement between Borrower and Bank;



     (c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms
and in any order that Bank considers advisable; notify any Person owing Borrower money of Bank’s
security interest in the funds and verify the amount of the Account. Borrower must collect all
payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in
the form received from the account debtor, with proper endorsements for deposit;



     (d) Make any payments and do any acts it considers necessary or reasonable to protect its
security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and
make it available as Bank designates. Bank may enter premises where the Collateral is located,
take and maintain possession of any part of the Collateral, and pay, purchase, contest, or
compromise any Lien which appears to be prior or superior to its security interest and pay all
expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without
charge, to exercise any of Bank’s rights or remedies;



     (e) Bank may place a ‘hold’ on any account maintained with Bank with respect to all
Obligations plus reasonably anticipated interest accruals and Bank Expenses and deliver a notice of
exclusive control, any entitlement order, or other directions or instructions pursuant to any
control agreement or similar agreements providing control of any Collateral. Apply to the
Obligations (i) any balances and deposits of Borrower it holds, or (ii) any amount held by Bank
owing to or for the credit or the account of Borrower;



     (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for
sale, and sell the Collateral. Bank is granted a non-exclusive, royalty-free license or other
right to use, without charge, Borrower’s labels, Patents, Copyrights, Mask Works, rights of use of
any name, trade secrets, trade names, Trademarks, service marks, and advertising matter, or any
similar property as it pertains to the Collateral, in completing production of, advertising for
sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this
Section, Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit;
and



     (g) Dispose of the Collateral according to the Code.



9.2 Power of Attorney.




     Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints
Bank as its lawful attorney to: (i) endorse Borrower’s name on any checks or other forms of payment
or security; (ii) sign Borrower’s name on any invoice or bill of lading for any Account or drafts
against account debtors, (iii) make, settle, and adjust all claims under Borrower’s insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly with account
debtors, for amounts and on terms Bank determines reasonable; and (v) transfer the Collateral into
the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to
sign Borrower’s name on any documents necessary to perfect or continue the perfection of any
security interest regardless of whether an Event of Default has occurred. Bank’s appointment as
Borrower’s attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are
irrevocable until all Obligations have been fully repaid and performed and Bank’s obligation to
provide Credit Extensions terminates.



9.3 Bank Expenses.




     If Borrower fails to pay any amount or furnish any required proof of payment to third persons,
Bank may make all or part of the payment or obtain insurance policies required in Section 6.5, and
take any action under the policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses
and immediately due and payable, bearing interest at the then applicable rate and secured by the
Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or
Bank’s waiver of any Event of Default.



9.4 Bank’s Liability for Collateral.




     If Bank complies with reasonable banking practices and Section 9-207 of the Code, it is not
liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c)
any diminution in the value of the



12









 




Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person.
Except as provided above, Borrower bears all risk of loss, damage or destruction of the Collateral.




9.5 Remedies Cumulative.




     Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements
are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity.
Bank’s exercise of one right or remedy is not an election, and Bank’s waiver of any Event of
Default is not a continuing waiver. Bank’s delay is not a waiver, election, or acquiescence. No
waiver is effective unless signed by Bank and then is only effective for the specific instance and
purpose for which it was given.



9 Demand Waiver.




     Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which
Borrower is liable.



10 NOTICES




     All notices or demands by any party about this Agreement or any other related agreement must
be in writing and be personally delivered or sent by an overnight delivery service, by certified
mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at
the beginning of this Agreement. A party may change its notice address by giving the other party
written notice.



11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER




     Oregon law governs the Loan Documents without regard to principles of conflicts of law.
Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in
Multnomah County, Oregon.


BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING
OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH
OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO
THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.




12 GENERAL PROVISIONS




12.1 Successors and Assigns.




     This Agreement binds and is for the benefit of the successors and permitted assigns of each
party. Borrower may not assign this Agreement or any rights under it without Bank’s prior written
consent, which may be granted or withheld in Bank’s discretion. Bank has the right, without the
consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or
any part of, or any interest in, Bank’s obligations, rights and benefits under this Agreement.



12.2 Indemnification.




     Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents
against: (a) all obligations, demands, claims, and liabilities asserted by any other party in
connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank
Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank
and Borrower (including reasonable attorneys fees and expenses), except for losses caused by Bank’s
gross negligence or willful misconduct.



12.3 Time of Essence.




     Time is of the essence for the performance of all obligations in this Agreement.



13









 





12.4 Severability of Provision.




     Each provision of this Agreement is severable from every other provision in determining the
enforceability of any provision.



12.5 Amendments in Writing, Integration.




     All amendments to this Agreement must be in writing and signed by Borrower and Bank. This
Agreement represents the entire agreement about this subject matter, and supersedes prior
negotiations or agreements. All prior agreements, understandings, representations, warranties, and
negotiations between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents.



12.6 Counterparts.




     This Agreement may be executed in any number of counterparts and by different parties on
separate counterparts, each of which, when executed and delivered, are an original, and all taken
together, constitute one Agreement.



12.7 Survival.




     All covenants, representations and warranties made in this Agreement continue in full force
while any Obligations remain outstanding. The obligations of Borrower in Section 12.2 to indemnify
Bank will survive until all statutes of limitations for actions that may be brought against Bank
have run.



12.8 Confidentiality.




     In handling any confidential information, Bank will exercise the same degree of care that it
exercises for its own proprietary information, but disclosure of information may be made (i) to
Bank’s subsidiaries or affiliates, (ii) to prospective transferees or purchasers of any interest in
the loans (provided, however, Bank shall use commercially reasonable efforts in obtaining such
prospective transferee or purchasers agreement of the terms of this provision), (iii) as required
by law, regulation, subpoena, or, other order, (iv) as required in connection with Bank’s
examination or audit and (v) as Bank considers appropriate exercising remedies under this
Agreement. Confidential information does not include information that either: (a) is in the public
domain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain after
disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the
third party is prohibited from disclosing the information.



12.9 Attorneys’ Fees, Costs and Expenses.




     In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the
prevailing party will be entitled to recover its reasonable attorneys’ fees and other reasonable
costs and expenses incurred at trial, on appeal and in any arbitration or bankruptcy proceeding, in
addition to any other relief to which it may be entitled.



12.10 Joint and Several Obligations.




     If Borrower consists of more than one person or entity, all Obligations of Borrower under this
Agreement shall be joint and several, and all references to Borrower shall mean each and every
Borrower.



13 DEFINITIONS




13.1 Definitions.




     In this Agreement:



     “Accounts” are all existing and later arising accounts, contract rights, and other obligations
owed Borrower in connection with its sale or lease of goods (including licensing software and other
technology) or provision of services, all credit insurance, guaranties, other security and all
merchandise returned or reclaimed by Borrower and Borrower’s Books relating to any of the
foregoing, as such definition may be amended from time to time according to the Code.



14









 





     “Affiliate” of a Person is a Person that owns or controls directly or indirectly the Person,
any Person that controls or is controlled by or is under common control with the Person, and each
of that Person’s senior executive officers, directors, partners and, for any Person that is a
limited liability company, that Person’s managers and members.



     “Bank Expenses” are all audit fees and expenses and reasonable costs and expenses (including
reasonable attorneys’ fees and expenses) for preparing, negotiating, administering, defending and
enforcing the Loan Documents (including appeals or Insolvency Proceedings).



     “Borrower’s Books” are all Borrower’s books and records including ledgers, records regarding
Borrower’s assets or liabilities, the Collateral, business operations or financial condition and
all computer programs or discs or any equipment containing the information.



     “Business Day” is any day that is not a Saturday, Sunday or a day on which the Bank is closed.



     “Code” is the Oregon Uniform Commercial Code, as applicable.



     “Collateral” is the property described on Exhibit A.



     “Committed Equipment Line” is a Credit Extension of up to $2,500,000.



     “Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or
not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation
of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted
or sold with recourse by that Person, or for which that Person is directly or indirectly liable;
(ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all
obligations from any interest rate, currency or commodity swap agreement, interest rate cap or
collar agreement, or other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent
Obligation” does not include endorsements in the ordinary course of business. The amount of a
Contingent Obligation is the stated or determined amount of the primary obligation for which the
Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability
for it determined by the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.



     “Copyrights” are all copyright rights, applications or registrations and like protections in
each work of authorship or derivative work, whether published or not (whether or not it is a trade
secret) now or later existing, created, acquired or held.



     “Credit Extension” is each Equipment Advance or any other extension of credit by Bank for
Borrower’s benefit.



     “Effective Date” is the date Bank executes this Agreement.



     “Equipment” is all present and future machinery, equipment, tenant improvements, furniture,
fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.



     “Equipment Advance” is defined in Section 2.1.1.



     “Equipment Availability End Date” is defined in Section 2.1.1.



     “Equipment Maturity Date” is defined in Section 2.1.1.



     “ERISA” is the Employment Retirement Income Security Act of 1974, and its regulations.



     “GAAP” is generally accepted accounting principles.



     “Guarantor” is any present or future guarantor of the Obligations.



15









 





     “Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or
services, such as reimbursement and other obligations for surety bonds and letters of credit, (b)
obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease
obligations and (d) Contingent Obligations.



     “Insolvency Proceeding” are proceedings by or against any Person under the United States
Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit
of creditors, compositions, extensions generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.



     “Intellectual Property” is all of Borrower’s:



     (a) Copyrights, Trademarks, Patents, and Mask Works including amendments, renewals,
extensions, and all licenses or other rights to use and all license fees and royalties from the
use;



     (b) Any trade secrets and any intellectual property rights in computer software and computer
software products now or later existing, created, acquired or held;



     (c) All design rights that may be available to Borrower now or later created, acquired or
held;



     (d) Any claims for damages (past, present or future) for infringement of any of the rights
above, with the right, but not the obligation, to sue and collect damages for use or infringement
of the intellectual property rights above;



     All proceeds and products of the foregoing, including all insurance, indemnity or warranty
payments.



     “Inventory” is present and future inventory in which Borrower has any interest, including
merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and
finished products intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or possession or in
transit and including returns on any accounts or other proceeds (including insurance proceeds) from
the sale or disposition of any of the foregoing and any documents of title.



     “Investment” is any beneficial ownership of (including stock, partnership interest or other
securities) any Person, or any loan, advance or capital contribution to any Person.



     “Lien” is a mortgage, lien, deed of trust, charge, pledge, security interest or other
encumbrance.



     “Loan Documents” are, collectively, this Agreement, any note, or notes or guaranties executed
by Borrower or Guarantor, and any other present or future agreement between Borrower and/or for the
benefit of Bank in connection with this Agreement, all as amended, extended or restated.



     “Mask Works” are all mask works or similar rights available for the protection of
semiconductor chips, now owned or later acquired.



     “Material Adverse Change” is defined as (i) a material adverse change in the business,
operations, or financial condition of the Borrower, or (ii) a material impairment of the prospect
of repayment of any portion of the Obligations; or (iii) a material impairment of the value or
priority of Bank’s security interests in the Collateral.



     “Obligations” are debts, principal, interest, Bank Expenses and other amounts Borrower owes
Bank now or later, including cash management services, letters of credit and foreign exchange
contracts, if any and including interest accruing after Insolvency Proceedings begin and debts,
liabilities, or obligations of Borrower assigned to Bank.



     “Patents” are patents, patent applications and like protections, including improvements,
divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.



     “Permitted Indebtedness” is:



     (a) Borrower’s indebtedness to Bank under this Agreement or any other Loan Document;



16









 





     (b) Indebtedness existing on the Effective Date and shown on the Schedule;



     (c) Subordinated Debt;



     (d) Indebtedness to trade creditors incurred in the ordinary course of business; and



     (e) Indebtedness secured by Permitted Liens.



     “Permitted Investments” are:



     (a) Investments shown on the Schedule and existing on the Effective Date;



     (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United
States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial
paper maturing no more than 1 year after its creation and having the highest rating from either
Standard & Poor’s Corporation or Moody’s Investors Service, Inc., and (iii) Bank’s certificates of
deposit issued maturing no more than 1 year after issue; and



     (c) Investments permitted under Borrower’s investment policy approved by its Board of
Directors.



     “Permitted Liens” are:



     (a) Liens existing on the Effective Date and shown on the Schedule or arising under this
Agreement or other Loan Documents;



     (b) Liens for taxes, fees, assessments or other government charges or levies, either not
delinquent or being contested in good faith and for which Borrower maintains adequate reserves on
its Books, if they have no priority over any of Bank’s security interests;



     (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries
incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when
acquired, if the Lien is confined to the property and improvements and the proceeds of the
equipment;



     (d) Licenses or sublicenses granted in the ordinary course of Borrower’s business and any
interest or title of a licensor or under any license or sublicense, if the licenses and sublicenses
permit granting Bank a security interest;



     (e) Leases or subleases granted in the ordinary course of Borrower’s business, including in
connection with Borrower’s leased premises or leased property;



     (f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by
Liens described in (a) through (c), but any extension, renewal or replacement Lien must be
limited to the property encumbered by the existing Lien and the principal amount of the
indebtedness may not increase.



     “Person” is any individual, sole proprietorship, partnership, limited liability company, joint
venture, company association, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, firm, joint stock company, estate, entity or government
agency.



     “Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowest
rate.



     “Responsible Officer” is each of the Chief Executive Officer, the President, the Chief
Financial Officer and the Controller of Borrower.



     “Rights”, as applied to the Collateral, means the Borrower’s rights and interests in, and
powers with respect to, that Collateral, whatever the nature of those rights, interests and powers
and, in any event, including Borrower’s power to transfer rights in such Collateral to Bank.



     “Schedule” is any attached schedule of exceptions.



17









 





     “Subordinated Debt” is debt incurred by Borrower subordinated to Borrower’s indebtedness owed
to Bank and which is reflected in a written agreement in a manner and form acceptable to Bank and
approved by Bank in writing.



     “Subsidiary” is for any Person, or any other business entity of which more than 50% of the
voting stock or other equity interests is owned or controlled, directly or indirectly, by the
Person or one or more Affiliates of the Person.



     “Tangible Net Worth” is, on any date, the consolidated total assets of Borrower and its
Subsidiaries minus, (i) any amounts attributable to (a) goodwill, (b) intangible items such
as unamortized debt discount and expense, patents, trade and service marks and names, copyrights
and research and development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.



     “Total Liabilities” is on any day, obligations that should, under GAAP, be classified as
liabilities on Borrower’s consolidated balance sheet, including all Indebtedness, and current
portion Subordinated Debt allowed to be paid, but excluding all other Subordinated Debt.



     “Trademarks” are trademark and servicemark rights, registered or not, applications to register
and registrations and like protections, and the entire goodwill of the business of Borrower
connected with the trademarks.



     “Treasury Rate” is the average weekly yield (of the week ending figures) in the most recent
Federal Reserve Statistical Release on actively traded U. S. Treasury obligations of similar
maturity to the principal being repaid or if a Statistical Release in not published, the arithmetic
average (to the nearest .01%) of the per annum yields to maturity for each Business Day during the
week (ending at least two Business Days before the determination is made) of all actively traded
marketable United States Treasury fixed interest rate securities with a constant maturity of, or
not more than 30 days longer or shorter than the average life of the principal and interest
payments that are being prepaid (excluding securities that can be surrendered at face value to pay
Federal estate tax, or which provide for tax benefits to the holder).



18









 




UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY BANK CONCERNING LOANS AND
OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY
BY THE BORROWER’S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY BANK TO BE
ENFORCEABLE.




BORROWER:




ZARS, INC.




	 	 	 	 	 
	By:
	 	/s/ Robert Lippert	 	 
	 

	 	 

	 	 
	Title:
	 	President & CEO	 	 
	 

	 	 

	 	 






BANK:




SILICON VALLEY BANK




By: /s/
Shane Anderson                    




Title:
Relationship MGR




Effective
Date: 10-11-05





19









 








EXHIBIT A




     The Collateral consists of all of Borrower’s right, title and interest in and to the following
whether owned now or hereafter arising and whether the Borrower has rights now or hereafter has
rights therein and wherever located:



     All goods and equipment now owned or hereafter acquired, including, without limitation, all
machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of
the foregoing, and all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;



     All inventory, now owned or hereafter acquired, including, without limitation, all
merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and
finished products including such inventory as is temporarily out of Borrower’s custody or
possession or in transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above;



     All contract rights and general intangibles (as such definitions may be amended from time to
time according to the Code), now owned or hereafter acquired, including, without limitation,
goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer
lists, route lists, infringements, claims, computer programs, computer discs, computer tapes,
literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights
to payment of any kind;



     All now existing and hereafter arising accounts, contract rights, royalties, license rights
and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the
licensing of technology or the rendering of services by Borrower (as such definitions may be
amended from time to time according to the Code) whether or not earned by performance, and any and
all credit insurance, insurance (including refund) claims and proceeds, guaranties, and other
security thereof, as well as all merchandise returned to or reclaimed by Borrower;



     All documents, cash, deposit accounts, securities, securities entitlements, securities
accounts, investment property, financial assets, letters of credit, letter of credit rights,
certificates of deposit, instruments and chattel paper and electronic chattel paper now owned or
hereafter acquired and Borrower’s Books relating to the foregoing;



     All copyright rights, copyright applications, copyright registrations and like protections in
each work of authorship and derivative work thereof, whether published or unpublished, now owned or
hereafter acquired; all trade secret rights, including all rights to unpatented inventions,
know-how, operating manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all mask work or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past,
present and future infringement of any of the foregoing; and



     All Borrower’s Books relating to the foregoing and any and all claims, rights and interests in
any of the above and all substitutions for, additions and accessions to and proceeds thereof.



     Notwithstanding the foregoing, the Collateral shall not be deemed to include any copyrights,
copyright applications, copyright registrations and like protection in each work of authorship and
derivative work thereof, whether published or unpublished, now owned or hereafter acquired; any
patents, patent applications and like protections including without limitation improvements,
divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same,
trademarks, servicemarks and applications therefor, whether registered or not, and the goodwill of
the business of Borrower connected with and symbolized by such trademarks, any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals, license rights and
agreements and confidential information, now owned or hereafter acquired; or any claims for damage
by way of any past, present and future infringement of any of the foregoing (collectively, the
“Intellectual Property”), except that the Collateral shall include the proceeds of all the
Intellectual Property that are accounts, (i.e. accounts receivable) of Borrower, or general
intangibles consisting of rights to payment, if a judicial authority (including a U.S. Bankruptcy
Court) holds that a security interest in the underlying Intellectual Property is necessary to have
a security interest in such accounts and general intangibles of Borrower that are proceeds of the
Intellectual Property, then the Collateral shall automatically, and effective as of the Effective
Date, include the Intellectual Property to the extent necessary to permit perfection of Bank’s
security interest in such accounts and general intangibles of Borrower that are proceeds of the
Intellectual Property.



 









 





     Borrower and Bank are parties to that certain negative pledge arrangement, whereby Borrower,
in connection with Bank’s loan or loans to Borrower, has agreed, among other things, not to sell,
transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of its
Intellectual Property, without Bank’s prior written consent.




 









 








EXHIBIT B




	 	 	 
	Loan Payment/Advance Request Form
	 	 
	Deadline for same day processing is 12:00 P.S.T.
	 	 
	Fax To:

	 	Date:                    











													
	Loan Payment:	 	 	 	 	 	 	 	 	 	 
	ZARS, INC. (Borrower)

	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	From Account #
	 	 	 	 	 	To Account #	 	 	 	 
	 

	 	 	 	 

(Deposit Account #)
	 	 	 	 	 	 

(Loan Account #)
	 	 






	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Principal $
	 	 	 	and/or Interest $	 	 	 	 
	 

	 	 	 	 

	 	 	 	 

	 	 
	 	 	All Borrower’s representation and warranties in the Loan and Security Agreement are true, correct and complete in all
material respects up to and including the date of the transfer request for a loan payment, but those representations and
warranties expressly referring to another date shall be true, correct and complete in all material respects as of that
date:






	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Authorized Signature:
	 	 	 	Phone Number:	 	 	 	 
	 

	 	 	 	 

	 	 	 	 

	 	 














			
	Loan Advance:
	 

	 	Complete Outgoing Wire Request section below if all or a portion of the funds from this loan advance are for an
outgoing wire.






	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	From Account #
	 	 	 	 	 	To Account #	 	 	 	 
	 

	 	 	 	 

(Deposit Account #)
	 	 	 	 	 	 

(Loan Account #)
	 	 






	 	 	 	 	 	 	 
	 

	 	Amount of Advance $	 	 	 	 
	 

	 	 	 	 

	 	 
	 
	 	 	 	 	 	 
	 	 	All Borrower’s representation and warranties in the Loan and Security Agreement are true, correct and complete in all
material respects up to and including the date of the transfer request for an advance, but those representations and
warranties expressly referring to another date shall be true, correct and complete in all material respects as of that
date:






	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Authorized Signature:
	 	 	 	Phone Number:	 	 	 	 
	 

	 	 	 	 

	 	 	 	 

	 	 














			
	Outgoing Wire Request
	Complete only if all or a portion of funds from the loan advance above are to be wired.
	Deadline for same day processing is 12:00pm, P.S.T.






	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Beneficiary Name:
	 	 	 	 	 	Amount of Wire: $	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 

	 	 
	 

	 	Beneficiary Bank:
	 	 	 	 	 	Account Number:	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 

	 	 
	 

	 	City and State:	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 	 	 






	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Beneficiary Bank Transit (ABA) #:
	 	 	 	 	 	Beneficiary Bank Code (Swift, Sort, Chip, etc.):	 	 	 	 
	 

	 	 	 	 

	 	 	 	(For International Wire Only)
	 	 

	 	 






	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 Intermediary Bank:
	 	 	 	 	 	Transit (ABA) #:	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 

	 	 






	 	 	 	 	 	 	 
	 

	 For Further Credit to:	 	 	 	 
	 

	 	 	 	 


	 

	 Special Instruction:	 	 	 	 
	 

	 	 	 	 


	 
	 	 	 	 	 	 
	 	By signing below, I (we) acknowledge and agree that my (our) funds transfer request shall be processed in accordance
with and subject to the terms and conditions set forth in the agreements(s) covering funds transfer service(s), which
agreements(s) were previously received and executed by me (us).







	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	  Authorized Signature:
	 	 	 	 	 	2nd Signature (If Required):	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 

	 	 






	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 Print Name/Title:
	 	 	 	 	 	Print Name/Title:	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 

	 	 






	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	Telephone #
	 	 	 	 	 	Telephone #	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 

	 	 











1









 





Schedule to Loan and Security Agreement



The exact correct corporate name of Borrower is (attach a copy of the formation documents,
e.g., articles, partnership agreement):


 







Borrower’s State of formation:




 






Borrower has operated under only the following other names (if none, so state):



 




All other address at which the Borrower does business are as follows (attach additional sheets if
necessary and include all warehouse addresses):




 






 




Borrower has deposit accounts and/or investment accounts located only at the following
institutions:



 





List Acct. Numbers:



 






Liens existing on the Effective Date and disclosed to and accepted by Bank in writing:



 





      




      



Investments existing on the Effective Date and disclosed to and accepted by Bank in writing:




      




      




      



Subordinated Debt:




 






      




      




Indebtedness on the Effective Date and disclosed to and consented to by Bank in writing:




      




      




      



The following is a list of the Borrower’s copyrights (including copyrights of software) that are
registered with the United States Copyright Office. (Please include name of the
copyright and registration number and attach a copy of the registration):






 






      




      




The following is a list of all software that the Borrower sells, distributes or licenses to others,
which is not registered with the United States Copyright Office. (Please include
versions that are not registered:





 





      



The following is a list of all of the Borrower’s patents that are registered with the United States
Patent Office. (Please include name of the patent and registration number and attach a copy of the
registration.):




      




      



The following is a list of all of the Borrower’s patents which are pending with the United States
Patent Office. (Please include name of the patent and a copy of the application.):





 





      




      




2









 




The following is a list of all of the Borrower’s registered trademarks. (Please include name of the
trademark and a copy of the registration.):





 





Borrower is not subject to litigation that would have a material adverse effect on the Borrower’s
financial condition, except the following (attach additional comments, if needed):




 






      




      



Tax ID
Number




 





Organizational
Number, if any:




 






3









 





EXHIBIT C

COMPLIANCE CERTIFICATE




	 	 	 
	TO:

	 	SILICON VALLEY BANK
	 

	 	3003 Tasman Drive
	 

	 	Santa Clara, CA 95054
	 
	 	 
	FROM:

	 	ZARS, INC.






     The undersigned Responsible Officer of ZARS, INC. (“Borrower”) certifies that under the terms
and conditions of the Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i)
Borrower is in complete compliance for the period ending                                          with all required
covenants except as noted below and (ii) all representations and warranties in the Agreement are
true and correct in all material respects on this date. In addition, the undersigned certifies
that (1) Borrower and each Subsidiary has timely filed all required tax returns and paid, or made
adequate provision to pay, all material taxes, except those being contested in good faith with
adequate reserves under GAAP and (ii) no liens has been levied or claims made against Borrower or
any of its Subsidiaries relating to unpaid employee payroll or benefits which Borrower has not
previously notified in writing to Bank. Attached are the required documents supporting the
certification. The Responsible Officer certifies that these are prepared in accordance with
Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next
except as explained in an accompanying letter or footnotes. The Responsible Officer acknowledges
that no borrowings may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is determined not just at
the date this certificate is delivered.



Please indicate compliance status by circling Yes/No under “Complies” column.




	 	 	 	 	 	 	 
	Reporting Covenant	 	Required	 	Complies	 	 
	Monthly financial statements + CC

	 	Monthly within 30 days
	 	Yes
	 	No
	Annual (Audited)

	 	FYE within 150 days
	 	Yes
	 	No






	 	 	 	 	 	 	 
	NDA Covenant	 	Required	 	Actual	 	Complies
	Receipt of $5MM payment
for the S-Caine Patch

	 	By 12/31/05
	 	 
	 	Yes No
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Approval of TetraPeel and receipt
of $5MM payment

	 	By 9/30/06
	 	 
	 	Yes No
	 

	 	 	 	 	 	 





	 	 	 
	Have there been updates to Borrower’s intellectual property?

	 	Yes / No
	Borrower only has deposit accounts located at the following institutions:
	 	 
	 

	 	 





Comments Regarding Exceptions: See Attached.






	 	 	 
	Sincerely,
	 	 
	 
	 	 
	ZARS, INC.
	 	 
	 
	 	 
	 

Signature

	 	 
	 
	 	 
	 

Title

	 	 
	 
	 	 
	 

Date

	 	 














BANK USE ONLY




	 	 	 	 	 
	Received by:
	 	 	 	 
	 

	 	 

authorized signer
	 	 






	 	 	 	 	 
	Date:
	 	 	 	 
	 

	 	 

	 	 
	Verified:
	 	 	 	 
	 

	 	 

authorized signer
	 	 
	Date:
	 	 	 	 
	 

	 	 	 	 





Compliance
Status:
                     Yes                 No