EXHIBIT 10.1 PROMISSORY NOTE Principal Amount: $1,000,000 United States Dollars September 30, 2002 FOR VALUE RECEIVED SCOLR, INC., a corporation organized under the laws of the State of Delaware ("Borrower") promises to pay to the order of CLYDE BERG, an individual residing in the State of [California] ("Lender") whose principal address is 10050 Bandley Ave., Cupertino, CA 95014, or such other address of Lender, the holder, successor or assignee of the Note ("Holder") as Lender may designate from time to time, the principal sum of One Million United States Dollars (US$1,000,000), together with interest on the unpaid outstanding principal balance from the date hereof until repayment in full. PAYMENT. Borrower shall pay this loan in one payment of all of the unpaid outstanding principal balance together with all accrued unpaid interest on September 30, 2004. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning November 1, 2002, and all subsequent interest payments are due on the first day of each month thereafter. FIXED INTEREST RATE. Interest shall accrue on the unpaid outstanding principal balance from the date hereof until it is paid in full at the Interest Rate, as defined herein. The Interest Rate on this Note is eight percent (8%) per annum. Interest hereunder shall be computed on the basis of the actual number of days elapsed in a year of three hundred sixty-five (365) days. OPTIONAL PREPAYMENT. Borrower may pay without penalty all or any portion of the amount owed hereunder earlier than it is due. MANDATORY PREPAYMENT. Borrower shall pay this loan in one payment of all of the unpaid outstanding principal balance, together with all accrued unpaid interest and any other amounts due related hereto, directly from the closing escrow of the sale of all or substantially all of the assets comprising Borrower's nutraceutical business. SECURITY. The right of Lender to receive payment hereunder is secured by certain assets of Borrower as set forth in that certain Security Agreement by and between Borrower and Lender, dated as of the date hereof. DEFAULT. Borrower will be in default upon the occurrence of any of the following events which has not been cured within ten (10) business days following written notice of such event by Lender to Borrower: (a) Borrower fails to make any payment hereunder when due; (b) Borrower breaks any promise Borrower has made hereunder to Lender, or Borrower fails to perform promptly at the time and strictly in the manner provided in this Note or any agreement related to this Note; (c) Any representation or statement made or furnished in relation hereto to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect; (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws; (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest; (f) The liquidation, termination, dissolution, or death as the case may be, of any party ever liable for payment of this Note, or (g) Default in the performance of any obligation from Borrower to Lender. It is 1
understood and agreed that the foregoing events of default are cumulative of, and in addition to, any events of default as may be contained in any other documents modifying, renewing, extending, increasing, evidencing, securing or pertaining to this Note or the debt evidenced thereby. LENDER'S RIGHTS. Upon default, Lender may declare the entire indebtedness, including the unpaid principal balance on this Note, all accrued unpaid interest, and all other amounts, costs and expenses for which Borrower is responsible under this Note or any other agreement with Lender pertaining to this Loan, immediately due, with notice. Upon default, or if this Note is not paid at final maturity, Lender, at its option, may add any accrued unpaid interest to principal and such sum will bear interest therefrom until paid, at the rate provided in this Note. Borrower shall pay the reasonable legal fees, costs, and expenses incurred in the enforcement of this Note. Borrower will also pay Lender all other amounts actually incurred by Lender as court costs, lawful fees for filing, recording, or releasing to any public office any instrument securing this loan. If Borrower should tender any payment which is less than the total thereof which is then due, Lender may refuse to accept such payment unless and until the said total amount then due is tendered in payment. The acceptance by Lender of less than the total amount then due shall not constitute a waiver of the delinquent amount and any other amount then due, nor shall such acceptance cure the default for failure to pay the delinquent amount or any other amount then due. WAIVERS. Except as otherwise provided herein, Borrower waives to the extent not prohibited by applicable law (i) all presentments, demands for performance, notices of nonperformance (except to the extent, if any, required by the provisions hereof), protests, notices of protest and notices of dishonor, (ii) any requirement of diligence or promptness on the part of Lender in the enforcement of its rights under this Note, (iii) all notices of every kind which may be required to be given by any statute or rule of law, (iv) any valuation, stay, appraisement or redemption laws and (v) any defense of any kind (other than payment) which it may now or hereafter have with respect to its liability under this Note. SEVERABILITY. Any provision of this Note which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. THE PARTIES HERETO HAVE EXPRESSLY AGREED THAT THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF WASHINGTON, UNITED STATES OF AMERICA, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. BORROWER: SCOLR, INC.
Signature: /s/ David T. Howard ----------------------------Name: David T. Howard Title: President and Chief Executive Officer
No. ____ THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO SEC RULE 144 OR UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT AND THE SECURITIES LAWS OF ANY STATE COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS. SCOLR, INC. COMMON STOCK WARRANT ISSUE DATE: September 30, 2002 750,000 shares of common stock THIS IS TO CERTIFY THAT FOR GOOD AND VALUABLE CONSIDERATION, Clyde Berg, an individual residing in the State of California, whose principal place of residence is 10050 Bandley Dr., Cupertino, CA 95014 (the "Holder"), is entitled to subscribe for and purchase from SCOLR, Inc. (the "Company"), Seven Hundred Fifty Thousand (750,000) shares of the Company's common stock (the "Warrant Shares") at an exercise price, subject to adjustment as set forth below, of $0.50 per share (the "Exercise Price"). This Warrant is issued in connection with that certain Promissory Note dated as of the date hereof (the "Note"), purchased by the Holder from the Company in the principal amount set forth on the Note. The Holder is subject to certain restrictions, and is entitled to certain rights and privileges, set forth in the Note. ARTICLE 1. EXERCISE OF WARRANT. 1.01. EXERCISE OF WARRANT. This Warrant will expire (the "Expiration Date"), upon the earliest of (i) ten (10) years from the Issue Date (as defined in Section 5.01(b) hereof), and (ii) a "Change of Control" (as defined in Section 5.01(a) hereof). The Holder may exercise this Warrant, in whole or in part, at any time or from time to time, commencing on the earliest to occur of June 30, 2003 or immediately prior to a Change of Control (the "Commencement Date"), and continuing thereafter until the Expiration Date. 1.02. METHOD OF EXERCISE. (a) At any time on or after the Commencement Date, the Holder shall exercise this Warrant, in whole or in part, at any time or from time to time, at or prior to the 1
Expiration Date, by surrendering it at the offices of the Company at the address designated for notice purposes under Section 5.03 below, together with either (i) a duly executed and completed subscription in substantially the form of the Subscription Notice attached hereto as Exhibit A, and a check payable to the Company in the amount equal to the aggregate Exercise Price, for the number of Warrant Shares being purchased, or (ii) a duly executed and completed Conversion Notice in the form attached hereto as Exhibit B. Upon exercise through a conversion (subject to Section 3.03 and without payment by the Holder of the Exercise Price), the Holder shall be entitled to receive that number of Warrant Shares equal to the quotient obtained by dividing ((A-B) x C) by A, where: A = The Fair Market Value of one (1) Warrant Share on the date of exercise of the Warrant; B = The per share Exercise Price; and C = The total number of Warrant Shares subject to purchase upon exercise of the Warrant. If the above calculation results in a number less than one (1), then no Warrant Shares shall be issuable or issued pursuant to a conversion. (b) For purposes of the foregoing, the term "Fair Market Value" of a Warrant Share shall mean: (i) The average of the closing bid and asked prices of the Company's common stock quoted in the Over-TheCounter Market Summary, the last reported sale price quoted on the Nasdaq National Market or on any exchange on which the common stock is listed, whichever is applicable, as published in the Western Edition of the Wall Street Journal for the ten (10) trading days prior to the date of determination of Fair Market Value; or (ii) In the event of an exercise in connection with a Change of Control, the Fair Market Value shall be the value received per share of common stock by all holders of common stock in such transaction as determined by the Board of Directors of the Company; or (iii) In any other instance, the Fair Market Value shall be as determined in good faith by the Board of Directors of the Company. (c) Surrendered Warrants shall be canceled by or on behalf of the Company. In the event of a partial exercise, the Company will forthwith issue and deliver to the Holder a new Warrant of like tenor for the number of Warrant Shares represented by the Warrant after giving effect to the partial exercise as set forth above. 1.03. SHARES ISSUED UPON EXERCISE OF WARRANT. As soon as practicable after the Warrant has been so exercised, and in any event within twenty (20) days thereafter, the Company shall issue and deliver, in such name or names as Holder may direct, a certificate or certificates for the number of Warrant Shares to which such Holder is entitled. All Warrant Shares shall be 2
duly authorized, validly issued, fully paid and nonassessable. The Company shall pay all documentary stamp taxes attributable to the initial issuance of the Warrant Shares, but shall not be required to pay any tax imposed in connection with any transfer involved in the issue of the Warrant Shares in a name other than that of the Holder. Irrespective of the date of issue of certificates for the Warrant Shares, the Holder shall be deemed to have become the holder of record of the Warrant Shares represented thereby on the date on which the Warrant is exercised and payment of the Exercise Price is received by the Company as provided in Section 1.02. ARTICLE 2. TRANSFER OF THE WARRANT. Subject to Section 4.11 hereof, this Warrant may be transferred in whole or in part, including to any "affiliate" of the Holder, as such term is defined in Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), by presentation of the Warrant to the Company with written instructions for transfer; provided however, that Holder agrees not to transfer the Warrant or the Warrant Shares in any manner that would result in a violation of the registration provisions of the Securities Act or any applicable state securities laws, and the Company shall not be required to take any action hereunder that would result in a violation of such provisions. On presentation for transfer, the Company will execute and deliver a new Warrant in the name of the transferee. ARTICLE 3. PROVISIONS FOR PROTECTION OF THE HOLDER. 3.01. LOST, STOLEN OR MUTILATED WARRANT. If this Warrant is lost, stolen, mutilated or destroyed, the Company will, on such reasonable terms with respect to indemnity or otherwise as it may in its discretion impose, issue a new warrant of like denomination, tenor and date as this Warrant. Any such new warrant shall constitute an original contractual obligation of the Company, and the lost, stolen, mutilated or destroyed, as applicable, Warrant shall be null and void. 3.02. HOLDER NOT SHAREHOLDER. This Warrant does not confer upon the Holder, as such, any rights or liabilities whatsoever as a shareholder of the Company, whether such rights or liabilities are asserted by the Company or by its creditors. 3.03. COMPLIANCE WITH SECURITIES LAWS. (a) Neither this Warrant nor the Warrant Shares have been registered under the Securities Act or any state securities laws. This Warrant has been acquired for investment purposes and not with a view to distribution or resale and may not be pledged, hypothecated, sold or otherwise transferred without an effective registration statement for such Warrant under the Securities Act or any applicable state securities laws or an opinion of counsel or other evidence reasonably satisfactory to the Company that registration is not required thereunder. Certificates representing the Warrant Shares shall bear a legend substantially in the following form: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR THE SECURITIES LAWS OF ANY STATE, AND 3
MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO SEC RULE 144 OR UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT AND THE SECURITIES LAWS OF ANY STATE COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS. (b) The Holder represents and warrants to the Company as follows: (i) This Warrant and the Warrant Shares issuable upon exercise thereof are being acquired for the Holder's own account, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act. Upon exercise of this Warrant, the Holder shall, if so requested by the Company, confirm in writing, in a form satisfactory to the Company, that the securities issuable upon exercise of this Warrant are being acquired for investment and not with a view toward distribution or resale. (ii) The Holder understands that the Warrant and the Warrant Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) or Section 4(6) thereof, and that they must be held by the Holder indefinitely, and that the Holder must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempted from such registration. The Holder understands that the Company is under no obligation to register any of the securities sold hereunder. (iii) The Holder is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. 3.04. ADJUSTMENT FOR STOCK DIVIDENDS, SPLITS, ETC. If at any time after the Issue Date of this Warrant the number of shares into which this Warrant is exercisable is increased by a stock dividend or other distribution thereon payable or by a subdivision, split-up or reclassification thereof, then immediately after the record date fixed for the determination of holders of such stock entitled to receive such stock dividend or the effective date of such subdivision, split-up or reclassification, as the case may be, the Exercise Price shall be reduced and the number of Warrant Shares issuable hereunder shall be increased, in each case appropriately so that the Holder shall be entitled to receive the number of Warrant Shares thereof that it would have owned immediately following such action had this Warrant been exercised in full for cash immediately prior thereto. 3.05. ADJUSTMENT FOR COMBINATION OF WARRANT SHARES. If at any time after the Issue Date of this Warrant the number of Warrant Shares into which this Warrant is exercisable is 4
decreased by a combination or reclassification of such shares, then, immediately after the effective date of such combination or reclassification, the number of Warrant Shares shall be decreased appropriately and the Exercise Price shall increase proportionately, as applicable, so that the Holder shall be entitled to receive the number of Warrant Shares which it would have owned immediately following such action had this Warrant been exercised immediately prior thereto. 3.06. ADJUSTMENT FOR CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Company's common stock is changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above), then in each such event, the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of shares of stock and other securities and property that would have been receivable upon such reorganization, reclassification or other change in respect of the number of such shares into which this Warrant could have been exercised in full for cash immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. 3.07. ADJUSTMENT FOR MERGER OR CONSOLIDATION. If at any time while the Warrant remains outstanding, any capital reorganization or reclassification of the Company, or any consolidation or merger of the Company with another corporation occurs in which the Company is the continuing or surviving corporation, the Holder shall have the right upon the exercise of this Warrant to receive the kind and amount of shares or other securities and property receivable by a holder of shares of common stock upon such reorganization, reclassification, consolidation, or merger in exchange for the number of shares that might have been purchased upon exercise of such Warrant, immediately prior to such reorganization, reclassification, consolidation or merger. 3.08. ANTI-DILUTION ADJUSTMENTS. (a) FULL RATCHET ANTI-DILUTION. Upon the occurrence of any issuance or sale of any Additional Stock (as defined below) without consideration or for a consideration per share less than the Exercise Price then in effect, as of the close of business on the date of such issuance or sale, the Exercise Price shall be adjusted to equal the price paid per share for such Additional Stock. (b) DEFINITION OF "ADDITIONAL STOCK". For purposes of this Section 3.08, "Additional Stock" shall mean any shares of common stock issued other than: (1) common stock issued pursuant to a transaction described in Sections 3.04 -- 3.07 hereof; (2) common stock issuable or issued to employees, consultants or directors of the Company directly or pursuant to a stock option plan or restricted stock plan approved by the Company's Board of Directors; 5
(3) capital stock, or warrants or options to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions; (4) capital stock issuable upon exercise or conversion of options, warrants, capital stock or other convertible securities outstanding or which the Company is obligated to issue as of the date hereof; and (5) capital stock, or warrants or options to purchase capital stock, issued in connection with bona fide acquisitions, mergers, joint venture agreements, distribution agreements, other strategic alliances, or similar transactions, the terms of which are approved by the Company's Board of Directors. (c) NO FRACTIONAL ADJUSTMENTS. No adjustment of the Exercise Price shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. (d) DETERMINATION OF CONSIDERATION. In the case of the issuance of common stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. In the case of the issuance of common stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Company's Board of Directors irrespective of any accounting treatment. 3.09. NOTICE TO HOLDER OF CERTAIN EVENTS. In the event the Company shall propose to take any action of the type described in Sections 3.04, 3.05, 3.06, 3.07, 3.08 or a Change of Control, the Company shall give notice to the Holder, which notice shall specify the record date, if any, with respect to any such action and the approximate date on which such action is to take place. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten (10) days prior to the date so fixed, and in case of all other action, such notice shall be given at least fifteen (15) days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action. 3.10. NO IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, issuance or sale of securities or otherwise, avoid or seek to avoid the observance or performance of any of the terms of this Article 3 or the other provisions of this Warrant and will at all times in good faith assist in the carrying out of all provisions hereof and in the taking of all actions as may be necessary in order to protect the rights of the Holder hereunder against impairment. ARTICLE 4. REGISTRATION RIGHTS. 6
The Company covenants and agrees as follows: 4.01. DEFINITIONS. For purposes of this Article 4: (a) The term "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (b) The term "HOLDER" means any person owning or having the right to acquire Registrable Securities or any assignee thereof to whom registration rights under this Warrant are assigned in accordance with Section 4.11 hereof. (c) The term "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (d) The term "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. (e) The term "REGISTRABLE SECURITIES" means (i) the Warrant Shares, and (ii) any common stock of the Company issued as a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in (i) above; provided, however, that the foregoing definition shall exclude in all cases any Registrable Securities sold by a person in a transaction in which his, her or its rights under this Warrant are not assigned. In addition, Warrant Shares or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, including sales made pursuant to Rule 144 promulgated under the Securities Act or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale. The number of shares of "Registrable Securities" outstanding shall be the sum of the number of shares of common stock outstanding that are Registrable Securities plus the number of shares of common stock issuable pursuant to then exercisable or convertible securities that are Registrable Securities. (f) The term "SEC" shall mean the Securities and Exchange Commission. 7
4.02 REQUEST FOR REGISTRATION. (a) Subject to the conditions of this Section 4.02, if the Company shall receive at any time after two (2) years after the date of this Warrant a written request from the Holder that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities with an anticipated aggregate offering price of at least $1,000,000 net of underwriter discounts and commissions, then the Company shall, subject to the limitations of this Section 4.02, use all reasonable efforts to file, within forty-five days, a registration statement under the Securities Act covering the Registrable Securities that the Holder requests to be registered, and to use reasonable efforts to cause such registration statement to become effective within one hundred twenty days of the Holder's request for registration. (b) If the Holder intends to distribute the Registrable Securities covered by the Holder's request by means of an underwriting, the Holder shall so advise the Company as a part of the request made pursuant to this Section 4.02. (c) The Company shall not be required to effect a registration pursuant to this Section 4.02: (1) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required under the Securities Act; (2) after the Company has effected one (1) registration pursuant to this Section 4.02, and such registrations have been declared or ordered effective; (3) during the period starting with the date sixty days prior to the Company's good faith estimate of the date of the filing of, and ending on a date one hundred eighty days following the effective date of, a Company-initiated registration subject to Section 4.03 below, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (4) if the Holder proposes to dispose of Registrable Securities that may be registered on Form S-3 pursuant to Section 4.04 hereof; or (5) if the Company shall furnish to the Holder requesting a registration statement pursuant to this Section 1.2, a certificate signed by the Company's Chief Executive Officer or Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred twenty days after receipt of the request of the Holder, provided that such right to delay a request shall be exercised by the Company not more than once in any twelve-month period. 1.3 COMPANY REGISTRATION. 8
(a) If the Company proposes to register (including for this purpose a registration initiated by the Company for shareholders other than the Holder) any of its stock or other securities under the Securities Act in connection with the public offering for cash of such securities (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration relating to a corporate reorganization or other transaction under Rule 145 of the Securities Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities, or a registration in which the only common stock being registered is common stock issuable upon conversion of debt securities that are also being registered), the Company shall, at such time, promptly give the Holder written notice of such registration. Upon the written request of the Holder given within twenty days after mailing of such notice by the Company, the Company shall use all reasonable efforts to cause to be registered under the Securities Act all of the Registrable Securities that the Holder has requested to be registered. (b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 4.03 prior to the effectiveness of such registration whether or not the Holder has elected to include securities in such registration. The expenses of such withdrawn registration shall be borne by the Company in accordance with Section 4.07 hereof. (c) UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under this Section 4.03 to include any of the Holder's securities in such underwriting unless the Holder accepts the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters) and enters into an underwriting agreement in customary form with an underwriter or underwriters selected by the Company, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, that the underwriters determine in their sole discretion will not jeopardize the success of the offering. 4.04 FORM S-3 REGISTRATION. In case the Company shall receive from the Holder a written request that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by the Holder, the Company shall use all reasonable efforts to effect, within forty-five days of the initial request for registration pursuant to Section 4.04, such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of the Holder's Registrable Securities as are specified in such request; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 4.04: 9
(1) if Form S-3 is not available for use by the Company with respect to such offering by the Holder; (2) if the Holder, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $500,000; (3) if the Company shall furnish to the Holder a certificate signed by the Chief Executive Officer or Chairman of the Board of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than one hundred twenty days after receipt of the request of the Holder under this Section 4.04; provided, however, that the Company shall not utilize this right more than once in any twelve month period; (4) if the Company has already effected one (1) registration on Form S-3 for the Holder pursuant to this Section 4.04; or (5) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. 4.05. OBLIGATIONS OF THE COMPANY. Whenever required under this Article 4 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holder, keep such registration statement effective for a period of up to one hundred twenty days or, if earlier, until the distribution contemplated in the Registration Statement has been completed; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) furnish to the Holder such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as the Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by the Holder; 10
(d) use reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holder, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering; (f) notify the Holder at any time when a prospectus relating thereto is required to be delivered under the Securities Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) cause all such Registrable Securities registered pursuant to this Warrant to be listed on each securities exchange on which similar securities issued by the Company are then listed; (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Warrant and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and (i) use its best efforts to furnish, at the request of the Holder, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Article 4, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (1) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holder and (2) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holder. 4.06 INFORMATION FROM HOLDER. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Article 4 with respect to the Registrable Securities of the Holder that the Holder shall furnish to the Company such information regarding the Holder, the Registrable Securities held by the Holder, and the intended method of disposition of such securities as shall be required to effect the registration of the Holder's Registrable Securities. 11
4.07 EXPENSES OF REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Sections 4.02, 4.03 and 4.04, including (without limitation) all registration, filing and qualification fees, printer's and accounting fees, fees and disbursements of counsel for the Company and fees and disbursements of one counsel for the Holder (subject to a maximum limit of $15,000 for registrations pursuant to Sections 4.02 and 4.03 and $10,000 for registrations pursuant to Section 4.04, shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 4.04 if the registration request is subsequently withdrawn at the request of the Holder (in which case the Holder shall bear all such expenses). 4.08 DELAY OF REGISTRATION. The Holder shall not have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Article 4. 4.09 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Article 4: (a) To the extent permitted by law, the Company will indemnify and hold harmless the Holder, legal counsel and accountants for the Holder, any underwriter (as defined in the Securities Act) for the Holder and each person, if any, who controls the underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or any state securities laws, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities laws or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities laws; and the Company will reimburse the Holder, underwriter or controlling person for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 4.09(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by the Holder, underwriter or controlling person. (b) To the extent permitted by law, the Holder will severally but not jointly indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the 12
meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter, any other shareholder selling securities in such registration statement and any controlling person of any such underwriter or other shareholder, against any losses, claims, damages or liabilities to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or any state securities laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by the Holder expressly for use in connection with such registration; and the Holder will reimburse any person intended to be indemnified pursuant to this Section 4.09(b), for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 4.09(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld), provided that in no event shall any indemnity under this Section 4.09(b) exceed the net proceeds from the offering received by the Holder. (c) Promptly after receipt by an indemnified party under this Section 4.09 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 4.09, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 4.09, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 4.09. (d) If the indemnification provided for in this Section 4.09 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations; provided, however, that the Holder will not be obligated to contribute more than the net proceeds received by the Holder from such offering. The relative fault of the 13
indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and the Holder under this Section 4.09 shall survive the completion of any offering of Registrable Securities in a registration statement under this Article 4, and otherwise. 4.10. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holder the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit the Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to the Holder, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing the Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration or pursuant to such form. 14
4.11. ASSIGNMENT OF REGISTRATION RIGHTS. Subject to Article 2, the rights to cause the Company to register Registrable Securities pursuant to this Article 4 may be assigned (but only with all related obligations) by the Holder to a transferee or assignee of such securities that after such assignment or transfer, holds all of the shares of Registrable Securities originally issued to the Holder (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Warrant, including without limitation the provisions of Section 4.12 below; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. 4.12 TERMINATION OF REGISTRATION RIGHTS. The Holder shall not be entitled to exercise any right provided for in this Article 4 after such time at which all Registrable Securities held by the Holder (and any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144 of the Securities Act. ARTICLE 5. MISCELLANEOUS PROVISIONS. 5.01. DEFINITIONS. As used herein, the following terms shall have the meanings ascribed below: (a) "Change of Control" means any of the following events: (i) consummation of any merger or consolidation of the Company in which the Company is not the continuing or surviving corporation, or pursuant to which shares of the Company's common stock are converted into cash, securities, or other property, if following such merger or consolidation the holders of the Company's outstanding voting securities immediately prior to such merger or consolidation own less than 50% of the outstanding voting securities of the surviving corporation; or (ii) a change in ownership of the Company's capital stock as a result of which the owners of the Company's outstanding capital stock immediately prior to the change own less than 50% of the Company's outstanding capital stock following such change. (b) "Issue Date" means September 30, 2002. 5.02. GOVERNING LAW; VENUE. This Warrant shall be governed by and construed in accordance with the laws of the State of Washington, and venue for any action taken in connection herewith or related hereto shall exclusively reside in King County, Washington. 5.03. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery; upon confirmed transmission by telecopy or telex; or three (3) business days after deposit with the United States Post Office, by first-class mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to the Company, at 8340 154th Avenue NE, Redmond, Washington 98052, to the attention of the President, or at such other address as the Company shall have furnished to the 15
Holder, and (b) if to the Holder at the last address shown on the books of the Company or its transfer agent maintained for the registry and transfer of the Warrant. 5.04. SUCCESSORS. All covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns. 5.05. BENEFITS OF THIS WARRANT. Nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or claim under this Warrant. This Warrant shall be for the sole and exclusive benefit of the Company and the Holder. 5.06. WAIVER AND AMENDMENT. Any provision of this Warrant may be amended, waived or modified upon the written consent of the Company and Holder. 16
This Warrant has been executed and delivered as of the date first above written. SCOLR, INC.
By /s/ David T. Howard -----------------------------David T. Howard Print Name Its President & CEO
AGREED AND ACKNOWLEDGED:
/s/ Clyde Berg ----------------------------------CLYDE BERG
SECURITY AGREEMENT This Security Agreement, dated as of September 30, 2002, is being entered into by SCOLR, Inc., a Delaware corporation (the "Company") for the benefit of Clyde Berg, an individual residing in the State of California, whose principal address is 10050 Bandley Drive, Cupertino, California 95014 (the "Lender"). RECITALS WHEREAS, the Lender has agreed to loan the Company funds in consideration of that certain Promissory Note, dated as of the date hereof, executed by the Company for the benefit of the Lender (the "Promissory Note"); and WHEREAS, the Company has previously granted a security interest in some or all of the Collateral (as defined below) to Access Business Finance LLC (the "Access Security Interest"), pursuant to that certain Loan and Security Agreement dated April 30, 2002, by and between the Company and Access Business Finance LLC. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements set forth below, and for other good and valuable consideration, the parties hereto agree as follows: AGREEMENT 1. GRANT OF COLLATERAL. As security for the payment and performance of (i) the obligations to pay principal of, interest on and all other obligations under the Promissory Note and (ii) all obligations of the Company under this Agreement (all of the foregoing in the preceding clauses (i) and (ii), collectively, the "Secured Obligations"), the Company hereby grants a security interest in favor of the Lender and the other holders from time to time of the Secured Obligations in all of the Company's right, title and interest in and to (but none of its obligations or liabilities with respect to) the items and types of property described below in this Section 1, whether now owned or hereafter acquired and whether mentioned once or more than once in the following description: Accounts, contract rights, leases, documents, instruments, inventory, equipment, all other goods, intellectual property rights (including, but not limited to: patents, copyrights, trademarks, tradenames, and domain names), goodwill, all other general intangibles, stock or other evidences of ownership, all other investment property, chattel paper, instruments, leases, cash, cash equivalents, deposit accounts, letter-of-credit rights, books, records, insurance proceeds, dividends, all other property, assets and items of value, all supporting obligations, and all proceeds and products of any and all of the foregoing (all of the above being included in the term "Collateral"). As used in this Agreement, the following terms shall have the respective meanings given such terms in the Uniform Commercial Code as adopted in the State of Washington as of the date hereof: accounts, documents, instruments, inventory, equipment, goods, general
intangibles, investment property, chattel paper, instruments, deposit accounts, letter-of-credit rights, supporting obligations and proceeds. 2. NO VIOLATION. Notwithstanding anything contained in this Agreement to the contrary, no security interest shall be granted in any item of Collateral to the extent that the terms of any agreement, including without limitation the documents and instruments governing the Access Security Interest, or the provisions of any law applicable thereto would prohibit the grant of such security interest or to the extent that the grant of such security interest would create a default under any such agreement or a violation of any such law (other than to the extent that any such term or provision would be rendered ineffective pursuant to Section 9-406, Section 9-407 or 9-408 of the Uniform Commercial Code). 3. PERFECTION OF COLLATERAL. Upon the Lender's reasonable request from time to time, the Company will execute and deliver, and file and record in the proper filing and recording places, all such instruments, and take all such other action as the Lender deems reasonably necessary for perfecting or otherwise confirming to the Lender his security interest in the Collateral. The Company hereby authorizes the Lender to file or record Uniform Commercial Code financing statements in all jurisdictions and with all filing offices as the Lender may deem necessary or advisable to perfect the security interest guaranteed to the Lender hereunder. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of the Collateral that describes the Collateral as "all assets" or "all personal property". 4. INSURANCE. The Company shall at all times maintain comprehensive casualty insurance on the physical Collateral against such risks, in such amounts, with such deductibles, and with such insurance companies as is typical in the industry in which the Company is engaged. All such policies shall name the Lender as a loss payee and provide that no such policy may be cancelled or materially amended without providing at least 10 days prior written notice to the Lender of the impending cancellation or amendment. All insurance proceeds shall be applied by the Company, if no Event of Default then exists, to either the repair or replacement of the damaged or destroyed Collateral (if such repair or replacement is practicable) or the payment of the Secured Obligations, provided, that, if an Event of Default exists, the Lender shall have the right to direct whether the insurance proceeds are applied to such repair or replacement or to such payment. 5. GENERAL. The Company hereby acknowledges that the Lender is relying on this Agreement in making the loans evidenced by the Promissory Note. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns but no assignment shall release the Company of its obligations hereunder. Notices shall be furnished in writing to each party at its address appearing below or as it may otherwise direct in a writing actually received by the other party. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof, and any invalid or unenforceable provision shall be modified so as to be enforceable to the maximum extent of its validity or enforceability. The headings in this Agreement are for convenience of reference only and shall not limit, alter or otherwise affect the meaning hereof. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior and current understandings and agreements, whether written or oral. This Agreement shall 2
be governed by and construed in accordance with the laws (other than the conflict of laws rules) of the State of Washington, except as may be required by the Uniform Commercial Code of other jurisdictions with respect to matters involving the perfection of the Lender's lien on the Collateral. Each of the undersigned has caused this Agreement to be executed and delivered as of the date first written above. SCOLR, INC.
/s/ David T. Howard ------------------------------------Name: David T. Howard Title: President and Chief Executive Officer By:
Address: 8340 154th Avenue NE Redmond, Washington 98052 Acknowledged and Agreed to: CLYDE BERG
/s/ Clyde Berg -----------------------------------------Address: 10050 Bandley Drive Cupertino, California 95014
EXHIBIT 10.2 LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT, is entered into as of April 30, 2002 by and between Nutraceutix, Inc., a Delaware Corporation ("Borrower"), with its principal place of business at 8340 154th Avenue N. E. Redmond, WA 98052-3864 and ACCESS BUSINESS FINANCE L.L.C ("Lender"), with its principal place of business at 14205 S.E. 36th Street, Suite 350, Bellevue, Washington 98006. RECITALS A. Borrower has requested that Lender provide financial accommodations to Borrower as more fully set forth herein and in the Loan Documents. B. Borrower has requested that Guarantor(s) guaranty the Obligations. C. This Agreement is entered into and will be performed in the State of Washington. NOW, THEREFORE, in consideration of the premises, and intending to be legally bound hereby, the Parties hereby agree as follows: AGREEMENT 1. CERTAIN DEFINITIONS AND INDEX TO DEFINITIONS. 1.1 ACCOUNTING TERMS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP consistently applied. 1.2 DEFINITIONS. All other terms contained in this Agreement which are not specifically defined herein shall have the meanings provided in the UCC to the extent the same are used herein. All references herein to the singular or plural shall also mean the plural or the singular, respectively. As used herein, the following terms shall have the following meanings: "ACCOUNT DEBTOR" - the obligor on an Account. "ACCOUNTING PERIOD" - see Section 7.1.2 hereof. "ACCOUNTS" - all currently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services by Borrower, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "ADVANCES" - see Section 2.1.1 hereof. "AGREEMENT" - this Loan and Security Agreement, together with all exhibits and schedules hereto, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. "ALLOWABLE AMOUNT" - the lesser of the Borrowing Base and the Maximum Amount. "ANNIVERSARY DATE" - the date which is one (1) year from the date of the first Credit Accommodation hereunder. "AUDIT FEE" -- The current hourly rate per examiner, plus travel expenses. "AVAILABILITY RESERVES" - as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Advances which would otherwise be available to Borrower hereunder:
(a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets, business or prospects of Borrower or any Obligor, or (iii) the security interest and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof); (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect; or 1
(c) in respect of any state of facts which Lender determined in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. "AVERAGE UNUSED PORTION OF MAXIMUM AMOUNT" - the Maximum Amount less the average Obligations that were outstanding during the immediately preceding month. "BALANCE SUBJECT TO INTEREST" - the unpaid balance of (a) Advances, (b) payments by Lender on account of Letters of Credit, and (c) other payments made by Lender arising hereunder for which Borrower is liable to Lender. "BORROWER" - see Preamble hereof. "BORROWER'S ACCOUNT" - any demand deposit account maintained by Borrower, or represented by an employee of Borrower to be maintained by Borrower, wherever located. "BORROWER'S BOOKS" - all of Borrower's books and records including ledgers, records indicating, summarizing, or evidencing Borrower's properties or assets or liabilities, all information relating to Borrower's business operations or financial condition, and all computer programs, disc or tape files, printouts, runs, or other computer prepared information, and the equipment containing such information. "BORROWER'S FEDERAL EMPLOYER IDENTIFICATION NUMBER 91-1689591. "BORROWING BASE" - the sum of: (a) Ninety (90%) percent of the Net Face Amount of Borrower's Eligible Accounts; plus
(b) the lesser of (1) N/A percent of the Value of Eligible Inventory,(2) $N/A or N/A percent of Eligible Accounts. "BORROWING BASE CERTIFICATE" - a request for an Advance,
in the form annexed hereto as Exhibit A. "BUSINESS DAY" - any day which is not a Saturday, Sunday, or other day on which national banks are authorized or required to be closed. "CLEARANCE DAYS" - Three (3) Business Days. "CLEARANCE DAY PAYMENTS" - payments received by Lender, in whatever form and from whatever source, except wire transfers, in reduction of the Obligations. "CLOSING DATE" - the date on which this Agreement is accepted by Lender. "COLLATERAL" - all of the following present and future assets of Borrower, together with all collateral now or hereafter described in any form UCC-1 filed against Borrower naming Lender as the secured party: (a) All Accounts, interests in goods represented by accounts, returned, reclaimed or repossessed goods with respect thereto and rights as an unpaid vendor; contract rights; chattel paper; general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names and applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, chooses in action and other claims, and existing and future leasehold interests in equipment, and fixtures); documents; instruments; letters of credit; deposit accounts; (b) All goods, including, but not limited to:
i) All Inventory; ii) All Equipment; iii) All consumer goods, farm products, crops growing or to be grown, timber to be cut,, minerals or the like (including, but not limited to, oil and gas), wherever located and of whatever kind, nature or description; (c) All real or other personal property in or upon which Lender has or may hereafter have a security interest, lien or right of setoff; (d) All Borrower's Books; (e) Any claim of Borrower on any policy of insurance, including claims for premium refund under any workmen's compensation policy, or claims under any business interruption or similar coverage; (f) All investment property; and (g) All products and proceeds of the foregoing, in whatever form and wherever located, including, but not limited to, all insurance proceeds, all claims against third parties for loss or destruction of or damage to any of the foregoing, and all income from the lease or rental of any of the foregoing. "COLLATERAL MANAGEMENT FEE" - waived. "CREDIT ACCOMMODATION" - any Advance or other extension of credit by Lender to or on behalf of Borrower hereunder or under any Evidence of Special Credit Accommodation. "DEFAULT RATE" - Fifteen (15%) percent per annum in excess of the Interest Rate. To the extent the Default Rate is calculated with reference to the Prime Rate, any change in the Default Rate shall be effective as of the date of any change in the Prime Rate. "DELINQUENT ACCOUNTS" - Accounts which remain uncollected for more than Ninety (90) days from invoice date. "EARLY TERMINATION PREMIUM" - the greater of: (a) the total interest for the immediately preceding three (3) months; or 2
(b) $12,000.00. "ELIGIBLE ACCOUNT" - an Account, excluding the following: (a) Delinquent Accounts; (b) Finance charges assessed by Borrower against past due Account Debtors. (c) Accounts due from an Account Debtor that has suffered a business failure or the termination of its existence, or as to which a dissolution, insolvency or bankruptcy proceeding has been commenced, any assignment for the benefit of creditors has been made, or a trustee, receiver or conservator has been appointed for all or any part of the assets of such Account Debtor; (d) Accounts due from an Account Debtor affiliated with Borrower in any manner, including, without limitation, as stockholder, owner, officer, director, agent or employee; (e) Accounts with respect to which payment is or may be conditional; (f) Accounts with respect to which the Account Debtor is not a resident or citizen of, located in, or subject to service of process in, the United States, and which are not either (i) covered by credit insurance in form and amount, and by an insurer, satisfactory to Lender, or (ii) supported by one or more letters of credit that are assignable by their terms and have been delivered to Lender in an amount, of a tenor, and issued by a financial institution, acceptable to Lender; (g) Accounts due from an Account Debtor who is any national, federal or state government, including, without limitation, any instrumentality, division, agency, body or department thereof, except where such account debtor has agreed to make payment directly to Lender; (h) Accounts commonly known as "bill and hold" or a similar arrangement; (i) Accounts due from an Account Debtor as to which Ten (10%) percent or more of the aggregate dollar amount of all outstanding Accounts owing from such Account Debtor are Delinquent Accounts; (j) That portion of Accounts due from an Account Debtor which is in excess of Ten (10%) percent of Borrower's aggregate dollar amount of all outstanding Accounts; (k) Accounts as to which Borrower is or may become liable to the Account Debtor for any reason (including contras and advance deposits from customers); (l) Accounts which are not free of all liens, encumbrances, charges, rights and interest of any kind, except in favor of Lender; (m) Accounts which are supported or represented by a promissory note, post-dated check or letter of credit unless such instrument is actually delivered to Lender; (n) Accounts with respect to which the Account Debtor is located in New Jersey, Minnesota, or any other state denying creditors access to its courts in the absence of a Notice of Business Activities Report or other similar filing, unless Borrower has either qualified as a foreign corporation authorized to transact business in such state or has filed a Notice of Business Activities Report or similar filing with the applicable state agency for the then current year; (o) Accounts that are payable in other than United States Dollars; (p) Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services. (q) Accounts which are unsuitable as collateral, as determined by Lender in the exercise of its reasonable sole discretion.
"ELIGIBLE INVENTORY" - Inventory of Borrower which is held for sale or lease in the ordinary course of Borrower's business which is: (a) ______________________________ (describe specific type of eligible inventory); (b) Inventory in which Lender has a first priority perfected security interest; (c) not subject to a security interest, lien or other encumbrance in favor of any other Person; (d) of good and merchantable quality free from defects; (e) owned and in the lawful possession of Borrower; (f) not owned by Borrower for more than N/A days; and (g) otherwise acceptable to Lender in its reasonable sole discretion. "EQUIPMENT" - all of Borrower's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, dies, jigs, goods (other than consumer goods, farm products, or Inventory), wherever located, and any interest of Borrower in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located. "EVENTS OF DEFAULT" - see Section 9 hereof. "EVIDENCE OF SPECIAL CREDIT ACCOMMODATION" - see Section 2.2 hereof. "GAAP" - means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and pronouncements of the Financial Accounting Standards Board (or any successor authority) that are applicable as of the date of determination. 3
"GUARANTOR(s)" - all entities now or hereafter guaranteeing the Obligations. "GUARANTY" - a continuing guaranty in form and substance acceptable to Lender by which a Guarantor guarantees the Obligations. "INTEREST RATE" - 8 percent per annum in excess of the Prime Rate; To the extent the Interest Rate is calculated with reference to the Prime Rate, any change in the Interest Rate shall be effective as of the date of any change in the Prime Rate. "INVENTORY" - all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, packing and shipping materials, wherever located, and any documents of title representing any of the above. "KEY EMPLOYEES" - David T. Howard and Steven H. Moger. "LENDING OFFICE" - Lender's office described in the Section below entitled "Notices". "LOAN DOCUMENTS" - this Agreement, together with any documents, instruments and agreements, executed or delivered in connection herewith, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. "LOAN FEE" - $11,000.00. "MAXIMUM AMOUNT" - $1,100,000.00. "MINIMUM MONTHLY CHARGE" - $4,000.00. "MISDIRECTED PAYMENT FEE" - 15% of the amount of any payment on an Account where said payment has been received by Borrower and not delivered in kind by Borrower to Lender within three (3) Business Days of receipt thereof. "MONETARY COLLATERAL" - cash, checks or other proceeds of Collateral in tangible form. "NEGOTIABLE COLLATERAL" - all of Borrower's present and future letters of credit, notes, drafts, instruments, certificated and uncertificated securities (including the shares of stock of subsidiaries of Borrower), documents, personal property leases (wherein Borrower is the lessor), chattel paper, and Borrower's Books relating to any of the foregoing. "NET FACE AMOUNT" - with respect to an Account, the gross face amount of such Account less all trade discounts or other deductions to which the Account Debtor is entitled. "OBLIGATED PARTY" - see Section 5.3.1 hereof. "OBLIGATIONS" - all present and future obligations owing by Borrower to Lender whether or not for the payment of money, whether or not evidenced by any note or other instrument, whether direct or indirect, absolute or contingent, due or to become due, joint or several, primary or secondary, liquidated or unliquidated, secured or unsecured, original or renewed or extended, whether arising before, during or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute, including, but not limited to any obligations arising pursuant to letters of credit or acceptance transactions or any other financial accommodations; and all principal, interest, fees, charges, expenses, attorneys' fees and accountants' fees chargeable to Borrower or incurred by Lender in connection with this Agreement and/or the transaction(s) related thereto. "OBLIGORS" - Borrower and all Guarantors. "PERMITTED LIENS" -
(a) liens and security interests held by Lender; (b) liens and security interests set forth on Exhibit B hereto; (c) mechanics', materialmen's, warehousemen's, or similar liens. "PRIME RATE" - the Prime Rate as reflected in The Wall Street Journal (Western Edition). If such rate is shown as a range, then the Prime Rate shall be the highest value in such range. "REQUIRED MINIMUM PERIOD" --one year from the date of this Agreement. "SPECIAL CREDIT ACCOMMODATION" - see Section 2.2 hereof. "SPECIAL CREDIT ACCOMMODATION FEE" - Two (2%) percent of the original amount of any Special Credit Accommodation. "STANDARD FEE SCHEDULE" - the schedule of Lender's standard fees for services. "SUBORDINATING CREDITOR" - N/A "SUBORDINATION AGREEMENT" - a subordination agreement in form and substance acceptable to Lender whereby a subordinating creditor subordinates in favor of Lender obligations owed to it by Borrower. "UNUSED LINE FEE" - waived. "UCC" - means the Uniform Commercial Code as in effect on the date hereof in the State of Washington as amended from time to time, and any successor statute. "VALUE OF ELIGIBLE INVENTORY" - shall mean, as determined by Lender in good faith, the lower of (a) cost, computed on a first-in-first-out basis in accordance with GAAP, or (b) market value. 4
2. CREDIT FACILITIES. 2.1 ADVANCES Subject to the terms and conditions of this Agreement, from the date on which this Agreement becomes effective: 2.1.1 Lender, shall, from time to time, at the request of Borrower, make advances ("Advances") to Borrower, less any Availability Reserves, so long as, before and after such Advance, the Obligations do not exceed the Allowable Amount. 2.1.2 Lender may, in its discretion, from time to time, upon not less than five (5) days prior notice to Borrower, reduce the Borrowing Base to the extent that Lender determines in good faith that: 126.96.36.199 the dilution with respect to the Accounts for any period (based on the ratio of (a) the aggregate amount of reductions in Accounts other than as a result of payments in cash to (b) the aggregate amount of total sales) has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels; 188.8.131.52 the general creditworthiness of Account Debtors has declined; or 184.108.40.206 the number of days of the turnover of the Inventory for any period has changed in any material respect, or (a) the liquidation value of the Eligible Inventory, or any category thereof, has decreased, or (b) the nature and quality of the Inventory has deteriorated. 220.127.116.11 In determining whether to reduce the Borrowing Base, Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts, Eligible Inventory or in establishing Availability Reserves. 2.2 SPECIAL CREDIT ACCOMMODATIONS. Lender may, in its sole and absolute discretion, from time to time, extend Credit Accommodations to Borrower in excess of the Allowable Amount (any Credit Accommodation extended to Borrower pursuant to this Section being a "Special Credit Accommodation"). Each Special Credit Accommodation shall be evidenced by a writing in form and substance satisfactory to Lender in its sole discretion (any such writing, an "Evidence of Special Credit Accommodation"). Notwithstanding the terms and provisions of any Evidence of Special Credit Accommodation, each Special Credit Accommodation shall be payable on demand. 2.3 GENERAL PROVISIONS. 2.3.1 BORROWING BASE CERTIFICATE. Each request from Borrower for a Credit Accommodation shall be accompanied by a Borrowing Base Certificate, completed and signed by Borrower. 2.3.2 CREDITING BORROWER'S ACCOUNT. All Credit Accommodations by Lender may be made by deposits or transfers to any demand deposit account of Borrower. 2.3.3 AUTHORIZATION FOR CREDIT ACCOMMODATIONS. Subject to the terms and conditions of this Agreement, Lender is authorized to make Credit Accommodations: 18.104.22.168 upon telephonic, facsimile or other instructions received from anyone purporting to be an officer, employee or representative of Borrower; or 22.214.171.124 at the sole discretion of Lender, and notwithstanding any other provision in this Agreement, if necessary to meet any Obligations, including but not limited to any interest not paid when due. 2.4 CONDITIONS OF LENDER'S OBLIGATIONS. All conditions of Lender's obligation to make Advances are imposed solely and exclusively for the benefit of Lender and may be freely waived or modified in whole or in part by Lender at any time. 2.5 LIMITATIONS ON CREDIT ACCOMMODATIONS. Notwithstanding anything to the contrary contained herein, Lender shall not be obligated to make a Credit Accommodation if, before or as a result thereof,
the Obligations shall exceed either the Borrowing Base or the Maximum Amount. 3. PAYMENTS BY BORROWER. 3.1 IN GENERAL. 3.1.1 PLACE OF PAYMENTS. All payments hereunder shall be made by Borrower to Lender at the Lending Office, or at such other place as Lender may designate in writing. 3.1.2 CREDITING OF PAYMENTS. 126.96.36.199 GENERALLY. No payments received by Lender purportedly in satisfaction of any of the Obligations shall constitute payment thereof unless and until final payment thereof. 188.8.131.52 PREPAYMENTS; APPLICATION OF PAYMENTS. Borrower shall have the right to make payments at any time in reduction of the Obligations, in whole or in part, provided, however, that Lender may apply any payments received to the Obligations, or portion thereof, in any manner and in any order as Lender may determine in its sole discretion, notwithstanding contrary instructions received. 5
184.108.40.206 ACH DEBITS. In order to satisfy any of the Obligations, Lender is hereby authorized by Borrower to initiate electronic debit or credit entries through the ACH system to Borrower's Account or any other deposit account maintained by Borrower wherever located. Borrower may only terminate this authorization by giving Lender thirty (30) days prior written notice of termination. 3.2 INTEREST AND FEES. 3.2.1 INTEREST. 220.127.116.11 BASIC INTEREST. Subject to Section 18.104.22.168 hereof, interest on the Balance Subject to Interest shall be payable monthly, in arrears, shall be computed at the Interest Rate, and shall be due on the first (1st) day of each month following the accrual thereof. Lender is authorized to debit Borrower's loan account on the first business day of each month for interest accrued hereunder on the Balance Subject to Interest during the preceding month at the Interest Rate. 22.214.171.124 DEFAULT INTEREST. Immediately upon the occurrence of an Event of Default, unless waived by Lender, Borrower shall pay to Lender, monthly until the first (1st) Anniversary Date on which all Obligations have been fully paid, the greater of: 126.96.36.199.1 interest, before, as well as after judgment, at the Default Rate; or 188.8.131.52.2 the greater of: 184.108.40.206.2.1 the monthly average of all interest and fees paid by Borrower to Lender hereunder for the preceding one-hundred eighty (180) days (or portion thereof if Obligations have not been outstanding for at least onehundred eighty (180) days); or 220.127.116.11.2.2 the Minimum Monthly Charge. 18.104.22.168 Lender's failure to assess interest at the Default Rate as provided hereunder shall not be deemed a waiver by Lender to charge such Default Rate. Lender reserves the right, and Borrower hereby acknowledges that Lender may, recalculate interest at the Default Rate. 22.214.171.124 CALCULATION OF INTEREST. All interest charged hereunder shall be computed on the basis of a three-hundred sixty (360) day year for the actual number of days elapsed. Notwithstanding anything to the contrary contained herein, any interest rate calculated hereunder shall be rounded up to the closest one-quarter of one (1/4 of 1%) percent, with no adjustments made for rate changes of less than one-quarter of one (1/4 of 1%) percent. 126.96.36.199 APPLICATION OF COLLECTIONS. Lender shall, for the purpose of the computation of interest due hereunder, add the Clearance Days to any Clearance Day Payments, which is acknowledged by the parties to constitute an integral aspect of the pricing of Lender's facility to Borrower, and shall apply irrespective of the characterization of whether receipts are owned by Borrower or Lender. Should any check or item of payment not be honored when presented for payment, then Borrower shall be deemed not to have made such payment, and interest shall be recalculated accordingly. 3.2.2 FEES. 188.8.131.52 LOAN FEE. Borrower shall pay the Loan Fee to Lender immediately upon the execution of this Agreement, and upon each renewal or extension of this Agreement by Lender whether such renewal or extension is for one (1) year or for less than one year. Any portion not paid when due shall accrue interest at the applicable interest rate set forth herein. 184.108.40.206 COLLATERAL MANAGEMENT FEE. Borrower shall pay the Collateral Management Fee to Lender monthly, in arrears, on the first (1st) day of each month following the accrual thereof. 220.127.116.11 UNUSED LINE FEE. Borrower shall pay the Unused Line Fee to Lender on the first (1st) day of each month during the term of this Agreement.
18.104.22.168 SPECIAL CREDIT ACCOMMODATION FEE. Borrower shall pay a Special Credit Accommodation Fee to Lender simultaneously with the making by Lender of a Special Credit Accommodation. 22.214.171.124 MINIMUM MONTHLY CHARGE. For any full month in which the sum of interest and the Collateral Management Fee earned by Lender is less than the Minimum Monthly Charge, Lender shall debit the difference to the Obligations as of the first day of the following month, until the date on which all Obligations have been fully repaid (whether or not this Agreement has heretofore been terminated). 126.96.36.199 MISDIRECTED PAYMENT FEE. Borrower shall pay the Misdirected Payment Fee to Lender immediately upon its accrual. 188.8.131.52 EARLY TERMINATION PREMIUM. If Borrower terminates this Agreement prior to the end of the Required Minimum Period, Borrower shall pay the Early Termination Premium to Lender on the effective date of such termination. The Early Termination Premium shall be presumed to be the amount of damages sustained by Lender as a result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. This premium will be waived if Borrower obtains financing from a commercial bank. 184.108.40.206 AUDIT FEE. Borrower shall pay an Audit Fee to Lender in connection with each audit Lender performs or causes to be performed pursuant to Section 220.127.116.11 hereof. 6
18.104.22.168 ADDITIONAL FEES. Borrower shall pay to Lender fees for such services as Lender customarily charges, as set forth in Lender's Standard Fee Schedule, a copy of which will be provided to Borrower on demand. Lender shall have the right to change all or any of such fees upon ten (10) days notice to Borrower. 4. GRANT OF SECURITY INTEREST. To secure the payment and performance in full of all of the Obligations, Borrower hereby grants to Lender a continuing security interest in the Collateral. 5. COLLECTION AND ADMINISTRATION OF ACCOUNTS. 5.1 COLLECTION. 5.1.1 MONETARY COLLATERAL. Unless Lender specifically consents in writing that Borrower may collect Monetary Collateral on behalf of and in trust for Lender, Borrower shall, at Borrower's expense and in the manner requested by Lender from time to time, direct that Monetary Collateral be (or, if received by Borrower, shall cause same to be): 22.214.171.124 sent to Lender or a post office box designated by or in the name of Lender, or in the name of Borrower, but as to which access is limited solely to Lender. or 126.96.36.199 deposited into a bank account maintained in the name of Lender, or a blocked bank account under arrangements with the depository bank under which all funds deposited to such blocked bank account are required to be transferred to Lender. In connection therewith, Borrower shall execute such post office box or blocked bank account agreements as Lender shall specify. 5.2 ELECTRONIC PROCEEDS OF COLLATERAL. In the event Borrower receives proceeds of Collateral in the form of a wire transfer or other intangible funds transfer mechanism, Borrower shall immediately pay such proceeds to Lender. 5.3 NOTIFICATIONS, ETC. Lender may, at any time, irrespective of whether an Event of Default has occurred, without notice to or the assent of Borrower: 5.3.1 notify any entity obligated with respect to any Monetary Collateral (an "Obligated Party"), by means of the letter attached hereto as Exhibit C, the form and substance of which Borrower hereby consents, that the underlying Monetary Collateral has been assigned to Lender by Borrower and that payment thereof is to be made to the order of and directly and solely to Lender; and 5.3.2 send, or cause to be sent by its designee, written or telephonic requests (which may identify the sender by a pseudonym) for verification of any Monetary Collateral directly to the appropriate Obligated Party or any bailee with respect thereto. At Lender's request, all invoices and statements sent to any Obligated Party or any bailee, shall state that the relevant Monetary Collateral has been assigned to Lender and that any payments in respect thereof are payable directly and solely to Lender. 5.4 LENDER'S POWERS. Borrower hereby authorizes Lender and any designee of Lender, at Borrower's sole expense, to exercise at any time in Lender's or such designee's discretion, all or any of the following powers, which powers are irrevocable until all of the Obligations have been paid in full: 5.4.1 receive, take, endorse, negotiate, assign, deliver, accept and deposit, in the name of Lender or Borrower, any and all cash, checks, commercial paper, letters of credit, drafts, remittances and other instruments and documents relating to the Collateral or the proceeds thereof; 5.4.2 to accept, indorse and deposit on behalf of Borrower any checks tendered by an Account Debtor "in full payment" of its obligation to Borrower. Borrower shall not assert against Lender any claim arising therefrom, irrespective of whether such action by Lender effects an accord and satisfaction of Borrower's claims, under Section 3-311 of the Uniform Commercial Code, or otherwise; 5.4.3 take or bring, in the name of Lender or Borrower, all steps, actions, suits or proceedings deemed by Lender necessary or desirable to effect collection of or other realization upon any Collateral;
5.4.4 after an Event of Default, change the address for delivery of mail to Borrower and to receive and open mail addressed to Borrower; 5.4.5 after an Event of Default, upon any terms and conditions, extend the time of payment of, compromise, or settle for cash, credit, return of merchandise, any and all Monetary Collateral and discharge or release any Obligated Party without affecting any of the Obligations; 5.4.6 execute in the name of Borrower and file against Borrower in favor of Lender financing statements or amendments with respect to any or all of the Collateral; execute in the name of Borrower and file on behalf of Borrower with such governmental authorities as are appropriate such documents (including, without limitation, applications, certificates, and tax returns) as may be required for purposes of having Borrower qualified to transact business in a particular state or geographic location; and 5.5 pay any sums necessary to discharge any lien or encumbrance which is senior to Lender's security interest in the Collateral, which sums shall be included as Obligations hereunder, and which sums shall accrue interest at the Default Rate until paid in full. 7
5.6 RELEASE. Borrower hereby releases and exculpates Lender, its officers, employees, agents, designees, attorneys, and accountants from any liability arising from any acts under this Agreement or in furtherance thereof, whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact, except for gross negligence or willful misconduct. In no event shall Lender have any liability to Borrower for lost profits or other special or consequential damages. 5.7 NO AMENDMENTS. After written notice by Lender to Borrower, and automatically, without notice, after an Event of Default, Borrower shall not, without the prior written consent of Lender in each instance: 5.7.1 grant any extension of time for payment of any Monetary Collateral; 5.7.2 compromise or settle any Monetary Collateral for less than the full amount thereof; 5.7.3 release in whole or in part any Obligated Party; or 5.7.4 grant any credits, discounts, allowances, deductions, return authorizations or the like with respect to any Monetary Collateral. 5.8 DELIVERY OF COLLATERAL. At such times as Lender may request and in the manner specified by Lender, Borrower shall deliver to Lender or Lender's representative original invoices, agreements, proof of rendition of services and delivery of goods and other documents evidencing or relating to the transactions which gave rise to any of the Collateral, together with customer statements, schedules describing the Monetary Collateral or statements of account and confirmatory assignments to Lender of the Monetary Collateral, in form and substance satisfactory to Lender, and duly executed by Borrower. Without limiting the provisions of any other section of this Agreement, Borrower will promptly notify Lender, in writing, of Borrower's granting of credits, discounts, allowances, deductions, return authorizations or the like with respect to any Monetary Collateral. In no event shall any such schedule or confirmatory assignment (or the absence thereof or omission of any Monetary Collateral therefrom) limit or in any way be construed as a waiver, limitation, or modification of the Liens or rights of Lender or the warranties, representations, and covenants of Borrower under this Agreement. In addition, in the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower shall, immediately upon written request therefor from Lender, endorse and assign such Negotiable Collateral over to Lender and deliver actual physical possession of the Negotiable Collateral to Lender. 5.9 CONDITIONS PRECEDENT TO ALL ADVANCES. Subject to the other terms and conditions contained herein, Lender's obligation to make any Credit Accommodation available to Borrower is subject to the satisfaction of, or waiver of, immediately prior to or concurrently with the making of such Credit Accommodation, the following conditions precedent: 5.9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in the Loan Documents shall be true and correct in all respects on and as of the date of such Advance. 5.9.2 NO EVENT OF DEFAULT. No Event of Default or event which, with the giving of notice or passage of time would constitute an Event of Default, shall have occurred and be continuing on the date of such Advance. 5.9.3 PAYMENT OF ALL FEES. Borrower shall have paid to Lender all accrued and unpaid fees and other amounts due and payable hereunder and pursuant to the terms hereof. 5.9.4 NO INJUNCTIONS, ETC. No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the making of such Advance shall have been issued and remain in force by any governmental authority against Borrower or Lender. 6. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as follows, the truth and accuracy of which, and compliance with which, shall be continuing conditions of the making of any Credit Accommodations: 6.1 PRIORITY INTEREST. Borrower has good and indefeasible title to the Collateral, free and clear of liens, claims, security interests, or encumbrances, except for Permitted Liens.
6.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are and will remain bona fide existing obligations created by the sale and delivery of Inventory or the rendition of services to Account Debtors in the ordinary course of Borrower's business, unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. At the time of the creation of an Eligible Account Borrower has not received notice of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any applicable Account Debtor regarding such Eligible Account. 6.3 LOCATION OF COLLATERAL. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Lender's prior written consent) and are located only at the locations identified on Exhibit D hereto. 6.4 ACCURATE RECORDS. Borrower now keeps, and hereafter at all times shall keep, correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Inventory, and Borrower's cost therefor. 6.5 CHIEF EXECUTIVE OFFICE. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement. 6.6 BORROWER'S FEDERAL EMPLOYER IDENTIFICATION NUMBER. Borrower's Federal Employer Identification Number is as set forth in Section 1.2 hereof. 6.7 NO ACTIONS, ETC. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower or any Guarantor of the Obligations, except for ongoing collection matters in which Borrower is the plaintiff. 8
6.8 FINANCIAL STATEMENTS. All financial statements relating to Borrower or any Guarantor of the Obligations that have been delivered by Borrower to Lender have been prepared in accordance with GAAP and fairly present Borrower's (or such Guarantor's, as applicable) financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a material adverse change in the financial condition of Borrower (or such Guarantor, as applicable) since the date of the latest financial statements submitted to Lender on or before the Closing Date. 7. AFFIRMATIVE COVENANTS. Until full payment of the Obligations and termination of this Agreement, Borrower shall: 7.1 FINANCIAL STATEMENTS, REPORTS AND CERTIFICATIONS. Furnish to Lender, in form and substance satisfactory to Lender: 7.1.1 ANNUAL FINANCIAL STATEMENTS. As soon as possible after the end of each fiscal year of Borrower, and in any event within Ninety (90) days thereafter: 188.8.131.52 a complete copy of Borrower's financial statements, including but not limited to (a) the management letter, if any, (b) the balance sheet as of the close of the fiscal year, and (c) the income statement for such year, together with a statement of cash flows, Audited by a firm of independent certified public accountants of recognized standing and acceptable to Lender; or if permitted by Lender in writing, by Borrower; and 184.108.40.206 a statement certified by the chief financial officer of Borrower that Borrower is in compliance with all the terms, conditions, covenants and warranties of this Agreement. 7.1.2 OTHER FINANCIAL STATEMENTS. No later than Thirty (30) days after the close of each month (an "Accounting Period"), Borrower's balance sheet as of the close of such Accounting Period and its income statement for that portion of the then current fiscal year through the end of such Accounting Period certified by Borrower's chief financial officer as being complete, correct, and fairly representing its financial condition and results of operations. 7.1.3 TAX RETURNS. Copies of each of Borrower's federal income tax returns, and any amendments thereto, within Fifteen (15) days of the filing thereof with the Internal Revenue Service. 7.1.4 INVENTORY REPORTS. A listing of all Borrower's Inventory, and any other Collateral specified by Borrower, wherever located, based upon a physical count taken by Borrower every N/A months and whenever requested by Lender. 7.2 INSPECTIONS. 7.2.1 Permit Lender or any representatives thereof, during usual business hours, without notice to Borrower, to periodically: 220.127.116.11 have access to all premises where Collateral is located for the purposes of inspecting (and removing, if after the occurrence of an Event of Default) any of the Collateral, including Borrower's books and records; and 18.104.22.168 permit Lender or its designees to inspect, audit, make copies of, and make extracts from Borrower's Books as Lender may request. 7.2.2 Without expense to Lender, Lender may use any of Borrower's personnel, equipment, including computer equipment, programs, printed output and computer readable media, supplies and premises for the collection of accounts and realization on other Collateral as lender, in its sole discretion, deems appropriate. 7.2.3 Borrower hereby irrevocably authorizes all accountants and third parties, in the form attached hereto as Exhibit E, to disclose and deliver to Lender at Borrower's expense, all financial information, books and records, work papers, management reports and other information in their possession relating to Borrower. In addition to the foregoing, Borrower hereby permits Lender at any time to access electronically information concerning any accounts maintained by Borrower with any bank or other financial institution so long as such access is in furtherance of, or to monitor compliance with, the terms of this Agreement.
7.3 EXPENSES. 7.3.1 GENERALLY. Pay all reasonable out-of-pocket expenses of Lender (including, but not limited to, fees and disbursements of Lender's counsel) incident to (whether by judicial proceedings or otherwise, and whether any resulting dispute resolution procedure involving tort, contract or other claims): 22.214.171.124 the preparation, negotiation, execution, administration and enforcement of the Loan Documents, any amendments, extensions and renewals thereof, and any other documents prepared in connection with any transactions between Borrower and Lender, whether or not executed; 126.96.36.199 any expenses incurred by Lender (whether or not for the benefit of Borrower) under this Agreement, including, without limitation, all expenses for postage relating to the mailing of statements, invoices, and verifications, and all expenses relating to any audits of all or any portion of the Collateral; 188.8.131.52 the protection of Lender's rights under the Loan Documents; 184.108.40.206 defending against any and all claims against Lender relating to any of its acts of commission or omission directly or indirectly relating to the Loan Documents; 9
220.127.116.11 or in any way arising out of a bankruptcy proceeding commenced by or against Borrower, including but not limited to expenses incurred in enforcing or defending Lender's claims against Borrower or the Collateral, defending any avoidance actions, and expenses related to the administration of said proceeding. 7.3.2 INDEMNIFICATION. Indemnify and save Lender harmless from any and all liability with respect to any stamp or other taxes (other than transfer or income taxes) which may be determined to be payable in connection with the execution of the Loan Documents or any action of Lender with respect to the Collateral, including, without limitation, the transfer of the Collateral to Lender's name or that of Lender's nominee or any purchaser at a foreclosure sale. 7.4 COSTS AND EXPENSES - ENFORCEMENT OF JUDGMENTS. Reimburse Lender for all costs and expenses, including attorneys' fees, which Lender incurs in enforcing any judgment rendered in connection with this Agreement. This provision is severable from all other provisions hereof and shall survive, and not be deemed merged into, such judgment. 7.5 TAXES AND EXPENSES REGARDING BORROWER'S ASSETS. 7.5.1 Make timely payment or deposit of all taxes, assessments or contributions required of Borrower. If Borrower fails to make any such payment or deposit or furnish proof of such payment immediately upon Lender's request, Lender may, in its sole discretion and without notice to Borrower: 18.104.22.168 make payment of the same or any part thereof; or 22.214.171.124 set up such reserves against the Obligations as Lender deems necessary to satisfy the liability therefore, or both. 7.5.2 Lender may conclusively rely on statements of the amount owing or other official statements issued by the appropriate governmental agency. Any payment made by Lender shall constitute neither: 126.96.36.199 an agreement by Lender to make similar payments in the future; nor 188.8.131.52 a waiver by Lender of any default under the Loan Documents. Lender need not inquire into, nor contest the validity of, any expense, tax, security interest, encumbrance or lien, and the receipt of the usual official notice requiring the payment thereof shall be conclusive evidence that the same was validly due and owing. 7.6 LOCATION OF COLLATERAL. Give Lender written notice immediately upon forming an intention to change the location of its chief place of business or any of the Collateral. 7.7 CHANGE IN NAME. Give Lender written notice immediately upon forming an intention to change its name, or form of business organization, or merge with another entity. 7.8 INSURANCE. At all times maintain, with financially sound and reputable insurers, casualty insurance with respect to the Collateral and other assets. All such insurance policies shall be in such form, substance, amounts and coverage as may be satisfactory to Lender and shall provide for thirty (30) days prior written notice to Lender of cancellation or reduction of coverage. Borrower hereby irrevocably authorizes Lender and any designee of Lender to obtain at Borrower's expense, and, after an Event of Default, to adjust or settle any claim or other matter under or arising pursuant to such insurance or to amend or cancel such insurance. Borrower shall deliver to Lender evidence of such insurance and a Lender's loss payable endorsement naming Lender as loss payee as to all existing and future insurance policies relating to the Collateral. Borrower shall deliver to Lender, in kind, all instruments representing proceeds of insurance received by Borrower. Lender may apply any and all insurance proceeds received at any time to the cost of repairs to or replacement of any portion of the Collateral or, at Lender's option, to the payment of or as security for any of the Obligations, whether or not due, in any order or manner as Lender determines. 8. NEGATIVE COVENANTS. Until full payment of the Obligations and termination of this Agreement, Borrower will not: 8.1 LIENS AND ENCUMBRANCES. Create, incur, assume, or permit to exist, directly or indirectly, any lien
on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens. 8.2 MERGERS, ETC. Enter into any acquisition, merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business, property, or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or substantially all of the properties, assets, stock, or other evidence of beneficial ownership of any entity. 8.3 TRANSFER OF ASSETS. Enter into any transaction not in the ordinary and usual course of Borrower's business, including the sale, lease, or other disposition of, moving, relocation, or transfer, whether by sale or otherwise, of any of Borrower's properties, assets (other than sales of Inventory to buyers in the ordinary course of Borrower's business as currently conducted). 8.4 CHANGE OF NAME. Change Borrower's name, Federal Employer Identification Number, business structure, or identity, or add any new fictitious name. 8.5 SUSPENSION OF BUSINESS. Suspend or go out of a substantial portion of its business. 10
8.6 CHIEF EXECUTIVE OFFICE. Without thirty (30) days prior written notification to Lender, relocate its chief executive office to a new location and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Lender's security interests and also provides to Lender a landlord's waiver in form and substance satisfactory to Lender. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent. 8.7 FINANCIAL COVENANTS. 8.7.1 TANGIBLE NET WORTH. Permit its tangible net worth at any time to be less than N/A; or 8.7.2 DEBT-TO WORTH RATIO. Permit the ratio of its aggregate debt to tangible net worth at any time to be greater than N/A. 9. EVENTS OF DEFAULT. Each of the following events or conditions shall constitute an "Event of Default": 9.1 Borrower defaults in the payment or performance of any Obligations when due, whether at maturity, upon acceleration, or otherwise; 9.2 Borrower is in default with respect to the Loan Documents; 9.3 The Obligations at any time exceed the Allowable Amount; 9.4 Borrower or any Guarantor fails to pay any indebtedness for borrowed funds when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) or fails to perform or observe any term, covenant, or condition of any agreement relating to any such indebtedness, if the effect of such failure to perform or observe is the acceleration of the maturity of such indebtedness, whether or not such failure is waived by the obligee of such indebtedness; or any such indebtedness is declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; 9.5 An order for relief is entered against any Obligor by any United States Bankruptcy Court; or any Obligor does not generally pay its debts as they become due (within the meaning of 11 U.S.C. 303(h) as at any time amended, or any successor statute thereto); or any Obligor makes an assignment for the benefit of creditors; or any Obligor applies for or consents to the appointment of a custodian, receiver, trustee, or similar officer for it or for all or any substantial part of its assets, or such custodian, receiver, trustee, or similar officer is appointed without the application or consent of any Obligor; or any Obligor institutes (by petition, application, answer, consent, or otherwise) any bankruptcy, insolvency, reorganization, moratorium, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application, or otherwise) against any Obligor; or any judgment, writ, warrant of attachment, execution, or similar process shall be issued or levied against a substantial portion of the property of any Obligor; 9.6 An adverse change occurs with respect to the financial condition or operations of Borrower which results in a material impairment of the prospect of repayment of the Obligations; 9.7 A sale, hypothecation, assignment or other disposition is made of twenty (20%) percent or more of the beneficial interest in any class of voting stock of Borrower; 9.8 Any Guarantor fails to perform or observe any of such Guarantor's obligations under any Guaranty, or shall notify Lender of its intention to rescind, modify, terminate or revoke the Guaranty with respect to future transactions, or the Guaranty shall cease to be in full force and effect for any reason whatever; 9.9 Any Subordinating Creditor fails to perform or observe any of such Subordinating Creditor's obligations under any Subordination Agreement, or notifies Lender of the Subordinating Creditor's intention to rescind, modify, terminate or revoke the Subordination Agreement with respect to future transactions, or the Subordination Agreement ceases to be in full force and effect for nay reason whatsoever; 9.10 Any of the Key Employees fails to devote one hundred (100%) percent of their efforts in furtherance of the
business affairs of Borrower for any one month, or ceases to be employed by Borrower; or 9.11 Any provision of this Agreement or any of the Loan Documents ceases, for any reason, to be valid and binding on Borrower. 9.12 A court determines Borrower does not have rights in any of the Collateral. 10. REMEDIES. 10.1 Upon the occurrence of any Event of Default (other than an Event of Default arising under Section 9.5 hereof), at Lender's option: 10.1.1 Lender may declare this Agreement and all of Lender's obligations hereunder terminated; 10.1.2 Lender may declare all Obligations to be immediately due and payable, without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by Borrower; 11
10.1.3 all Obligations shall accrue interest at the Default Rate; and 10.1.4 Lender may, immediately and without expiration of any period of grace, enforce payment of all Obligations and exercise any and all other remedies granted to it under the Loan Documents, at law, in equity, or otherwise. 10.1.5 Lender may further develop, modify, sell or assign all or any portion of the Collateral hereunder. 10.2 Upon the occurrence of an Event of Default arising under Section 9.5 hereof: 10.2.1 all Lender's obligations hereunder shall automatically terminate; 10.2.2 all Obligations to be immediately due and payable, without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by Borrower; 10.2.3 all Obligations shall accrue interest at the Default Rate; and 10.2.4 Lender may, immediately and without expiration of any period of grace, enforce payment of all Obligations and exercise any and all other remedies granted to it under the Loan Documents, at law, in equity, or otherwise. 10.3 BORROWER WAIVES ANY REQUIREMENTS THAT LENDER INFORM BORROWER BY AFFIRMATIVE ACT OR OTHERWISE OF ANY ACCELERATION OF BORROWER'S OBLIGATIONS HEREUNDER. FURTHER, LENDER'S FAILURE TO CHARGE OR ACCRUE INTEREST OR FEES AT ANY "DEFAULT" OR "PAST DUE" RATE SHALL NOT BE DEEMED A WAIVER BY LENDER OF ITS CLAIM THERETO. 11. TERMINATION. 11.1 This Agreement shall become effective upon the execution and delivery hereof by Borrower and Lender and shall continue in full force and effect for one (1) year from the date hereof, and shall be further annually extended automatically unless Borrower gives Lender written notice of its intention to terminate at least sixty (60) days prior to each such anniversary, or Lender gives the Borrower at least ten (10) days notice prior to each anniversary, whereupon this Agreement shall terminate on said anniversary. 11.2 Upon the effective date of termination of this Agreement, the unpaid balance of the Obligations shall be due and payable without demand or notice. 12. REVOCATION OF BORROWER'S RIGHT TO SELL INVENTORY FREE AND CLEAR OF LENDER'S SECURITY INTEREST. Lender may, upon the occurrence of an Event of Default, revoke Borrower's right to sell Inventory free and clear of Lender's security interest therein. 13. NO LIEN TERMINATION WITHOUT RELEASE. In recognition of Lender's right to have all its attorneys' fees and other expenses incurred in connection with this Agreement secured by the Collateral, notwithstanding payment in full of all Obligations by Borrower, Lender shall not be required to record any terminations or satisfactions of any of its liens on the Collateral unless and until Borrower and all Guarantors have executed and delivered to Lender general releases in a form reasonably acceptable to Lender. Borrower understands that this provision constitutes a waiver of its rights under Section 9-404 of the UCC. 14. DISCLAIMER FOR NEGLIGENCE. Lender shall not be liable for any claims, demands, losses or damages made, claimed or suffered by Borrower, except such as may arise through or could be caused by Lender's gross negligence or willful misconduct. 15. LIMITATION OF CONSEQUENTIAL DAMAGE. Lender shall not be responsible for any lost profits of Borrower arising from any breach of contract, tort (excluding the Lender's gross negligence or willful misconduct), or any other wrong arising from the establishment, administration or collection of the Obligations. 16. ACCOUNT STATED. Lender shall render to Borrower a statement setting forth the transactions arising
hereunder. Each statement shall be considered correct and binding upon Borrower, absent manifest error, as an account stated, except to the extent that Lender receives, within thirty (30) days after the mailing of such statement, written notice from Borrower of any specific exceptions by Borrower to that statement. 17. RETENTION OF RECORDS. Lender shall retain any documents, schedules, invoices or other papers delivered by Borrower only for such period as Lender, at its sole discretion, may determine necessary, after which time Lender may destroy such records without notice to or consent from Borrower. 12
18. NOTICES TO THIRD PARTIES. Lender shall have the right at any time to give any Guarantor or Subordinating Creditor notice of any fact or event relating to this Agreement, as Lender may deem necessary or desirable in Lender's sole discretion, including, without limitation, Borrower's financial condition. Borrower shall provide to each Guarantor and Subordinating Creditor a copy of each notice, statement or report required to be given to Lender under any of the paragraphs of this section. 19. INFORMATION TO PARTICIPANTS. Lender may furnish any financial or other information concerning Borrower, or any of its subsidiaries, heretofore or hereafter provided by Borrower to Lender, pursuant to this Agreement or otherwise, to any prospective or actual purchaser of any participation or other interest in any loans made by Lender to Borrower (whether under this Agreement or otherwise), or to any prospective purchaser of any securities issued or to be issued by Lender. 20. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding among and between the parties hereto, and supersedes all prior or contemporaneous agreements and understandings between said parties, verbal or written, express or implied, relating to the subject matter hereof. No promises of any kind have been made by Lender or any third party to induce Borrower to execute this Agreement. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Agreement. 21. MISCELLANEOUS. 21.1 NOTICES. 21.1.1 All notices required to be given to any entity other than Lender shall be deemed given upon the first to occur of: 184.108.40.206 deposit thereof in a receptacle under the control of the United States Postal Service; 220.127.116.11 transmittal by electronic means to a receiver under the control of such entity; or 18.104.22.168 actual receipt by such party or an employee or agent of such entity. 21.1.2 All notices required to be given to Lender hereunder shall be deemed given upon actual receipt by a responsible officer of Lender. For the purposes hereof, notices hereunder shall be sent to the following addresses, or to such other addresses as each such entity may in writing hereafter indicate: BORROWER
Nutraceutix, Inc. ADDRESS: 8340 154th Avenue N. E. Redmond, WA 98052-3864
Telephone Number: (425) 883-9518 Telefacsimile Number: (425) 869-1020 Attention: Steven Moger
14205 S.E. 36th Street, Suite 350 Bellevue, Washington 98006 Telephone Number: (425) 747-9090 Telefacsimile Number: (425) 747-1404 Attention: Mr. Thomas E. Cleveland
21.2 SURVIVAL. All representations, warranties and agreements herein
contained shall be effective so long as any portion of this Agreement remains executory. 21.3 AMENDMENT AND WAIVER. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated, nor may any consent to the departure from the terms hereof be given, orally (even if supported by new consideration), but only by an instrument in writing signed by all parties to this Agreement. Any waiver or consent so given shall be effective only in the specific instance and for the specific purpose for which given. 13
21.4 NO WAIVER. No failure to exercise and no delay in exercising any right, power, or remedy hereunder shall impair any right, power, or remedy which Lender may have, nor shall any such delay be construed to be a waiver of any of such rights, powers, or remedies, or any acquiescence in any breach or default hereunder; nor shall any waiver by Lender of any breach or default by Borrower hereunder be deemed a waiver of any default or breach subsequently occurring. All rights and remedies granted to Lender hereunder shall remain in full force and effect notwithstanding any single or partial exercise of, or any discontinuance of action begun to enforce, any such right or remedy. The rights and remedies specified herein are cumulative and not exclusive of each other or of any rights or remedies which Lender would otherwise have. Any waiver, permit, consent or approval by Lender of any breach or default hereunder must be in writing and shall be effective only to the extent set forth in such writing and only as to that specific instance. 21.5 CHOICE OF LAW. This Agreement and all transactions contemplated hereunder and/or evidenced hereby shall be governed by, construed under, and enforced in accordance with the internal laws of the State of Washington. 21.6 WAIVER OF STATUTE OF LIMITATIONS. Borrower waives the pleading of any statute of limitations with respect to any and all actions in connection herewith. To the extent that Borrower may now or in the future have any claim against Lender, arising out of this Agreement or the transaction contemplated herein whether in contract or tort or otherwise, Borrower must assert such claim within one year of it accruing. Failure to assert such claim within one year shall constitute a waiver thereof. Borrower agrees that such period is reasonable and sufficient for it to investigate and act upon the claim. This Section shall survive any termination of this Agreement. A copy of the waiver may be filed as a written consent in any judicial proceeding. 21.7 VENUE. The parties agree that any suit, action or proceeding arising out of the subject matter hereof, or the interpretation, performance or breach of this Agreement, shall, if Lender so elects, be instituted in the United States District Court for the Western District of Washington or any court of the State of Washington located in King County (the "Acceptable Forums"), each party agrees that the Acceptable Forums are convenient to it, and each party irrevocably submits to the jurisdiction of the Acceptable Forums, irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement, and waives any and all objections to jurisdiction or venue that it may have under the laws of the State of Washington or otherwise in those courts in any such suit, action or proceeding. Should such proceeding be initiated in any other forum, Borrower waives any right to oppose any motion or application made by Lender as a consequence of such proceeding having been commenced in a forum other than an Acceptable Forum. 21.8 WAIVER OF TRIAL BY JURY. IN RECOGNITION OF THE HIGHER COSTS AND DELAY WHICH MAY RESULT FROM A JURY TRIAL, THE PARTIES HERETO WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING HEREUNDER, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY FURTHER WAIVES ANY RIGHT TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 21.9 COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if all signatures were upon the same instrument. Delivery of an executed counterpart of the signature page to this Agreement by telefacsimile shall be effective as delivery of a manually executed counterpart of this Agreement, and any party delivering such an executed counterpart of the signature page to this Agreement by telefacsimile to any other party shall thereafter also promptly deliver a manually executed counterpart of this Agreement to such other party, provided that the failure to deliver such manually executed counterpart shall not affect the validity, enforceability, or binding effect of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
By: --------------------------------Name: --------------------------------Title: ---------------------------------
ACCESS BUSINESS FINANCE, LLC
By: --------------------------------Name: --------------------------------Title: ---------------------------------
EXHIBIT 11.1 COMPUTATION OF EARNINGS (LOSS) PER SHARE
THREE MONTHS ENDED September 30, ------------------------------2002 2001 ----------------------BASIC AND FULLY DILUTED: Average shares outstanding Effect of potentially issuable common stock Effect of shares over market 20,775,608 17,803,289 20,062,652 17,803,28 NINE MONTHS ENDED September 30, -----------------------------2002 2001 ----------------------
-------------20,775,608 ============ $ (522,495) ============
3,268,779 (2,944,106) -----------18,127,962 ============ $ 257,134 ============
-------------20,062,652 ============ $ (1,663,738) ============
3,268,77 (2,944,10 ----------18,127,96 =========== $ 20,25 ===========
Net earnings (loss)
Basic and fully diluted net earnings (loss) per share
$ (0.03) ============
$ 0.01 ============
$ (0.08) ============
$ 0.0 ===========
EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of SCOLR, Inc., a Washington corporation (the "Company"), does hereby certify that: The Quarterly Report on Form 10-QSB for the quarter ended September 30, 2002 (the "Form 10-QSB") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 14, 2002 /s/ David T. Howard -------------------------------David T. Howard Chief Executive Officer
EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of SCOLR, Inc., a Washington corporation (the "Company"), does hereby certify that: The Quarterly Report on Form 10-QSB for the quarter ended September 30, 2002 (the "Form 10-QSB") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 14, 2002 /s/ Steven H. Moger ------------------------------Steven H. Moger Chief Financial Officer