Document:

exv10w19

 

Exhibit 10.19

Security Agreement

     This Security Agreement (the “Security Agreement”) is made between ZARS, Inc.
(“Borrower”), a Utah corporation, and Zions First National Bank (“Lender”), pursuant to a Loan
Agreement dated June 28, 2007, between Borrower and Lender (the “Loan Agreement”).

     For good and valuable consideration, receipt of which is hereby acknowledged, Borrower and
Lender hereby agree as follows:

     1. Definitions. Except as otherwise provided herein, terms defined in the Loan
Agreement shall have the same meanings when used herein. Terms defined in the singular shall have
the same meaning when used in the plural and vice versa. Terms defined in the Uniform Commercial
Code which are used herein shall have the meanings set forth in the Uniform Commercial Code, except
as expressly defined otherwise. As used herein, the term:

     “Collateral” means the collateral described in Section 2, Grant of Security Interest,
below.

     “Default Rate” means the default interest rate provided in the Promissory Notes.

     “Liquidation Costs” means the reasonable costs and out of pocket expenses incurred by Lender
in obtaining possession of any Collateral, in storage and preparation for sale, lease or other
disposition of any Collateral, in the sale, lease, or other disposition of any or all of the
Collateral, and/or otherwise incurred in foreclosing on any of the Collateral, including, without
limitation, (a) reasonable attorneys fees and legal expenses, (b) transportation and storage costs,
(c) advertising costs, (d) sale commissions, (e) sales tax and license fees, (f) costs for
improving or repairing any of the Collateral, and (g) costs for preservation and protection of any
of the Collateral.

     “Permitted Encumbrances” means the following, in an aggregate amount not to exceed, without
the prior written consent of Lender, fifty thousand dollars ($50,000.00): (a) liens for taxes and
assessments not yet due and payable or, if due and payable, those being contested in good faith by
appropriate proceedings and for which appropriate reserves are maintained; (b) security interests
and liens created by the Loan Documents; (c) liens arising in the ordinary course of business (such
as liens of carriers, warehousemen, mechanics, materialmen, and landlords) and other similar liens
imposed by law for sums not yet due and payable or, if due and payable, those being contested in
good faith by appropriate proceedings and for which appropriate reserves are maintained in
accordance with Accounting Standards; (d) any liens existing on the date of this Security Agreement
and set forth on Schedule A attached hereto; (e) liens (i) upon or in any equipment acquired or
held by Borrower to secure the purchase price of such equipment or indebtedness (including capital
leases) incurred solely for the purpose of financing the acquisition of such equipment or (ii)
existing on such equipment at the time of its acquisition, provided that the lien is confined
solely to the equipment so acquired, improvements thereon and the Proceeds of such equipment; (f)
leases or subleases and licenses or sublicenses granted to others in the ordinary course of
Borrower’s business; (g) any right, title or interest of a

 

 

licensor under a license; (h) liens arising from judgments, decrees or attachments that have
been stayed or bonded within fifteen (15) days after notice thereof; (i) liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (j) liens arising solely by virtue of any statutory or
common law provision relating to banker’s liens, rights of setoff or similar rights and remedies as
to deposit accounts or other funds maintained with a creditor depository institution; (k) liens in
favor of a depository bank or a securities intermediary pursuant to such depository bank’s or
securities intermediary’s customary customer account agreement; provided that any such liens shall
at no time secure any indebtedness or obligations other than customary fees and charges payable to
such depository bank or securities intermediary; (l) liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory or regulatory obligations, surety and appeal bonds,
government contracts, performance and return-of-money bonds, and other obligations of like nature,
in each case, in the ordinary course of business; (m) liens incurred or deposits made in the
ordinary course of business in connection with workers’ compensation, unemployment insurance and
other types of social security; (n) liens incurred in connection with the extension, renewal or
refinancing of indebtedness secured by liens permitted under the preceding clauses, provided that
any extension, renewal or replacement lien shall be limited to the property encumbered by the
existing lien and the principal amount of the indebtedness being extended, renewed or refinanced
does not increase; and (o) other security interests and liens authorized in writing by Lender.

     “Uniform Commercial Code” means the Uniform Commercial Code as adopted now or in the future in
the State of Utah.

     2. Grant of Security Interest. Borrower hereby grants to Lender a security interest
in the following personal property of Borrower, wherever located, now owned or existing or
hereafter acquired or created (the “Collateral”):

     a. All inventory, all proceeds and products thereof and all additions and accessions
to, replacements of, insurance or condemnation proceeds of, and documents covering any of
the foregoing, all leases of any of the foregoing, and all rents, revenues, issues, profits
and proceeds arising from the sale, lease, license, encumbrance, collection, or any other
temporary or permanent disposition of any of the foregoing or any interest therein
(collectively, the “Inventory”).

     b. All accounts and all proceeds thereof (collectively, the “Accounts”).

     c. All equipment and goods, all motor vehicles, all proceeds and products of the
foregoing and all additions and accessions to, replacements of, insurance or condemnation
proceeds of, and documents covering any of the foregoing, all leases of any of the
foregoing, and all rents, revenues, issues, profits and proceeds arising from the sale,
lease, license, encumbrance, collection, or any other temporary or permanent disposition of
any of the foregoing or any interest therein (collectively, the “Equipment”).

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     d. All general intangibles and all documentation and supporting information related
thereto, all rents, profits and issues thereof, and all proceeds thereof.

     e. All of the following (collectively, the “Financial Obligations Collateral”):

     i. Any and all promissory notes and instruments payable to or owing to Borrower
or held by Borrower;

     ii. Any and all leases under which Borrower is the lessor;

     iii. Any and all chattel paper in favor of, owing to, or held by Borrower,
including, without limitation, any and all conditional sale contracts or other sales
agreements, whether Borrower is the original party or the assignee;

     iv. Any and all security agreements, collateral and titles to motor vehicles
which secure any of the foregoing obligations; and

     v. All amendments, modifications, renewals, extensions, replacements,
additions, and accessions to the foregoing and all proceeds thereof.

     f. All deposit accounts, including without limitation, all interest, dividends or
distributions accrued or to accrue thereon, whether or not due, and all proceeds thereof.

     g. All investment property, all interest, dividends or distributions accrued or to
accrue thereon, whether or not due, and all proceeds thereof.

     h. All documents, all amendments, modifications, renewals, extensions, replacements,
additions, and accessions thereto, and all proceeds thereof.

     i. All letter-of-credit rights, all amendments, modifications, renewals, extensions,
replacements, additions, and accessions thereto, and all proceeds thereof.

     j. All supporting obligations, all amendments, modifications, renewals, extensions,
replacements, additions, and accessions thereto, and all proceeds thereof.

     Notwithstanding the foregoing, the Collateral shall not include (x) any Intellectual Property
(as defined in the “Loan Agreement”), (y) any Account, Chattel Paper, General Intangible or
promissory note in which Borrower has any right, title or interest if and to the extent such
Account, Chattel Paper, General Intangible or promissory note includes a provision containing a
restriction on assignment such that the creation of a security interest in the right, title or
interest of Borrower therein would be prohibited and would, in and of itself, cause or result in a
default thereunder enabling another person party to such Account, Chattel Paper, General Intangible
or promissory note to enforce any remedy with respect thereto; provided that the foregoing
exclusion shall not apply if (i) such prohibition has been waived or such other person has
otherwise consented to the creation hereunder of a security interest in such Account, Chattel
Paper, General Intangible or promissory note or (ii) such prohibition would be rendered

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ineffective pursuant to Sections 9-406(d), 9-407(a) or 9-408(a) of the UCC, as applicable and as
then in effect in any relevant jurisdiction, or any other applicable law (including Title XI of the
United States Code) or principles or equity); provided further that immediately upon the
ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and
Borrower shall be deemed to have granted on the date hereof a security interest in, all its rights,
title and interest in and to such Account, Chattel Paper, General Intangible or promissory note as
if such provision had never been in effect; and provided further that the foregoing exclusion shall
in no way be construed so as to limit, impair or otherwise affect Lender’s unconditional continuing
security interest in and to all rights, title and interests of Borrower in or to any payment
obligations or other rights to receive monies due or to become due under any such Account, Chattel
Paper, General Intangible or promissory note and in any monies and other proceeds of such Account,
Chattel Paper, General Intangible or promissory note; or (z) more than 66% of the total combined
voting power of all classes of stock entitled to vote the shares of capital stock of any subsidiary
of Borrower not incorporated or organized under the laws of one of the States or jurisdictions of
the United States.

     Borrower and Lender acknowledge their mutual intent that all security interests contemplated
herein are given as a contemporaneous exchange for new value to Borrower, regardless of when
advances to Borrower are actually made or when the Collateral is created or acquired.

     3. Debts Secured. The security interest granted by this Security Agreement shall
secure all of Borrower’s present and future debts, obligations, and liabilities of whatever nature
to Lender, including, without limitation, (a) the Promissory Note (Term Loan A) of Borrower in
favor of Lender dated June 28, 2007, in the original principal amount of eight million dollars
($8,000,000.00), and all renewals, extensions, modifications and replacements thereof (including
any which increase the original principal amount), (b) the Promissory Note (Term Loan B) of
Borrower in favor of Lender dated June 28, 2007, in the original principal amount of two million
five hundred thousand dollars ($2,500,000.00), and all renewals, extensions, modifications and
replacements thereof (including any which increase the original principal amount), (c) all
obligations of Borrower arising from or relating to the Loan Documents, including, without
limitation, this Security Agreement, (d) advances of the same kind and quality or relating to this
transaction, (e) transactions in which the documents evidencing the indebtedness refer to this
grant of security interest as providing security therefor, and (f) all overdrafts on any account of
Borrower maintained with Lender, now existing or hereafter arising; provided that the security
interest granted by this Security Agreement shall not secure Borrower’s obligations under the
Warrant to Purchase Stock issued contemporaneously with the execution and delivery of this Security
Agreement.

     Borrower and Lender expressly acknowledge their mutual intent that the security interest
created by this Security Agreement secure any and all present and future debts, obligations, and
liabilities of Borrower to Lender without any limitation whatsoever.

     4. Location of Borrower and Collateral. Borrower represents and warrants that:

     a. Borrower is a corporation organized under the laws of the State of Utah.

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     b. The complete and exact name of Borrower is ZARS, Inc.

     c. The organizational identification number, if any, assigned to Borrower by Borrower’s
state of organization is 1331474-0142.

     d. During the five (5) years preceding the date of this Security Agreement:

     i. Borrower has not been known by nor used any legal, fictitious or trade name;

     ii. Borrower has not changed its name in any respect;

     iii. Borrower has not been the surviving entity of a merger or consolidation;

     iv. Borrower has not acquired all or substantially all of the assets of any
person or entity.

     e. Borrower’s chief executive office is located at 1455 West 2200 South, Suite 300,
Salt Lake City, Utah 84119.

     f. Borrower’s place of business is located at 1455 West 2200 South, Suite 300, Salt
Lake City, Utah 84119.

     g. The Inventory of Borrower is kept at the following locations and no others: 1142
West 2320 South, Salt Lake City, Utah 84119.

     h. During the five (5) years preceding the date of this Security Agreement, there has
not been any change in any of the above locations, except for the leasing of additional
office space at 1455 West 2200 South, Suite 300, Salt Lake City, Utah 84119.

     i. Other than four (4) employees domiciled and working for Borrower in the states of
Pennsylvania and North Carolina, the Equipment is located in the State of Utah, other than
temporary (not to exceed three months) uses outside such state in the ordinary course of
Borrower’s business, will not be removed from such state without the prior written consent
of Lender.

     Borrower agrees that it will not change its state of organization, name, or any of the above
locations or create any new locations for such matters without giving Lender at least thirty (30)
days prior written notice thereof, except in accordance with the merger of Borrower into ZARS
Pharma, Inc., as described in the Loan Agreement.

     5. Representations and Warranties Concerning Collateral. Borrower represents and
warrants that:

     a. Borrower is the sole owner of the Collateral.

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     b. The Collateral is not subject to any security interest, lien, prior assignment, or
other encumbrance of any nature whatsoever except Permitted Encumbrances.

     c. The Accounts and Financial Obligations Collateral, if any, are each a bona fide
obligation of the obligor identified therein for the amount identified in the records of
Borrower, except for normal and customary disputes which arise in the ordinary course of
business and which do not affect a material portion of the Accounts and Financial
Obligations Collateral.

     d. There are no defenses or setoffs to payment of the Accounts and Financial
Obligations Collateral, if any, which can be asserted by way of defense or counterclaim
against Borrower or Lender, except for normal and customary disputes which arise in the
ordinary course of business and which do not affect a material portion of the Accounts and
Financial Obligations Collateral.

     e. There is presently no default or delinquency in any payment of the Accounts and
Financial Obligations Collateral, if any, except for any default or delinquency which has
been reserved against by Borrower in accordance with generally accepted accounting
principles and the Accounts and Financial Obligations Collateral will be timely paid in full
by the obligors, except for normal and customary disputes which arise in the ordinary course
of business and which do not affect a material portion of the Accounts and Financial
Obligations Collateral.

     f. Borrower has no knowledge of any fact or circumstance which would materially impair
the ability of any obligor on the Accounts and Financial Obligations Collateral, if any, to
timely perform its obligations thereunder, except those which arise in the ordinary course
of business and which do not affect a material portion of the Accounts and Financial
Obligations Collateral.

     g. Any services performed or goods sold giving rise to the Accounts and Financial
Obligations Collateral, if any, have been rendered or sold in compliance with applicable
laws, ordinances, rules, and regulations and in the ordinary course of Borrower’s business.

     h. There have been no extensions, modifications, or other agreements relating to
payment of the Accounts and Financial Obligations Collateral, if any, except those granted
in the ordinary course of business and which do not affect a material portion of the
Accounts and Financial Obligations Collateral.

     6. Covenants Concerning Collateral. Borrower covenants that:

     a. Borrower will keep the Collateral free and clear of any and all security interests,
liens, assignments or other encumbrances, except Permitted Encumbrances.

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     b. Borrower hereby authorizes Lender to file UCC Financing Statements concerning the
Collateral. Borrower will execute and deliver any documents (properly endorsed, if
necessary) reasonably requested by Lender for perfection or enforcement of any security
interest or lien, give good faith, diligent cooperation to Lender, and perform such other
acts reasonably requested by Lender for perfection and enforcement of any security interest
or lien, including, without limitation, obtaining control for purposes of perfection with
respect to Collateral consisting of deposit accounts, investment property, letter-of-credit
rights, and electronic chattel paper. Lender is authorized to file, record, or otherwise
utilize such documents as it deems necessary to perfect and/or enforce any security interest
or lien granted hereunder.

     c. Borrower shall keep the Equipment in good repair, ordinary wear and tear and
obsolescence excepted, and be responsible for any loss or damage to the Equipment. Borrower
shall pay when due all taxes, license fees and other charges on the Equipment. Borrower
shall not sell, misuse, conceal, or in any way dispose of the Equipment (except for sales or
transfers of worn-out, obsolete or surplus Equipment (each as determined by the Borrower in
its reasonable judgment)) or permit it to be used unlawfully or for hire or contrary to the
provisions of any insurance coverage. Risk of loss of the Equipment shall be on Borrower at
all times unless Lender takes possession of the Equipment. Loss of or damage to the
Equipment or any part thereof shall not release Borrower from any of the obligations secured
by the Equipment. Lender or its representatives may, at any time and from time to time,
enter any premises where the Equipment is located and inspect, audit and check the
Equipment.

     d. Borrower agrees to insure the Equipment, at Borrower’s expense, against loss,
damage, theft, and such other risks as Lender may request to the full insurable value
thereof with insurance companies and policies satisfactory to Lender. Proceeds from such
insurance shall be payable to Lender as its interest may appear, shall name Lender as an
additional insured and as a loss payee, and such policies shall provide for a minimum ten
days written cancellation notice to Lender. Upon request, policies or certificates
attesting to such coverage shall be delivered to Lender. Insurance proceeds may be applied
by Lender toward payment of any obligation secured by this Security Agreement, whether or
not due, in such order of application as Lender may elect.

     e. Borrower agrees to insure the Inventory, at Borrower’s expense, against loss,
damage, theft, and such other risks as Lender may request to the full insurable value
thereof with insurance companies and policies satisfactory to Lender. Proceeds from such
insurance shall be payable to Lender as its interest may appear, shall name Lender as an
additional insured and as a loss payee, and such policies shall provide for a minimum ten
days written cancellation notice to Lender. Upon request, policies or certificates
attesting to such coverage shall be delivered to Lender. Insurance proceeds may be applied
by Lender toward payment of any obligation secured by this Security Agreement, whether or
not due, in such order of application as Lender may elect.

     f. Borrower shall submit to Lender reports as to the Collateral, at such times and in
such form as Lender may reasonably request. Borrower will at all times keep

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accurate and complete records of the Collateral. Lender or its representatives may, at
any time and from time to time, enter any premises where the Collateral and/or the records
pertaining to the Collateral are located and inspect, inventory, audit, check, copy, and
otherwise review the Collateral and the records concerning the Collateral.

     g. So long as no Event of Default has occurred and is continuing, Borrower shall have
the right to sell or otherwise dispose of the Inventory in the ordinary course of business.
No other disposition of the Inventory may be made without the prior written consent of
Lender.

     h. If an Event of Default has occurred and is continuing, if at any time Lender so
requests, all proceeds from the sale or other disposition of the Inventory, and all
collections and other proceeds from the Accounts and Financial Obligations Collateral, if
any, shall be deposited into an account designated by Lender (the “Cash Collateral
Account”), which account shall be under the sole and exclusive control of Lender. Such
proceeds and collections shall not be commingled with any other funds and shall be promptly
and directly deposited into such account in the form in which received by Borrower. Such
proceeds and collections shall not be deposited in any other account and said Cash
Collateral Account shall contain no funds other than such proceeds and collections. All or
any portion of the funds on deposit in said Cash Collateral Account may, in the sole
discretion of Lender, be applied from time to time as Lender elects to payment of
obligations secured by this Security Agreement or Lender may elect to turn over to Borrower,
from time to time, all or any portion of such funds.

     i. Borrower agrees to use diligent and good faith efforts to collect the Accounts and
Financial Obligations Collateral, if any. Until written notice is given by Lender, Borrower
is authorized to collect the Accounts and Financial Obligations Collateral in a commercially
reasonable manner. If an Event of Default has occurred and is continuing, Lender, in its
discretion, may terminate such authority at any time whereupon Lender is authorized by
Borrower, without further act, to notify any and all account debtors and obligors to make
payment thereon directly to Lender, and to take possession of all proceeds from the Accounts
and Financial Obligations Collateral, and to take any action which Borrower might or could
take to collect the Accounts and Financial Obligations Collateral, including the right to
make any compromise, discharge, or extension. If an Event of Default has occurred and is
continuing, upon request of Lender, Borrower agrees to execute and deliver to Lender a
notice to the account debtors and obligors instructing said account debtors and obligors to
pay Lender. If an Event of Default has occurred and is continuing, Borrower further agrees
to execute and deliver to Lender all other notices and similar documents requested by Lender
to facilitate collection of the Accounts and Financial Obligations Collateral.

     j. All costs of collection of the Accounts and Financial Obligations Collateral, if
any, including attorneys fees and legal expenses, shall be borne solely by Borrower, whether
such costs are incurred by or for Borrower or Lender. In the event Lender elects to
undertake direct collection of the Accounts and Financial Obligations Collateral, Borrower
agrees to deliver to Lender, if so requested, all books, records, and

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documents in Borrower’s possession or under its control as may relate to the Accounts
and Financial Obligations Collateral or as may be helpful to facilitate such collection.
Lender shall have no obligation to cause an attorneys demand letter to be sent, to file any
lawsuit, or to take any other legal action in collection of the Accounts and Financial
Obligations Collateral. It is agreed that collection of the Accounts and Financial
Obligations Collateral in a commercially reasonable manner does not require that any such
legal action be taken.

     k. Borrower does hereby make, constitute, and appoint Lender and its designees as
Borrower’s true and lawful attorney in fact, with full power of substitution, such power to
be exercised in the following manner (and in the cases of clause (1) through (4), only upon
the occurrence and during the continuation of an Event of Default): (1) Lender may receive
and open all mail addressed to Borrower and remove therefrom any payments of the Accounts
and Financial Obligations Collateral, if any; (2) Lender may cause mail relating to the
Accounts and Financial Obligations Collateral to be delivered to a designated address of
Lender where Lender may open all such mail and remove therefrom any payments of the Accounts
and Financial Obligations Collateral; (3) Lender may endorse Borrower’s name upon notes,
checks, acceptances, drafts, money orders, or other forms of payment of the Accounts and
Financial Obligations Collateral; (4) Lender may settle or adjust disputes or claims in
respect to the Accounts and Financial Obligations Collateral for amounts and upon such terms
as Lender, in its sole discretion and in good faith, deems to be advisable, in such case
crediting Borrower with only the proceeds received and collected by Lender after deduction
of Lender’s costs, including reasonable attorneys fees and legal expenses; and (5) Lender
may do any and all other things necessary or proper to carry out the intent of this Security
Agreement and to perfect and protect the liens and rights of Lender created under this
Security Agreement.

     l. Immediately upon request, Borrower shall endorse and deliver to Lender all
instruments and chattel paper, if any, which are Collateral. Upon creation of any
instruments or chattel paper in the future, immediately upon creation Borrower shall endorse
and deliver the instruments and chattel paper to Lender.

     m. Borrower shall, immediately upon obtaining knowledge thereof, report to Lender in
writing any default on any item of Financial Obligations Collateral, any material claim or
dispute asserted by any obligor on any item of that Collateral, and any other material
matters that may affect the value, enforceability or collectability of any of that
Collateral.

     n. Borrower shall not, without Lender’s written consent, make any material settlement,
compromise or adjustment of any item of Financial Obligations Collateral or grant any
material discounts, extensions, allowances or credits thereon, except in the ordinary course
of Borrower’s business.

     7. Right to Perform for Borrower. Lender may, in its sole discretion and without any
duty to do so, elect to discharge taxes, tax liens, security interests, or any other encumbrance

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upon the Collateral, perform any duty or obligation of Borrower, pay filing, recording,
insurance and other charges payable by Borrower, or provide insurance as provided herein if
Borrower fails to do so. Any such payments advanced by Lender shall be repaid by Borrower upon
demand, together with interest thereon from the date of the advance until repaid, both before and
after judgment, at the Default Rate.

     8. Default. Time is of the essence of this Security Agreement. The occurrence of any
Event of Default shall constitute a default under this Security Agreement.

     No course of dealing or any delay or failure to assert any Event of Default shall constitute a
waiver of that Event of Default or of any prior or subsequent Event of Default.

     9. Remedies. Upon the occurrence of an Event of Default and during the continuance
thereof, Lender shall have the following rights and remedies, in addition to all other rights and
remedies existing at law, in equity, or by statute or provided in the Loan Documents:

     a. Lender shall have all the rights and remedies available under the Uniform Commercial
Code;

     b. Lender shall have the right to enter upon any premises where the Collateral or
records relating thereto may be and take possession of the Collateral and such records;

     c. Upon request of Lender, Borrower shall, at the expense of Borrower, assemble the
Collateral and records relating thereto at a place designated by Lender and tender the
Collateral and such records to Lender;

     d. Without notice to Borrower, Lender may obtain the appointment of a receiver of the
business, property and assets of Borrower and Borrower hereby consents to the appointment of
Lender or such person as Lender may designate as such receiver; and

     e. Lender may sell, lease or otherwise dispose of any or all of the Collateral and,
after deducting the Liquidation Costs, apply the remainder to pay, or to hold as a reserve
against, the obligations secured by this Security Agreement.

     Borrower shall be liable for all deficiencies owing on any obligations secured by this
Security Agreement after liquidation of the Collateral. Lender shall not have any obligation to
clean-up or otherwise prepare any Collateral for sale, lease, or other disposition.

     The rights and remedies herein conferred are cumulative and not exclusive of any other rights
and remedies and shall be in addition to every other right, power and remedy herein specifically
granted or hereafter existing at law, in equity, or by statute which Lender might otherwise have,
and any and all such rights and remedies may be exercised from time to time and as often and in
such order as Lender may deem expedient. No delay or omission in the exercise of any such right,
power or remedy or in the pursuance of any remedy shall impair any such

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right, power or remedy or be construed to be a waiver thereof or of any default or to be an
acquiescence therein.

     Upon the occurrence of any Event of Default and during the continuance thereof, Borrower
agrees to pay all costs and expenses, including reasonable attorneys fees and legal expenses,
incurred by or on behalf of Lender in enforcing, or exercising any remedies under, this Security
Agreement, and any other rights and remedies. Additionally, Borrower agrees to pay all Liquidation
Costs. Any and all such costs, expenses, and Liquidation Costs shall be payable by Borrower upon
demand, together with interest thereon from the date of the advance until repaid, both before and
after judgment, at the Default Rate.

     Regardless of the occurrence of any Event of Default, Borrower agrees to pay all expenses,
including reasonable attorneys fees and legal expenses, incurred by Lender in any bankruptcy
proceedings of any type involving Borrower, the Collateral, or this Security Agreement, including,
without limitation, expenses incurred in modifying or lifting the automatic stay, determining
adequate protection, use of cash collateral, or relating to any plan of reorganization.

     10. Notices. All notices or demands by any party hereto shall be in writing and shall
be sent as provided in the Loan Agreement.

     11. Indemnification. Borrower shall indemnify Lender for any and all claims and
liabilities, and for damages which may be awarded or incurred by Lender, and for all reasonable
attorneys fees, legal expenses, and other out-of-pocket expenses incurred in defending such claims,
arising from or related in any manner to the negotiation, execution, or performance by Lender of
this Security Agreement, but excluding any such claims based upon breach or default by Lender or
gross negligence or willful misconduct of Lender.

     Lender shall have the sole and complete control of the defense of any such claims. Lender is
hereby authorized to settle or otherwise compromise any such claims as Lender in good faith
determines shall be in its best interests.

     12. General. This Security Agreement is made for the sole and exclusive benefit of
Borrower and Lender and is not intended to benefit any third party. No such third party may claim
any right or benefit or seek to enforce any term or provision of this Security Agreement.

     In recognition of Lender’s right to have all its attorneys fees and expenses incurred in
connection with this Security Agreement secured by the Collateral, notwithstanding payment in full
of the obligations secured by the Collateral, Lender shall not be required to release, reconvey, or
terminate any security interest in the Collateral unless and until Borrower and all Guarantors have
executed and delivered to Lender general releases in form and substance satisfactory to Lender.

     Lender and its officers, directors, employees, representatives, agents, and attorneys, shall
not be liable to Borrower or any Guarantor for consequential damages arising from or relating to

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any breach of contract, tort, or other wrong in connection with or relating to this Security
Agreement or the Collateral.

     If the incurring of any debt by Borrower or the payment of any money or transfer of property
to Lender by or on behalf of Borrower or any Guarantor should for any reason subsequently be
determined to be “voidable” or “avoidable” in whole or in part within the meaning of any state or
federal law (collectively “voidable transfers”), including, without limitation, fraudulent
conveyances or preferential transfers under the United States Bankruptcy Code or any other federal
or state law, and Lender is required to repay or restore any voidable transfers or the amount or
any portion thereof, or upon the advice of Lender’s counsel is advised to do so, then, as to any
such amount or property repaid or restored, including all reasonable costs, expenses, and attorneys
fees of Lender related thereto, the liability of Borrower and Guarantor, and each of them, and this
Security Agreement, shall automatically be revived, reinstated and restored and shall exist as
though the voidable transfers had never been made.

     This Security Agreement shall be governed by and construed in accordance with the laws of the
State of Utah.

     Any provision of this Security Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction only, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions hereof, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction.

     All references in this Security Agreement to the singular shall be deemed to include the
plural if the context so requires and vice versa. References in the collective or conjunctive
shall also include the disjunctive unless the context otherwise clearly requires a different
interpretation.

     All agreements, representations, warranties and covenants made by Borrower shall survive the
execution and delivery of this Security Agreement, the filing and consummation of any bankruptcy
proceedings, and shall continue in effect so long as any obligation to Lender contemplated by this
Security Agreement is outstanding and unpaid, notwithstanding any termination of this Security
Agreement. All agreements, representations, warranties and covenants in this Security Agreement
shall bind the party making the same and its heirs and successors, and shall be to the benefit of
and be enforceable by each party for whom made and their respective heirs, successors and assigns.

     This Security Agreement, together with the Loan Documents, constitute the entire agreement
between Borrower and Lender as to the subject matter hereof and may not be altered or amended
except by written agreement signed by Borrower and Lender. All other prior and contemporaneous
agreements, arrangements, and understandings between the parties hereto as to the subject matter
hereof are, except as otherwise expressly provided herein, rescinded.

     Dated: June 28, 2007.

- 12 -

 

	 	 	 	 	 	 	 	 	 	 	 
	Lender:	 	Borrower:
	 
	 	 	 	 	 	 	 	 	 	 
	Zions First National Bank	 	ZARS, Inc.
	 
	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/ Thomas C. Etzel
	 	 	 	By:
	 	/s/ Robert Lippert	 	 
	 

	 	 
	 	 	 	 	 	 	 	 
	Name:

	 	Thomas C. Etzel
	 	 	 	Name:
	 	Robert Lippert	 	 
	Title:

	 	Senior Vice President
	 	 	 	Title:
	 	President	 	 

- 13 -

 

Schedule A

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Principal Balance
	Lease No.	 	Schedule No.	 	Lender	 	as of 5/31/07
	0010714
	 	0010714004	 	Zions Credit Corporation	 	$	14,784.61	 
	0010714
	 	0010714003	 	Zions Credit Corporation	 	$	4,823.54<PAGE>

                                                                    EXHIBIT 10.2

                         ATHENA HEALTHCARE INCORPORATED

                             1997 STOCK OPTION PLAN

1.   PURPOSES OF THE PLAN

     The Athena HealthCare Incorporated 1997 Stock Option Plan is intended to
encourage ownership of shares of Common Stock of Athena HealthCare Incorporated
(the "Company") by key employees, non-employee directors and certain consultants
and advisors to the Company and its affiliates in order to attract such persons,
to induce them to work for the benefit of the Company or of an Affiliate, and to
provide additional incentive for them to promote the success of the Company or
of an Affiliate.

2.   DEFINITIONS

     Unless otherwise specified or unless the context otherwise requires, the
following terms, as used in the Plan, have the following meanings:

Affiliate means a corporation which, for purposes of Section 424 of the Code, is
a parent or subsidiary of the Company, direct or indirect.

Board of Directors means the Board of Directors of the Company.

Code means the United States Internal Revenue Code of 1986, as amended.

Committee means the Compensation Committee of the Board of Directors or any
successor thereto appointed by the Board of Directors pursuant to Section 4
hereof to administer this Plan, or in the absence of any such Committee, means
the full Board of Directors.

Common Stock means shares of the Company's common stock, $.01 par value.

Company means Athena HealthCare Incorporation, a Delaware corporation.

Disability or Disabled means permanent and total disability as defined in
Section 22(e)(3) of the Code.

Exchange Act means the Securities Exchange Act of 1934, as amended.

Fair Market Value of a Share of Common Stock on a particular date shall be the
mean between the highest and lowest quoted selling prices on such date (the
"valuation date") on the securities market where the Common Stock of the Company
is traded, or if there were no sales on the valuation date, on the next
preceding date within a reasonable period (as determined in the sole

<PAGE>

discretion of the Committee) on which there were sales. In the event that there
were no sales in such a market within a reasonable period, or in the event the
Common Stock of the Company is not traded on any securities market, the Fair
Market Value shall be as determined in good faith by the Committee in its sole
discretion.

ISO means an option intended to qualify as an incentive stock option under Code
Section 422.

Key Employee means an employee of the Company or of an Affiliate (including,
without limitation, an employee who is also serving as an officer or director of
the Company or of an Affiliate), designated by the Committee to be eligible to
be granted one or more Stock Rights under the Plan.

NQSO means an option which is not intended to qualify as an ISO.

Option means an ISO or NQSO granted under the Plan.

Participant means a Key Employee to whom one or more Stock Rights are granted
under the Plan. As used herein, "Participant" shall include "Participant's
Survivors" and a Participant's permitted transferees where the context requires.

Participant's Survivors means a deceased Participant's legal representatives
and/or any person or persons who acquires the Participant's rights to a Stock
Right by will or by the laws of descent or distribution.

Plan means this Athena HealthCare Incorporated 1997 Stock Option Plan, as
amended from time to time.

Shares means shares of the Common Stock as to which Stock Rights have been or
may be granted under the Plan or any shares of capital stock into which the
Shares are changed or for which they are exchanged within the provisions of
Section 3 of the Plan. The Shares issued upon exercise of Stock Rights granted
under the Plan may be authorized and unissued shares or shares held by the
Company in its treasury, or both.

Stock Agreement means an agreement between the Company and a Participant
executed and delivered pursuant to the Plan, in such form as the Committee shall
approve.

Stock Award means an award of Shares or the opportunity to make a direct
purchase of Shares of the Company granted under the Plan.

Stock Right means a right to Shares of the Company granted pursuant to the Plan
as an ISO, an NQSO, or a Stock Award.

                                       -2-

<PAGE>

3.   SHARES SUBJECT TO THE PLAN

     The number of Shares subject to the Plan as to which Stock Rights may be
granted from time to time shall be 600,000 of which all may be ISOs if the
Committee so determines, or the equivalent of such number of Shares after the
Committee, in its sole discretion, has interpreted the effect of any stock
split, stock dividend, combination, recapitalization, or similar transaction in
accordance with Section 16 of the Plan.

     If an Option granted hereunder ceases to be "outstanding", in whole or in
part, the Shares which were subject to such Option shall also be available for
the granting of other Stock Rights under the Plan. Any Stock Right shall be
treated as "outstanding" until such Stock Right is exercised in full or
terminates or expires under the provisions of the Plan, or by agreement of the
parties to the pertinent Stock Agreement, without having been exercised in full.

4.   ADMINISTRATION OF THE PLAN

     The Plan shall be administered by the Committee. The Committee shall
comprise two or more members of the Board of Directors, all of whom shall be
"outside directors" as that term is used in Section 162 of the Code and the
regulations promulgated thereunder, or the entire Board of Directors acting as
such a committee. Any provision in this Plan with respect to the Committee
contrary to Code Section 162 and, if the Company has a class of stock registered
under Section 12 of the Exchange Act, Rule 16b-3 under the Exchange Act, shall
be deemed void to the extent permitted by law and deemed appropriate by the
Committee.

     Subject to the provisions of the Plan, the Committee is authorized to:

     (a)  Interpret the provisions of the Plan or of any Option, Stock Award, or
          Stock Agreement and to make all rules and determinations which it
          deems necessary or advisable for the administration of the Plan;

     (b)  Determine which employees of the Company or of an Affiliate shall be
          designated as Key Employees and which of the Key Employees shall be
          granted Stock Rights;

     (c)  Determine the number of Shares and exercise price for which a Stock
          Right or Stock Rights shall be granted;

     (d)  Specify the terms and conditions upon which a Stock Right or Stock
          Rights may be granted; and

     (e)  In its discretion, accelerate the date of exercise of any installment
          of any Stock Right; provided that the Committee shall not, without the
          consent of the Participant, accelerate the exercise date of any
          installment of any Option granted

                                       -3-

<PAGE>

          to such Participant as an ISO (and not previously converted into an
          NQSO pursuant to Section 18) if such acceleration would violate the
          annual vesting limitation contained in Section 422(d) of the Code, as
          described in paragraph (b)(3) of Section 6;

provided, however, that all such interpretations, rules, determinations, terms,
and conditions shall be made and prescribed in the context of preserving the tax
status under Code Section 422 and, if the Company has a Class of stock
registered under Section 12 of the Exchange Act, Rule 16b-3 under the Exchange
Act, of those Options which are designated as ISOs and shall be in compliance
with any applicable provisions of Rule 16b-3 under the Exchange Act. Subject to
the foregoing, the interpretation and construction by the Committee of any
provisions of the Plan or of any Stock Right granted under it shall be final,
unless otherwise determined by the Board of Directors, if the Committee is other
than the Board of Directors.

     The Committee may employ attorneys, consultants, accountants, or other
persons, and the Committee, the Company, and its officers and directors shall be
entitled to rely upon the advice, opinions, or valuations of such persons. All
actions taken and all interpretations and determinations made by the Committee
in good faith shall be final and binding upon the Company, all Participants, and
all other interested persons. No member or agent of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to the Plan or grants hereunder. Each member of the Committee
shall be indemnified and held harmless by the Company against any cost or
expense (including counsel fees) reasonably incurred by him or liability
(including any sum paid in settlement of a claim with the approval of the
Company) arising out of any act or omission to act in connection with, the Plan
unless arising out of such member's own fraud or bad faith. Such indemnification
shall be in addition to any rights of indemnification the members of the
Committee may have as directors or otherwise under the by-laws of the Company,
or any agreement, vote of stockholders, or disinterested directors, or
otherwise.

5.   ELIGIBILITY FOR PARTICIPATION

     The Committee shall, in its sole discretion, name the Participants in the
Plan, provided, however, that each Participant must be a Key Employee of the
Company or of an Affiliate at the time a Stock Right is granted. Notwithstanding
the foregoing, the Committee may authorize the grant of a Stock Right to a
person not then an employee of the Company or of an Affiliate; provided,
however, that the actual grant of such Stock Right shall be conditioned upon
such person becoming eligible to become a Participant at or prior to the time of
execution of the Stock Agreement evidencing such Stock Right. The granting of
any Stock Right to any individual shall neither entitle that individual to, nor
disqualify him or her from, participation in other grants of Stock Rights.

                                       -4-

<PAGE>

6.   TERMS AND CONDITIONS OF OPTIONS

     (a) General. Each Option shall be set forth in writing in a Stock
Agreement, duly executed by the Company and, to the extent required by law or
requested by the Company, by the Participant. The Committee may provide that
Options be granted subject to such conditions as the Committee may deem
appropriate, including, without limitation, subsequent approval by the
shareholders of the Company of this Plan or any amendments thereto; provided,
however, that the option price per share of the Shares covered by each Option
shall not be less than the par value per share of the Common Stock. Each Stock
Agreement shall state the number of Shares to which it pertains, the date or
dates on which it first is exercisable, and the date after which it may no
longer be exercised. Option rights may accrue or become exercisable in
installments over a period of time, or upon the achievement of certain
conditions or the attainment of stated goals or events. Exercise of any Option
may be conditioned upon the Participant's execution of a Share purchase
agreement in form satisfactory to the Committee providing for certain
protections for the Company and its other shareholders, including requirements
that the Participant's or the Participant's Survivors' right to sell or transfer
the Shares may be restricted, and the Participant or the Participant's Survivors
may be required to execute letters of investment intent and to acknowledge that
the Shares will bear legends noting any applicable restrictions.

     (b) ISOs. In addition to the minimum standards set forth in paragraph (a)
of this Section 6, ISOs shall be subject to the following terms and conditions,
with such additional restrictions or changes as the Committee determines are
appropriate but not in conflict with Code Section 422 and relevant regulations
and rulings of the Internal Revenue Service:

          (1) ISO Option Price: The Option price per Share of the Shares subject
to an ISO shall not be less than one hundred percent (100%) of the Fair Market
Value per share of the Common Stock on the date of grant of the ISO; provided,
however that the Option price per share of the Shares subject to an ISO granted
to a Participant who owns, directly or by reason of the applicable attribution
rules in Code Section 424(d), more than ten percent (10%) of the total combined
voting power of all classes of share capital of the Company or an Affiliate
shall not be less than one hundred ten percent (110%) of the said Fair Market
Value on the date of grant.

          (2) Term of ISO: Each ISO shall expire not more than ten (10) years
from the date of grant; provided, however, that an ISO granted to a Participant
who owns, directly or by reason of the applicable attribution rules in Code
Section 424(d), more than ten percent (10%) of the total combined voting power
of all classes of share capital of the Company or an Affiliate, shall expire not
more than five (5) years from the date of grant.

          (3) Limitation on Yearly ISO Exercisability: The aggregate Fair Market
Value (determined at the time each ISO is granted) of the stock with respect to
which ISOs are exercisable for the first time by a Participant in any calendar
year (under this or any other ISO

                                       -5-

<PAGE>

plan of the Company or an Affiliate) shall not exceed the maximum amount
allowable under Section 422 of the Code.

          (4) Limitation on Grant of ISOs: No ISOs shall be granted after
October 10, 2007, the date which is ten (10) years from the date of the approval
of the Plan by the Board of Directors.

     (c) Limitation on Number of Options Granted. Notwithstanding anything in
the Plan to the contrary, no Participant shall be granted Options in any
calendar year for the purchase of more than 300,000 Shares.

7.   TERMS AND CONDITIONS OF STOCK AWARDS

     Each Stock Award shall be set forth in a Stock Agreement, duly executed by
the Company and, to the extent required by law or requested by the Company, by
the Participant. The Stock Agreement shall be in the form approved by the
Committee, with such changes and modifications to such form as the Committee, in
its discretion, shall approve with respect to any particular Participant or
Participants. The Stock Agreement shall contain terms and conditions which the
Committee determines to be appropriate and in the best interest of the Company;
provided, however, that the purchase price per share of the Shares covered by
each Stock Award shall not be less than the par value per Share. Each Stock
Agreement shall state the number of Shares to which the Stock Award pertains,
the date prior to which the Stock Award must be exercised by the Participant,
and the terms of any right of the Company to reacquire the Shares subject to the
Stock Award, including the time and events upon which such rights shall accrue
and the purchase price therefor, and any restrictions on the transferability of
such Shares.

8.   EXERCISE OF STOCK RIGHTS AND ISSUANCE OF SHARES

     A Stock Right (or any part or installment thereof) shall be exercised by
giving written notice to the Company, together with provision for payment of the
full purchase price in accordance with this Section for the Shares as to which
such Stock Right is being exercised, and upon compliance with any other
conditions set forth in the Stock Agreement. Such written notice shall be signed
by the person exercising the Stock Right, shall state the number of Shares with
respect to which the Stock Right is being exercised, and shall contain any
representation required by the Plan or the Stock Agreement.

     Payment of the purchase price for the Shares as to which such Stock Right
is being exercised shall be made (i) in United States dollars in cash or by
check, (ii) at the discretion of the Committee, by any other means, including
through delivery of shares of Common Stock already owned by the Participant or a
promissory note of the Participant, which the Committee determines to be
consistent with the purpose of this Plan and applicable law, (iii) at the
discretion of the Committee, in accordance with a cashless exercise program
established with a securities brokerage firm and approved by the Committee, or
(iv) at the discretion of the

                                       -6-

<PAGE>

Committee, by any combination of (i), (ii) and (iii), above. Notwithstanding the
foregoing, the Committee shall accept only such payment on exercise of an ISO as
is permitted by Section 422 of the Code.

     The Company shall reasonably promptly deliver the Shares as to which such
Stock Right was exercised to the Participant (or to the Participant's Survivors,
as the case may be). In determining what constitutes "reasonably promptly," it
is expressly understood that the delivery of the Shares may be delayed by the
Company in order to comply with any law or regulation which requires the Company
to take any action with respect to the Shares prior to their issuance. The
Shares shall, upon delivery, be fully paid, non-assessable Shares.

9.   RIGHTS AS A SHAREHOLDER

     No Participant to whom a Stock Right has been granted shall have rights as
a shareholder with respect to any Shares covered by such Stock Right, except
after due exercise thereof and tender of the full purchase price for the Shares
being purchased pursuant to such exercise and registration of the Shares in the
Company's share register in the name of the Participant.

10.  ASSIGNABILITY AND TRANSFERABILITY OF STOCK RIGHTS

     ISOs and, except as otherwise provided in the pertinent Stock Agreement,
NQSOs and Stock Awards shall not be transferable by the Participant other than
by will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act of 1974 or the rules thereunder; provided,
however, that the designation of a beneficiary of a Stock Right by a Participant
shall not be deemed a transfer prohibited by this Section. Except as provided in
the preceding sentence or as otherwise permitted under an NQSO or Stock Award
Stock Agreement, a Stock Right shall be exercisable, during the Participant's
lifetime, only by such Participant (or by his or her legal representative) and
shall not be assigned, pledged, or hypothecated in any way (whether by operation
of law or otherwise) and shall not be subject to execution, attachment, or
similar process. Any attempted transfer, assignment, pledge, hypothecation, or
other disposition of any Stock Right or of any rights granted thereunder
contrary to the provisions of this Plan, or the levy of any attachment or
similar process upon a Stock Right, shall be null and void.

11.  EFFECT OF TERMINATION OF SERVICE

     (a) Except as otherwise provided in the pertinent Stock Agreement or as
otherwise provided in Section 12, 13, or 14, if a Participant ceases to be an
employee of the Company and its Affiliates (a "Termination of Service") for any
reason other than termination "for cause", Disability, or death before the
Participant has exercised all Stock Rights, the Participant may exercise any
Stock Right granted to him or her to the extent that the Stock Right is
exercisable on the date of such Termination of Service, but only within a period
of not more than three (3) months after the date of the Participant's
Termination of Service or, if earlier, within the

                                       -7-

<PAGE>

originally prescribed term of the Stock Right. Notwithstanding the foregoing,
except as provided in Section 13, in no event may an ISO be exercised later than
three (3) months after the Participant's termination of employment with the
Company and its Affiliates.

     (b) The provisions of this Section, and not the provisions of Section 13 or
14, shall apply to a Participant who subsequently becomes disabled or dies after
the Termination of Service; provided, however, that in the case of a
Participant's death within three (3) months after the Termination of Service,
the Participant's Survivors may exercise the Stock Right within one (1) year
after the date of the Participant's death, but in no event after the date of
expiration of the term of the Stock Right.

     (c) Notwithstanding anything herein to the contrary, if subsequent to a
Participant's Termination of Service, but prior to the exercise of a Stock
Right, the Committee determines that, either prior or subsequent to the
Participant's Termination of Service, the Participant engaged in conduct which
would constitute "cause" (as defined in Section 12), then such Participant shall
forthwith cease to have any right to exercise any Stock Right.

     (d) Absence from work with the Company or an Affiliate because of temporary
disability (any disability other than a permanent and total Disability as
defined in Section 2 hereof), or a leave of absence for any purpose, shall not,
during the period of any such absence, be deemed, by virtue of such absence
alone, a Termination of Service, except as the Committee may otherwise expressly
provide.

     (e) A change of employment or other service within or among the Company and
its Affiliates shall not be deemed a Termination of Service, so long as the
Participant continues to be an employee of the Company or any Affiliate;
provided, however, that if a Participant's employment with the Company or an
Affiliate should cease (other than to become an employee of another Affiliate or
of the Company), then paragraph (a) of this Section 11 shall apply as to any
ISOs granted to such Participant.

12.  EFFECT OF TERMINATION OF SERVICE FOR "CAUSE"

     Except as otherwise provided in the pertinent Stock Agreement, in the event
of a Termination of Service of a Participant "for cause," all outstanding and
unexercised Stock Rights as of the date the Participant is notified his or her
service is terminated "for cause" will immediately be forfeited. For purposes of
this Section 12, "cause" shall include (and is not limited to) dishonesty with
respect to the Company and its Affiliates, insubordination, substantial
malfeasance or nonfeasance of duty, unauthorized disclosure of confidential
information, conduct substantially prejudicial to the business of the Company or
any Affiliate, and termination by the Participant in violation of an agreement
by the Participant to remain in the employ of the Company of an Affiliate. The
determination of the Committee as to the existence of cause will be conclusive
on the Participant and the Company. "Cause" is not limited to events which have
occurred prior to a Participant's Termination of Service, nor is it necessary
that the

                                       -8-

<PAGE>

Committee's finding of "cause" occur prior to termination. If the Committee
determines, subsequent to a Participant's Termination of Service but prior to
the exercise of a Stock Right, that either prior or subsequent to the
Participant's termination the Participant engaged in conduct which would
constitute "cause," then the right to exercise any Stock Right shall be
forfeited. Any definition in an agreement between a Participant and the Company
or an Affiliate which contains a conflicting definition of "cause" for
termination and which is in effect at the time of such termination shall
supersede the definition in this Plan with respect to that Participant.

13.  EFFECT OF TERMINATION OF SERVICE FOR DISABILITY

     Except as otherwise provided in the pertinent Stock Agreement, in the event
of a Termination of Service by reason of Disability, the Disabled Participant
may exercise any Stock Right granted to him or her to the extent exercisable but
not exercised on the date of Disability. A Disabled Participant may exercise
such rights only within a period of not more than one (1) year after the date
that the Participant became Disabled or, if earlier, within the originally
prescribed term of the Stock Right.

     The Committee shall make the determination both of whether Disability has
occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or
approved by the Committee, the cost of which examination shall be paid for by
the Company.

14.  EFFECT OF DEATH WHILE AN EMPLOYEE

     Except as otherwise provided in the pertinent Stock Agreement, in the event
of death of a Participant while the Participant is an employee of the Company or
of an Affiliate, any Stock Rights granted to such Participant may be exercised
by the Participant's Survivors to the extent exercisable but not exercised on
the date of death. Any such Stock Right must be exercised within one (1) year
after the date of death of the Participant.

15.  PURCHASE FOR INVESTMENT

     Unless the offering and sale of the Shares to be issued upon the particular
exercise of a Stock Right shall have been effectively registered under the
Securities Act of 1933, as now in force or hereafter amended (the "Securities
Act"), the Company shall be under no obligation to issue the Shares covered by
such exercise unless and until the following conditions have been fulfilled:

     (a)  The person who exercises such Stock Right shall warrant to the
          Company, at the time of such exercise or receipt, as the case may be,
          that such person is acquiring such Shares for his own account for
          investment and not with a view to,

                                       -9-

<PAGE>

          or for sale in connection with, the distribution of any such Shares,
          in which event the person acquiring such Shares shall be bound by the
          provisions of the following legend which shall be endorsed upon the
          certificate evidencing the Shares issued pursuant to such exercise or
          such grant:

               "The shares represented by this certificate have been taken for
               investment and they may not be sold or otherwise transferred by
               any person, including a pledgee, unless (1) either (a) a
               Registration Statement with respect to such shares shall be
               effective under the Securities Act of 1933, as amended, or (b)
               the Company shall have received an opinion of counsel
               satisfactory to it that an exemption from registration under such
               Act is then available, and (2) there shall have been compliance
               with all applicable state securities laws.

     (b)  The Company shall have received an opinion of its counsel that the
          Shares may be issued upon such particular exercise in compliance with
          the Securities Act without registration thereunder.

          The Company may delay issuance of the Shares until completion of any
action or obtaining of any consent which the Company deems necessary under any
applicable law (including, without limitation, state securities or "blue sky"
laws).

16.  ADJUSTMENTS

     Upon the occurrence of any of the following events, a Participant's rights
with respect to any Stock Right granted to him or her hereunder which have not
previously been exercised in full shall be adjusted as hereinafter provided,
unless otherwise specifically provided in the written agreement between the
Participant and the Company relating to such Stock Right or in any employment
agreement between a Participant and the Company or an Affiliate:

     (a) Stock Dividends and Stock Splits. If the shares of Common Stock shall
be subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of such Stock Right shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination, or stock dividend

     (b) Mergers or Consolidations. If the Company is to be consolidated with or
acquired by another entity in a merger, or in the event of a sale of all or
substantially all of the Company's assets (an "Acquisition"), the Company may
take such action with respect to outstanding Stock Rights as the Committee or
the Board of Directors may deem to be equitable and in the best interests of the
Company and its stockholders under the circumstances, including, without
limitation, (i) giving the Participant reasonable advance notice of the pendency
of the Acquisition

                                      -10-

<PAGE>

and accelerating the vesting of the Stock Rights so that they become exercisable
in full immediately prior to the Acquisition, (ii) making appropriate provision
for the continuation of the Stock Rights by substituting on an equitable basis
for the shares then subject to the Options either the consideration payable with
respect to the outstanding shares of Common Stock in connection with the
Acquisition or securities of any successor or acquiring entity, or (iii) giving
the Participant reasonable advance notice of the pendency of the Acquisition and
canceling the Stock Rights effective upon the Acquisition if they are not
exercised prior to the Acquisition.

     (c) Recapitalization or Reorganization. In the event of a recapitalization
or reorganization of the Company (other than a transaction described in
paragraph (b) of this Section 16) pursuant to which securities of the Company or
of another corporation are issued with respect to the outstanding shares of
Common Stock, a Participant upon exercising a Stock Right shall be entitled to
receive for the purchase price paid upon such exercise the securities he or she
would have received if he or she had exercised such Stock Right prior to such
recapitalization or reorganization.

     (d) Modification of ISOs. Notwithstanding the foregoing, any adjustments
made pursuant to paragraph (a), (b), or (c) of this Section 16 with respect to
ISOs shall be made only after the Committee determines whether such adjustments
would constitute a "modification" of such ISOs (as that term is defined in
Section 424(h) of the Code) or would cause any adverse tax consequences for the
holders of such ISOs. If the Committee determines that such adjustments made
with respect to ISOs would constitute a modification of such ISOs, it may
refrain from making such adjustments, unless the holder of an ISO specifically
requests in writing that such adjustment be made and such writing indicates that
the holder has full knowledge of the consequences of such "modification" on his
or her income tax treatment with respect to the ISO.

17.  FRACTIONAL SHARES

     No fractional share shall be issued under the Plan, and the person
exercising any Stock Right shall receive from the Company cash in lieu of any
such fractional share equal to the Fair Market Value thereof determined in good
faith by the Board of Directors of the Company.

18.  CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS.

     Any Options granted under this Plan which do not meet the requirements of
the Code for ISOs shall automatically be deemed to be NQSOs without further
action on the part of the Committee. The Committee, at the Written request of
any Participant, may in its discretion take such actions as may be necessary to
convert such Participant's ISOs (or any portion thereof) that have not been
exercised on the date of conversion into NQSOs at any time prior to the
expiration of such ISOs, regardless of whether the Participant is an employee of
the Company or an Affiliate at the time of such conversion. Such actions may
include, but not be limited to, extending the exercise period or reducing the
exercise price of the appropriate installments of such

                                      -11-

<PAGE>

Options. At the time of such conversion, the Committee (with the consent of the
Participant) may impose such conditions on the exercise of the resulting NQSOs
as the Committee in its discretion may determine, provided that such conditions
shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to
give any Participant the right to have such Participant's ISOs converted into
NQSOs, and no such conversion shall occur until and unless the Committee takes
appropriate action. The Committee, with the consent of the Participant, may also
terminate any portion of any ISO that has not been exercised at the time of such
termination.

19.  WITHHOLDING

     In the event that any federal, state, or local income taxes, employment
taxes, Federal Insurance Contributions Act ("FICA") withholdings, or other
amounts are required by applicable law or governmental regulation to be withheld
from the Participant's salary, wages, or other remuneration in connection with
the exercise of a Stock Right or a Disqualifying Disposition (as defined in
Section 20), the Participant shall advance in cash to the Company, or to any
Affiliate of the Company which employs or employed the Participant, the amount
of such withholdings unless a different withholding arrangement, including the
use of shares of the Company's Common Stock, is authorized by the Committee (and
permitted by law); provided, however, that with respect to persons subject to
Section 16 of the Exchange Act, any such withholding arrangement shall be in
compliance with any applicable provisions of Rule 16b-3 promulgated under
Section 16 of the Exchange Act. For purposes hereof, the Fair Market Value of
any shares withheld for purposes of payroll withholding shall be determined in
the manner provided in Section 2 hereof, as of the most recent practicable date
prior to the date of exercise. If the Fair Market Value of the shares withheld
is less than the amount of payroll withholdings required, the Participant may be
required to advance the difference in cash to the Company or the Affiliate
employer. The Committee in its discretion may condition the exercise of an
Option for less than the then Fair Market Value on the Participant's payment of
such additional withholding.

20.  NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION

     Each Key Employee who receives an ISO must agree to notify the Company in
writing immediately after the Key Employee makes a Disqualifying Disposition of
any Shares acquired pursuant to the exercise of an ISO. A Disqualifying
Disposition is any disposition (including any sale) of such shares before the
later of (a) two years after the date the Key Employee was granted the ISO, or
(b) one year after the date the Key Employee acquired Shares by exercising the
ISO. If the Key Employee has died before such Shares are sold, these holding
period requirements do not apply and no Disqualifying Disposition can occur
thereafter.

21.  EFFECTIVE DATE; TERMINATION OF THE PLAN

     The Plan shall be effective on October 10, 1997. Stock Rights may be
granted under the Plan on and after its effective date; provided, however, that
any such Stock Rights shall be null and void if the Plan is not approved by the
stockholders of the Company within twelve (12)

                                      -12-

<PAGE>

months after the effective date. The Plan will terminate on October 10, 2007,
the date which is ten (10) years from the date of its approval by the Board of
Directors. The Plan may be terminated at an earlier date by vote of the
stockholders of the Company; provided, however, that any such earlier
termination will not affect any Stock Rights granted or Stock Agreements
executed prior to the effective date of such termination.

22.  AMENDMENT OF THE PLAN

     The Plan may be amended by the stockholders of the Company. The Plan may
also be amended by the Board of Directors or the Committee, including, without
limitation, to the extent necessary to qualify any or all outstanding Stock
Rights granted under the Plan or Stock Rights to be granted under the Plan for
favorable federal income tax treatment (including deferral of taxation upon
exercise) as may be afforded incentive stock options under Section 422 of the
Code, to the extent necessary to ensure the qualification of the Plan under Rule
16b-3 under the Exchange Act, and to the extent necessary to qualify the shares
issuable upon exercise of any outstanding Stock Rights granted, or Stock Rights
to be granted, under the Plan for listing on any national securities exchange or
quotation in any national automated quotation system of securities dealers. Any
amendment approved by the Board of Directors or the Committee which is of a
scope that requires stockholder approval in order to ensure favorable federal
income tax treatment for any ISOs or requires stockholder approval in order to
ensure the compliance of the Plan with Rule 16b-3 or Section 162(m) of the Code
shall be subject to obtaining such stockholder approval. No modification or
amendment of the Plan shall adversely affect any rights under a Stock Right
previously granted to a Participant without such Participant's consent.

     In its discretion, the Committee may amend any term or condition of any
outstanding Stock Right, provided (i) such term or condition as amended is
permitted by the Plan, (ii) if the amendment is adverse to the Participant, such
amendment shall be made only with the consent of the Participant, (iii) any such
amendment of any ISO shall be made only after the Committee determines whether
such amendment would constitute a "modification" of any Stock Right which is an
ISO (as that term is defined in Section 424(h) of the Code) or would cause any
adverse tax consequences for the holder of such ISO, and (iv) with respect to
any Stock Right held by any Participant who is subject to the provisions of
Section 16(a) of the 1934 Act, any such amendment shall be made only after the
Committee determines whether such amendment would constitute the grant of a new
Stock Right.

23.  EMPLOYMENT OR OTHER RELATIONSHIP

     Nothing in the Plan or any Stock Agreement shall be deemed to prevent the
Company or an Affiliate from terminating the employment status of a Participant,
nor to prevent a Participant from terminating his or her own employment, or to
give any Participant a right to be retained in employment or other service by
the Company or any Affiliate for any period of time.

                                      -13-

<PAGE>

24.  GOVERNING LAW

     This Plan shall be construed and enforced in accordance with the laws of
the State of Delaware.

                                      -14-
<PAGE>

                         ATHENA HEALTHCARE INCORPORATED
                             STOCK OPTION AGREEMENT
                             INCENTIVE STOCK OPTION

      Stock Option Agreement dated as of              between ATHENA HEALTHCARE
INCORPORATED, a Delaware corporation (the "Company"), and           (the
"Participant").

      WHEREAS, in consideration of the employment of the Participant by the
Company or by a subsidiary of the Company (a "Subsidiary") and to provide
additional incentive to the Participant by affording the Participant an
opportunity to acquire a proprietary interest in the Company through the
acquisition of shares of the Company's Common Stock, $.01 par value per share
("Common Stock"), upon the exercise of options with respect thereto, the Company
wishes to grant to the Participant options on the terms and conditions set forth
in this Agreement;

      NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties hereto agree as follows:

      1. GRANT OF OPTIONS.

      a) The Company hereby grants to the Participant, as of the date set forth
above (the "Grant Date"), options (the "Options") under the Company's 1997 Stock
Option Plan (the "1997 Option Plan") for the purchase of        shares
("Shares") of Common Stock, at an exercise price of
($    ) per share, subject to vesting as set forth below and the
additional terms and conditions set forth in this Agreement. The Options are
intended to be incentive stock options under the Internal Revenue Code of 1986,
as amended.

      b) If the Participant ceases for any reason, whether voluntary or
involuntary (other than death or Disability, as defined in the 1997 Option
Plan), to be employed by the Company or a Subsidiary (i) all Unvested Options
(as defined in Section 3 below) will be forfeited automatically and canceled as
of the date the Participant's employment terminates, and (ii) all Vested Options
(as defined in Section 3 below) must be exercised by 90 days after the date the
Participant's employment terminates. Vested Options not so exercised will be
forfeited automatically and canceled. Following termination of the Participant's
employment because of death or Disability, Unvested Options will be forfeited
automatically and canceled as of the date of termination, and Vested Options
will be exercisable in accordance with the provisions of the 1997 Option Plan.

      2. EXPIRATION OF OPTIONS. The termination date of the Options is        .
All Options not exercised by that date will be canceled and will be of no
further force or effect.

      3. VESTING.

      a) The right to purchase Shares will vest as set forth in this Section. As
used in this Agreement, Options as to which the right to purchase Shares has
vested pursuant to this Section will be referred to as "Vested Options," and
Options as to which the right to purchase Shares has not vested will be referred
to as "Unvested Options."

<PAGE>

      b) Options for the purchase of           % of the Shares will vest each
       anniversary of the date of grant until the total options have been vested
(period of            ).

      4. 1997 OPTION PLAN. The Participant hereby acknowledges receipt of a copy
of the 1997 Option Plan as currently in effect. The text and all of the terms
and provisions of the 1997 Option Plan are incorporated herein by reference and
the 1997 Option Plan is made part of this Agreement as if fully set forth
herein. The 1997 Option Plan will control in the event there is any conflict
between the 1997 Option Plan and this Agreement, and on such matters as are not
contained in this Agreement. All terms used herein and not otherwise defined
will have the meaning as defined in the 1997 Option Plan. The Options granted
herein are subject to such terms and provisions in all respects, including but
not limited to the following:

      a) The Options are not transferable by the Participant otherwise than by
operation of law, and are exercisable, during the Participant's lifetime, only
by him or her.

      b) The Options may be exercised in whole or in part from time to time
(subject to the vesting provision set forth in Section 3 hereof).

      c) The shares of Common Stock acquired upon exercise of the Options
("Underlying Common") and the exercise price of the Options will be
appropriately adjusted from time to time for stock splits, reverse stock splits,
stock dividends and reclassifications of shares.

      d) If the Company is to be consolidated with or acquired by another entity
in a merger, or in the event of a sale of all or substantially all of the
Company's assets (an "Acquisition"), the Company may take such action with
respect to the Options as the Company's Board of Directors may deem to be
equitable and in the best interests of the Company and its stockholders under
the circumstances, including, without limitation, (i) giving the Participant
reasonable advance notice of the pendency of the Acquisition and accelerating
the vesting of the Options so that they become exercisable immediately prior to
the Acquisition, (ii) making appropriate provision for the continuation of the
Options by substituting on an equitable basis for the shares then subject to the
Options either the consideration payable with respect to the outstanding shares
of Common Stock in connection with the Acquisition or securities of any
successor or acquiring entity, or (iii) giving the Participant reasonable
advance notice of the pendency of the Acquisition and canceling the Options
effective upon the Acquisition if they are not exercised prior to the
Acquisition. Nothing contained herein will be deemed to require the Company to
take, or refrain from taking, any one or more of the foregoing actions.

      e) The Options and the Underlying Common are subject to restrictions on
transfer and the other restrictions set forth in the 1997 Option Plan.

      f) Neither the Participant nor any subsequent holder of the Options or the
Underlying Common may sell, assign or otherwise transfer the Options or the
Underlying Common for 180 days after the date of the final prospectus used in
connection with an initial public offering by of the Common Stock. The
Participant and any such subsequent holder will execute and deliver such
documents as may be required by the managing underwriters of such initial public
offering confirming the foregoing.

<PAGE>

      5. NOTICE OF EXERCISE. At any time when the Participant wishes to exercise
the Options, in whole or in part, the Participant will submit to the Company a
duly executed Notice of Exercise of Options in the form attached hereto as
Exhibit A.

      6. BINDING AGREEMENT AND GOVERNING LAW. This Agreement will be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
administrators, successors and permitted assigns. This Agreement will be
governed by and interpreted in accordance with the laws of the Commonwealth of
Massachusetts.

      IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in its name and the Participant has hereunto set his or her hand as of the date
first written above.

                                        ATHENA HEALTHCARE INCORPORATED

                                        By:
                                            ----------------------------
                                            Name:
                                            Title:

                                        PARTICIPANT

                                        ----------------------------
                                        Signature

                                        -----------------------------
                                        Printed Name

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