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Forbearance Agreement

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Sectors: Biotechnology / Pharmaceuticals
Governing Law: Illinois, View Illinois State Laws
Effective Date: July 12, 2001
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FORBEARANCE AGREEMENT


THIS FORBEARANCE AGREEMENT dated as of July 12, 2001, by and among AKORN, INC., a Louisiana corporation ("Akorn"), AKORN (NEW JERSEY), INC., an Illinois corporation "Akorn NJ") (Akorn and Akorn NJ being sometimes referred to herein individually as a "Borrower" and collectively as the "Borrowers"), and THE NORTHERN TRUST COMPANY, an Illinois banking corporation (the "Lender");


W I T N E S S E T H:
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WHEREAS, the following documents (collectively, the "Documents") were heretofore entered into by the parties indicated:


(i) Amended and Restated Credit Agreement dated as of September 15,
1999, among the Borrowers and the Lender (which, as amended by the
documents referred to in (v), (vi) and (vii) below, is referred to herein
as the "Credit Agreement");


(ii) Amended and Restated Security Agreement dated as of December 29,
1997 (which, as amended by the documents referred to in (v), (vi) and (vii)
below, is referred to herein as the "Security Agreement"), from the
Borrowers to the Lender;


(iii) Intellectual Property Security Agreement dated as of September
15, 1999 (the "Intellectual Property Security Agreement"), from Akorn to
the Lender;


(iv) Junior Mortgage dated as of March 21, 2001 (the "Junior
Mortgage"), from Akorn to the Lender recorded in the Office of the Recorder
of Deeds of Macon County, Illinois, on May 7, 2001, in Book 3056, Page 544;


(v) First Amendment dated as of December 28, 1999, among the Borrowers
and the Lender;


(vi) Second Amendment and Waiver dated as of February 15, 2001, among
the Borrowers and the Lender;


(vii) Third Amendment and Waiver dated as of April 16, 2001, among the
Borrowers and the Lender; and


(viii) Note dated April 16, 2001, from the Borrowers to the Lender in
the principal amount of $45,000,000; and


WHEREAS, certain Events of Default have occurred and are continuing under the Documents, as more fully described below in this Agreement; and


WHEREAS, the Borrowers have requested that the Lender forbear from exercising certain remedies under the Documents in


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order to provide the Borrowers with additional time within which to comply with their obligations under the Documents; and


WHEREAS, the Lender is willing to so forbear from exercising remedies under the Documents, on the terms and subject to the conditions provided for in this Agreement;


NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:


Section 1. Recitals Part of Agreement; Defined Terms; Applicability of Provisions. (a) The foregoing recitals are hereby incorporated into and made a part of this Agreement.


(b) For purposes of this Agreement, the following terms shall have the following respective meanings:


(i) "Gross Receipts" shall mean, for any period, the amount of the
gross proceeds received by the Borrowers during such period from sales of
merchandise, including collections of accounts receivable, plus the amount
of proceeds of the loans under the Subordinated Loan Agreement received by
the Borrowers during such period, all determined on a cash basis.


(ii) "Net Receipts" shall mean, for any period, an amount equal to the
difference between (A) the Gross Receipts for such period and (B) the
amount of the cash expenditures of the Borrowers during such period, other
than capital expenditures that do not violate the conditions provided for
in Section 11 of this Agreement or in Section 7.18 of the Credit Agreement,
all determined on a cash basis.


(iii) "Subordinated Loan Agreement" means a Convertible Bridge Loan
and Warrant Agreement in the form attached to this Agreement as Exhibit A.


(c) All capitalized terms used and not otherwise defined in this Agreement shall have the same meanings as in the Credit Agreement. Unless otherwise defined or the context otherwise requires, all financial and accounting terms used in this Agreement shall be defined in accordance with GAAP.


(d) Except as otherwise expressly provided in this Agreement, all of the covenants and agreements of the Borrowers contained in this Agreement, and all of the conditions provided for in this Agreement, shall apply at all times on and after the date of this Agreement and until all of the Obligations of the Borrowers under the Documents have been fully paid and performed, notwithstanding any termination of the Forbearance Period (as defined below).


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Section 2. Acknowledgments by Borrowers. The Borrowers acknowledge and agree with the Lender as follows:


(a) The amount of the Advances outstanding under the Credit Agreement
as of May 15, 2001, was $44,800,000, and the amount of the Advances
outstanding under the Credit Agreement as of the date of this Agreement is
$44,800,000. There were no Letter of Credit Obligations outstanding under
the Credit Agreement as of May 15, 2001, and there are no Letter of Credit
Obligations outstanding under the Credit Agreement as of the date of this
Agreement.


(b) As of May 15, 2001, the $44,800,000 aggregate amount of Advances
and Letter of Credit Obligations outstanding under the Credit Agreement
exceeded the $43,500,000 Commitment in effect as of that date by
$1,300,000, and the Borrowers failed to prepay the outstanding amount of
Advances by an amount equal to such excess as required by Section 2.3(b) of
the Credit Agreement. The failure of the Borrowers to make such prepayment
constitutes an Event of Default under Section 8.1(a) of the Credit
Agreement, and such Event of Default is continuing as of the date of this
Agreement.


(c) The Borrowers failed to pay monthly interest on May 31, 2001, and
June 30, 2001, as required by Section 2.5(a) of the Credit Agreement. The
failure of the Borrowers to make such payments of interest constitutes an
Event of Default under Section 8.1(a) of the Credit Agreement, and such
Event of Default is continuing as of the date of this Agreement.


(d) As of May 15, 2001, the Borrowers had not received the cash
proceeds of the Subordinated Loan or otherwise caused the conditions set
forth in Section 6.15 of the Credit Agreement to be satisfied. The
circumstances described above in this paragraph have continued from May 15,
2001, through the date of this Agreement (being a period of more than 10
days) and therefore constitute an Event of Default under Section 8.1(c) of
the Credit Agreement, and such Event of Default is continuing as of the
date of this Agreement.


(e) The Events of Default described above in this Section are not
necessarily all of the Events of Default that have occurred and are
continuing under the Documents as of the date of this Agreement.


(f) By virtue of the Events of Default described above in this
Section, the Lender is entitled to exercise the remedies provided for in
the Documents, including the right to declare the Obligations to be
forthwith due and payable, the right to increase the rate of interest
applicable to the


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Loan to the Default Rate, and the right to foreclose on and proceed against
the Collateral.


Section 3. Forbearance. (a) During the period ending January 1, 2002, provided that the conditions set forth in paragraph (b) below are continuously satisfied, the Lender shall forbear from (i) exercising its right to declare the Obligations to be forthwith due and payable, (ii) its right to increase the rate of interest applicable to the Loan to the Default Rate, and (iii) its right to foreclose on or proceed against any of the Collateral, by reason of any Event of Default existing under the Documents as of the date of this Agreement, or by reason of the failure of the Borrowers to make payments of principal on the Note in accordance with the terms of the Documents. The period ending on January 1, 2002, or on any earlier date as of which the Lender is no longer obligated to forbear from exercising the aforesaid remedies pursuant to the provisions of this Section, is referred to herein as the "Forbearance Period."


(b) The agreement of the Lender set forth in paragraph (a) above is expressly contingent and conditioned upon the following (the "Forbearance Conditions"):


(i) Except as expressly provided to the contrary in Section 18 hereof,
the timely payment, performance, observance and satisfaction at all times
after the date of this Agreement of all of the obligations, terms,
covenants, conditions and provisions contained in the Documents, as
modified and amended by this Agreement, other than the obligation to pay
the principal of the Note.


(ii) The timely payment, performance, observance and satisfaction at
all times after the date of this Agreement of all of the obligations,
terms, covenants, conditions and provisions contained in Sections 5 through
17 of this Agreement.


(iii) The truth and accuracy in all material respects as of the date
of this Agreement of all of the representations and warranties of the
Borrowers contained in this Agreement.


(iv) The performance and observance by the Borrowers and by the lender
under the Subordinated Loan Agreement, at all times after the date of this
Agreement, of all of their respective obligations and agreements under the
Subordination and Standby Agreement referred to below.


In the event that at any time during the period ending January 1, 2002, any one or more of the Forbearance Conditions is not satisfied, then the Lender shall no longer be obligated to forbear from exercising the aforesaid remedies under the Documents, and the Lender shall be entitled to exercise any and all remedies under the Documents. A delay or failure on the part of the Lender in any instance to exercise remedies as a result of the failure of any Forbearance Condition to be satisfied shall


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not operate as a waiver of the Lender's right to later exercise remedies as a result thereof, or as a result of any other failure of the same or any other Forbearance Condition to be satisfied.


(c) The Borrowers acknowledge and agree that the Lender has made no agreement, and has given no assurances of any sort, as to any forbearance by the Lender after January 1, 2002, and the Borrowers understand, acknowledge and agree that the Lender will be entitled to exercise any and all remedies under the Documents after January 1, 2002, if and to the extent that all of the obligations of the Borrowers under the Documents have not been fully paid and performed as of January 1, 2002.


Section 4. Commitment. Except as provided below in this Section, the Commitment of the Lender to make Advances and to issue Letters of Credit under the Credit Agreement shall not be in effect from and after the date of this Agreement, and the Lender shall not be obligated to make, and the Borrowers shall not have the right to receive, any additional Advances or Letters of Credit under the Credit Agreement from and after the date of this Agreement. Notwithstanding the foregoing provisions of this Section, during the Forbearance Period (but not after any termination of the Forbearance Period), the Borrowers shall have the right to receive Advances, but only if and to the extent that the amount of the outstanding Advances under the Credit Agreement, after giving effect to such Advances, does not exceed $44,800,000, and only if at the time any such Advance is made all of the Forbearance Conditions are fully satisfied.


Section 5. Payments. (a) On the date of this Agreement, the Borrowers shall pay all past due interest outstanding under the Documents. In order to accomplish the payment of such past due interest, the Borrowers authorize and direct the Lender to debit Account No. 86746 at the Lender. The Borrowers also authorize and direct the Lender to debit Account No. 86746 at the Lender on each interest payment date under the Documents for the interest due on such interest payment date. The provisions of this paragraph are without limitation on the provisions of Section 2.7 of the Credit Agreement.


(b) If at any time after the date of this Agreement, either of the
Borrowers shall receive any federal, state or local tax refund, the
Borrowers shall promptly make a payment of the principal of the Loan in an
amount equal to the amount of such refund.


(c) In addition to the payments provided for in paragraphs (a) and (b)
of this Section, on the last day of the Forbearance Period, the Borrowers
shall immediately pay to the Lender all principal, interest and other
amounts due under the Documents.


Section 6. Collection and Deposit of Cash Receipts. (a) The Lender hereby grants to the Borrowers the authority to collect their accounts receivable during the


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Forbearance Period, and will not, during the Forbearance Period, exercise its right under Section 7 of the Security Agreement to make direct collections from the Borrowers' account debtors, but such grant of authority by the Lender to the Borrowers to collect their accounts receivable shall be subject to the terms and conditions hereinafter set forth in this Section. The authority granted to the Borrowers by the Lender in this Section to collect their accounts receivable shall terminate at the end of the Forbearance Period.


(b) Except as provided in Section 8 of this Agreement and in paragraph (e) of this Section, at all times on and after the date of this Agreement, (i) all cash receipts received by either of the Borrowers, including, without limitation, payments of accounts receivable, amounts deposited in the lockbox account referred to in paragraph (d) of this Section, and proceeds of the loans under the Subordinated Loan Agreement, whether by check or in any other form, shall be deposited by the Borrowers not later than the first Business Day after the date of receipt, in Account No. 86746 at the Lender; and (ii) the Borrowers shall have all of their cash and investments (whether derived from collections of accounts receivable or other sources) on deposit in accounts maintained with the Lender (all such accounts with the Lender, including the lockbox account referred to in paragraph (d) of this Section, are hereinafter referred to as the "Bank Accounts"). The Borrowers hereby acknowledge and reaffirm the grant to the Lender a security interest in the Bank Accounts as provided in the Security Agreement.


(c) At any time and from time to time after the end of the Forbearance Period, the Lender will, in its sole discretion, exercise its right under the Credit Agreement and the Security Agreement to apply the whole or any part of any amounts received by the Lender in the Bank Accounts against the Obligations of the Borrowers under the Documents in such order of application as the Lender may determine unless such amounts are, in the sole discretion of the Lender, released to the Borrowers. The provisions of this paragraph are without limitation on any of the provisions of the Credit Agreement or the Security Agreement.


(d) The Borrowers currently maintain a lockbox account arrangement with the Lender for the purpose of receiving payment of accounts receivable. From and after the date of this Agreement, such lockbox account arrangement shall be mandatory and shall be used by the Borrowers for the collection of all of their accounts receivable, except as otherwise permitted by paragraph (e) below. The Borrowers shall instruct their account debtors, to make payment of their accounts directly to such lockbox account, except as otherwise permitted by paragraph (e) below. The Borrowers hereby irrevocably designate, make, constitute and appoint the Lender, and all persons designated by the Lender, as the Borrowers' true and lawful attorney and agent-in-fact, and the Lender, or the Lender's agent may, without notice to the Borrowers, endorse any Borrower's name on any checks, notes, drafts or any other items of payment which come


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into the possession of the Lender or under the Lender's control and, at any time and from time to time after the end of the Forbearance Period, apply such payment or proceeds to the Obligations of the Borrowers under the Documents.


(e) Notwithstanding the foregoing provisions of this Section, during the Forbearance Period, the Borrowers may maintain a bank account at American National Bank and Trust Company of Chicago for the purpose of processing credit card payments, provided that the balance on deposit in such account shall not at any time be in excess of $150,000.


Section 7. Subordinated Loans. (a) The following are conditions of this Agreement:


(i) On or before the date of this Agreement, Akorn shall have entered
into the Subordinated Loan Agreement, and the lender under the Subordinated
Loan Agreement and the Borrowers shall have entered into a Subordination
and Standby Agreement with the Lender in the form attached to this
Agreement as Exhibit B (the "Subordination Agreement").


(ii) On or before the date of this Agreement, Akorn shall have
received any required approval from the shareholders of Akorn for the
$3,000,000 Tranche A Loan transaction contemplated by the Subordinated Loan
Agreement, or the National Association of Securities Dealers shall have
granted an exception in writing to the requirement for such shareholder
approval, and Akorn shall have received all of the proceeds of such Tranche
A Loan, which loan shall be evidenced by a Convertible Promissory Note in
the form of Exhibit A to the Subordinated Loan Agreement.


(iii) On or before August 16, 2001, Akorn shall have received any
required approval from the shareholders of Akorn for the $2,000,000 Tranche
B Loan transaction contemplated by the Subordinated Loan Agreement, or the
National Association of Securities Dealers shall have granted an exception
in writing to the requirement for such shareholder approval, and on or
before August 17, 2001, Akorn shall have received all of the proceeds of
such Tranche B Loan, which loan shall be evidenced by a Convertible
Promissory Note in the form of Exhibit A-1 to the Subordinated Loan
Agreement.


(b) Clause (h) of Section 7.3 of the Credit Agreement is hereby deleted. Notwithstanding anything to the contrary contained in the Documents, the consummation by Akorn of the transactions contemplated by the Subordinated Loan Agreement shall not constitute a violation of Section 7.3 of the Credit Agreement, provided that such transactions are consummated pursuant to documentation in the form attached to this Agreement as Exhibit A, and that the Subordination Agreement has been executed and delivered by all of the parties thereto, and Section


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7.3 of the Credit Agreement is hereby modified and amended accordingly.


(c) Notwithstanding anything to the contrary contained in the Documents, conversion of the loans under the Subordinated Loan Agreement into common stock of Akorn shall not constitute a violation of Section 7.5 or Section 7.14 of the Credit Agreement, provided that no cash or other property (other than shares of common stock of Akorn) of the Borrowers is given in exchange for the conversion of such loans, and Section 7.5 and Section 7.14 of the Credit Agreement are hereby modified and amended accordingly.


(d) Notwithstanding anything to the contrary contained in the Documents, issuance of common stock of Akorn to the lender under the Subordinated Loan Agreement pursuant to the Common Stock Purchase Warrants issued by Akorn in accordance with the Subordinated Loan Agreement, shall not constitute a violation of Section 7.5 or Section 7.14 of the Credit Agreement, and Section 7.5 and Section 7.14 of the Credit Agreement are hereby modified and amended accordingly.


Section 8. Fees and Expenses. Within 14 days after the date of this Agreement and at all time thereafter, the Borrowers shall have on deposit with the Lender in a blocked account, not less than $50,000 as an advance deposit against the obligation of the Borrowers to reimburse the Lender for fees and expenses as required by Section 10.4 of the Credit Agreement. The Lender shall have the right to debit such account from time to time in order to reimburse itself for such fees and expenses. The Lender shall give notice of each such debit to the Borrowers. At such time as all of the obligations of the Borrower under the Documents have been fully paid and performed, the Lender shall release any remaining balance on deposit in such account to the Borrowers.


Section 9. Lender's Consultant and Personnel. The Borrowers understand that the Lender intends to engage a consultant to review the accounting and business practices of the Borrowers relating to its accounting reserves and additions to those reserves, and that the Lender's collateral evaluation personnel will from time to time, and not less often than monthly, make visits to the Borrowers' places of business to inspect the tangible collateral for the Loan, review the books and records of the Borrowers and confer with the Borrowers' personnel. The Borrowers shall cooperate with such consultant and collateral evaluation personnel and allow them to have access to the Borrowers' books and records and personnel and to the collateral for the Loan. The Borrowers acknowledge that the fees of such consultant shall be reimbursable to the Lender by the Borrowers in accordance with Section 10.4 of the Credit Agreement. The provisions of this Section are without limitation on the provisions of Section 2.11 of the Credit Agreement.


Section 10. Inventory Reserve. It is a condition of this Agreement that from and after the date of this Agreement,


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the aggregate amount of the additions to the Borrowers' reserves for slow-moving and obsolete inventory shall not at any time exceed an amount equal to the sum of 3.0% of sales of merchandise booked after the date of this Agreement, plus $250,000.


Section 11. Capital Expenditures; Dividends. (a) The limitation on spending to acquire fixed or capital assets during Fiscal Year 2001 provided for in Section 7.18 of the Credit Agreement is hereby increased from $2,000,000 to $4,125,000, which spending may consist of the following:


(i) Up to $620,000 for interest required to be capitalized under GAAP
on borrowings to finance capital assets.


(ii) If the license fee payable to Johns Hopkins is required to be
capitalized under GAAP, up to $175,000 for such license fee.


(iii) Other capital expenditures made or contracted for prior the date
of this Agreement in an aggregate amount not exceeding $2,680,000.


(iv) Other capital expenditures made on or after the date of this
Agreement in an aggregate amount not exceeding $400,000 for the following
items at Akorn's Decatur, Illinois, place of business: (A) HVAC Areas C and
D upgrades; (B) chilled water systems revisions; (C) glassware washer
installation and system improvements; and (D) miscellaneous system
improvements.


(v) Other capital expenditures made on or after the date of this
Agreement in an aggregate amount not exceeding $250,000.


Section 7.18 of the Credit Agreement is hereby modified and amended to conform to the foregoing provisions of this Section.


(b) The Borrowers acknowledge that by virtue of the existence of Events of Default under the Credit Agreement, the Borrowers are, under the provisions of Section 7.14 of the Credit Agreement prohibited from paying cash dividends on their common stock. In addition to the restrictions contained in Section 7.14 of the Credit Agreement, from and after the date of this Agreement, the Borrowers shall not pay any cash dividend on any of their capital stock.


Section 12. Receipts. (a) It is a condition of this Agreement that (i) for each of the calendar months set forth in Column A below, the Gross Receipts and Net Receipts of the Borrowers shall be not less than the amount set forth beside such month in Column B and Column C below, respectively, and (ii) that for the periods commencing on July 1, 2001, and ending on the last day of each of the months set forth in Column A below, the cumulative Gross Receipts and cumulative Net Receipts of the


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Borrowers shall be not less than the amount set forth beside such month in Column D and Column E below, respectively:


------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E


Cumulative Gross Cumulative Net
Receipts For Receipts For
Period July 1, Period July 1,
2001, through Last 2001, through Last
Gross Receipts For Net Receipts For Day of Month Not Day of Month Not Month Month Not Less Than Month Not Less Than Less Than Less Than ------------------------------------------------------------------------------------------------------------ July, 2001 $2,960,000 ($3,100,000) $2,960,000 ($3,100,000) ------------------------------------------------------------------------------------------------------------ August, 2001 $3,680,000 $0 $7,380,000 ($2,300,000) ------------------------------------------------------------------------------------------------------------ September, 2001 $2,320,000 ($1,300,000) $10,620,000 ($2,800,000) ------------------------------------------------------------------------------------------------------------ October, 2001 $2,320,000 ($725,000) $13,520,000 ($3,025,000) ------------------------------------------------------------------------------------------------------------ November, 2001 $3,040,000 ($1,080,000) $17,140,000 ($3,930,000) ------------------------------------------------------------------------------------------------------------ December, 2001 $2,880,000 ($600,000) $20,780,000 ($4,350,000) ------------------------------------------------------------------------------------------------------------


(b) The Borrowers acknowledge and agree that the amounts provided
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