Document:

exv10w2

 

Exhibit 10.2

WAIVER AND CONSENT TO CREDIT AGREEMENT

     THIS WAIVER AND CONSENT TO CREDIT AGREEMENT (this “Consent”) is executed
and delivered as of this 23rd day of August, 2004 among LASALLE BANK NATIONAL
ASSOCIATION, as administrative agent (the “Administrative Agent”), the
financial institutions party hereto (the “Lenders”), AKORN, INC., a Louisiana
corporation (“Akorn”) and Akorn (New Jersey), Inc., an Illinois corporation
(“Akorn New Jersey”).

W I T N E S S E T H :

     A. The Administrative Agent, Akorn, Akorn New Jersey and the Lenders
entered into a Credit Agreement dated as of October 7, 2003 (as amended,
restated, supplemented or otherwise modified from time to time, the “Credit
Agreement”). Capitalized terms used but not defined herein shall have the
meanings attributed to them in the Credit Agreement.

     B. Akorn intends to (i) enter into that certain Subscription Agreement
dated as of 18th August, 2004 (the “Subscription Agreement”) along with the
subscribers named therein pursuant to which Akorn will issue Capital Securities
in Akorn (a copy of which is attached hereto as Exhibit A) and (ii) to issue
the Capital Securities as contemplated thereunder (the foregoing referred to
herein in as the “Transaction”).

     C. The Companies have requested that the Administrative Agent and the
Required Lenders consent to the action to be taken by the Companies in
connection with the Transaction with respect to the Credit Agreement, subject
to the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto hereby agree as follows:

     1. Waiver and Consent. Subject to the terms and conditions herein, the
Required Lenders hereby (i) consent to Akorn’s the issuance of the Capital
Securities in accordance with the Subscription Agreement and Akorn’s execution
of an amendment to its Akorn’s articles of incorporation (the “Charter
Amendment”) (a copy of which is attached hereto as Exhibit B) and (ii) waive
any Event of Default which, if not for the execution of this Consent, would
arise under Sections 13.1.1, 13.1.5(a) or 13.1.5(b) of the Credit Agreement
resulting solely from (A) the failure or inability to reduce the Revolving
Commitment Amount in violation of Section 6.1.2 of the Credit Agreement, (B)
the Company’s issuance of Capital Securities in violation of Sections 11.5(b)
and 11.10 of the Credit Agreement and (C) the amending of Akorn’s articles of
incorporation in violation of 11.6 of the Credit Agreement; provided, that the
foregoing clauses (i) and (ii) are expressly conditioned upon the satisfaction
of the conditions to effectiveness set forth in Section 3 hereof, including,
without limitation, receipt by the Administrative Agent of the Loan Payment
amount referenced in clause (b) of Section 3 hereof.

     2. Representations and Warranties. To induce the Administrative Agent and
the Required Lenders to execute this Consent, each Company represents and
warrants to the Administrative Agent and the Lenders as follows: (a) each
Company has all requisite power and authority to execute, deliver and perform
this Consent; (b) this Consent constitutes the legal,

 

 

valid and binding obligation of each Company, enforceable against each
Company in accordance with its terms, subject to bankruptcy, insolvency and
similar laws affecting the enforceability of creditors’ rights generally and to
general principles of equity; (c) the representations and warranties in the
Loan Documents are true and correct in all material respects with the same
effect as though made on and as of the date of this Consent (except to the
extent stated to relate to a specific earlier date, in which case such
representations and warranties shall be true and correct as of such earlier
date); and (d) after giving effect to this Consent, no Unmatured Event of
Default or Event of Default exists.

     3. Conditions to Effectiveness. The effectiveness of this Consent is
expressly conditioned upon delivering to the Administrative Agent all of the
following in form and substance acceptable to the Administrative Agent: (a)
this Consent executed by each Company, the Administrative Agent and the
Required Lenders; (b) receipt by the Administrative Agent in accordance with
Section 6.2.2(a)(ii) of the Credit Agreement (i) of an irrevocable payment in
an amount sufficient to repay the Term Loan in full and (ii) of an irrevocable
payment in an amount sufficient to reduce the outstanding Revolving Loans to
$0.00 (such payments collectively referred to as the “Loan Payment Amount”) and
(c) an executed copy of the Subscription Agreement and the Charter Amendment
certified by the secretary of Akorn as true, accurate and complete.

     4. Affirmation. Except as specifically provided in this Consent, the
execution, delivery and effectiveness of this Consent shall not operate as a
waiver or forbearance of any Default or Event of Default or any right, power or
remedy of the Administrative Agent or any Lender under the Credit Agreement or
any of the other Loan Documents, or constitute a consent, waiver or
modification with respect to any provision of the Credit Agreement or any of
the other Loan Documents, and the Company hereby fully ratifies and affirms
each Loan Document to which it is a party. Reference in any of this Consent,
the Credit Agreement or any other Loan Document to the Credit Agreement shall
be a reference to the Credit Agreement as modified hereby and as further
amended, modified, restated, supplemented or extended from time to time. This
Consent shall constitute a Loan Document for purposes of the Credit Agreement
and the other Loan Documents. In addition, each of the Companies hereby
reaffirms and acknowledges that, notwithstanding anything contained in the
Subscription Agreement, the Charter Amendment or any other document executed in
connection with the Transaction, each is prohibited from making any
redemptions, purchases, re-purchases or any other form of payment with respect
their Capital Securities except as specifically permitted by Section 11.4 of
the Credit Agreement.

     5. Counterparts. This Consent may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute one instrument. Delivery of an executed
counterpart of this Consent by facsimile shall be effective as delivery of an
original counterpart.

     6. Headings. The headings and captions of this Consent are for the
purposes of reference only and shall not affect the construction of, or be
taken into consideration in interpreting, this Consent.

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     7. Further Assurances. Each Company agrees to execute and deliver, or
cause to be executed and delivered, in form and substance satisfactory to the
Administrative Agent and the Lenders, such further documents, instruments,
amendments and financing statements and to take such further action, as may be
necessary from time to time to perfect and maintain the liens and security
interests created by the Loan Documents.

     8. APPLICABLE LAW. THIS CONSENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO ILLINOIS
CHOICE OF LAW DOCTRINE.

     9. Acknowledgment. Each Company hereby waives, discharges and forever
releases the Administrative Agent and each of the Lenders, and each of said
Person’s employees, officers, directors, attorneys, stockholders and successors
and assigns, from and of any and all claims, causes of action, allegations or
assertions that either Company has or may have had at any time through (and
including) the date of this Consent, against any or all of the foregoing,
regardless of whether any such claims, causes of action, allegations or
assertions are known to either Company or whether any such claims, causes of
action, allegations or assertions arose as a result of the Administrative
Agent’s or any Lender’s actions or omissions in connection with the Credit
Agreement, including any amendments or modifications thereto, or otherwise.

[signature pages follow]

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     IN WITNESS WHEREOF, this Consent has been duly executed and delivered as
of the day and year first above written.

	 	 	 	 	 
	 	AKORN, INC.

 	 
	 	By:  	/s/ Arthur S. Przybyl
 	 
	 	Title: 	President & CEO 	 
	 	 	 	 
	 

	 	 	 	 	 
	 	AKORN (NEW JERSEY), INC.

 	 
	 	By:  	                    /s/ Arthur S. Przybyl
 	 
	 	Title: 	President & CEO 	 
	 	 	 	 
	 

	 	 	 	 	 
	 	LASALLE BANK NATIONAL ASSOCIATION, as

Administrative Agent and Lender

 	 
	 	By:  	/s/
Patrick J. O’Toole
 	 
	 	Title: 	Vice President 	 
	 	 	 	 
	 

-4-exv10w3

 

EXHIBIT 10.3

CONSENT AND AGREEMENT OF

HOLDERS OF SERIES A 6.0% PARTICIPATING

CONVERTIBLE PREFERRED STOCK

OF

AKORN, INC.

August 17, 2004

     This Consent and Agreement of Holders of Series A 6.0% Participating
Convertible Preferred Stock is made and entered into by Akorn, Inc., a
Louisiana corporation (the “Company”) and the undersigned holders of Series A
6.0% Participating Convertible Preferred Stock of the Company (“Series A
Stock”) with respect to the following:

     WHEREAS, the Board of Directors of the Company (the “Board”) has
determined that it is in the best interests of the Company and its stockholders
that Articles of Amendment to the Articles of Incorporation of the Company, in
substantially the same form as attached hereto as Exhibit A (the “Amendment”),
be filed with the Secretary of State of Louisiana to (i) authorize, and
designate the rights, preferences and privileges of, One Hundred Seventy
Thousand (170,000) shares of Series B 6.0% Participating Convertible Preferred
Stock of the Company (the “Series B Stock”); and (ii) provide for additional
changes or modifications to the Amendment consistent with the intent of the
foregoing;

     WHEREAS, the Board has determined that it is in the best interests of the
Company and its stockholders to authorize the issuance of the Series B Stock
and warrants to purchase common stock (“Warrants”) in a private placement
transaction to certain accredited investors (the “Offering”) on substantially
the same terms and provisions as set forth in the from of subscription
agreement attached hereto as Exhibit B (the “Subscription Agreement”);

     WHEREAS, pursuant to (i) Section 2.2 of that certain Registration Rights
Agreement dated as of October 7, 2003, by and among the Company and each holder
of Series A Stock (the “Series A Registration Rights Agreement”), each of the
undersigned has the opportunity to register under the Registration Statement
(as defined in the Subscription Agreement) such number of Registrable
Securities (as defined in the Series A Registration Rights Agreement) as each
of the undersigned may request; and (ii) Section 2(a) of that certain
Registration Rights Agreement dated July 12, 2001, by and between the Company
and The John N. Kapoor Trust Dated September 20, 1989 (the “Kapoor Trust”), as
amended (the “Kapoor Registration Rights Agreement”), the Kapoor Trust has the
opportunity to register under the Registration Statement (as defined in the
Subscription Agreement) such number of Registrable Securities (as defined in
the Kapoor Registration Rights Agreement) as the Kapoor Turst may request
(collectively, the registration rights referred to in clause (i) and (ii) shall
hereinafter referred to as the “Right to Include Registrable Securities”);

     WHEREAS, the holders of Series A Stock and the Kapoor Trust are willing to
permit the Offering to proceed on the terms set forth in the Subscription
Agreement, wish to have the opportunity to exercise their Right to Include
Registrable Securities in the Registration Statement, but do not desire that
the Series A Registration Rights Agreement be amended as provided in Section
4.1 thereof, and desire that the Company enter into the Subscription Agreements
notwithstanding the provisions of Section 4.2 of the Series A Registration
Rights Agreement;

     WHEREAS the undersigned holders of Series A Stock, desire to act in
accordance with the Articles of Incorporation of the Company, and the Louisiana
Business Corporation Law, and to waive the requirement of a meeting and consent
and agree to the following with respect to their rights under the

 

 

Articles of Incorporation of the Company, and all of the undersigned
desire to enter in appropriate agreements with respect to the foregoing;

     NOW, THEREFORE, the Company and the undersigned, constituting each
Significant Holder (as defined in the Articles of Amendment to the Articles of
Incorporation of the Company, dated as of October 3, 2003, governing the Series
A Stock) and the holders of a majority of the outstanding shares of the Series
A Stock, in their capacities as holders of Series A Stock and in their
capacities as parties to the Series A Registration Rights Agreement, and with
respect to the Kapoor Trust, also in its capacity as a party to the Kapoor
Registration Rights Agreement, hereby agree as follows:

     1. The Amendment is ratified and approved, and the undersigned hereby
consent to the filing by the officers of the Company of the Amendment with the
Secretary of State of Louisiana to effectuate the amendment of the Articles of
Incorporation, with any such changes or modifications from the language set
forth in the Amendment as they shall deem necessary or appropriate.

     2. The terms and provisions of the Subscription Agreement are ratified and
approved.

     3. The Offering is approved, and the undersigned hereby consent to the
issuance of the Series B Stock and Warrants in the Offering and to the issuance
of securities upon the conversion or exercise thereof as set forth in the
Subscription Agreement and in the Amendment, and on such terms as the Board,
any committee of the Board to which the Board delegates such responsibility and
the officers of the Company, and any of them, shall deem necessary or
appropriate.

     4. Other than the Right to Include Registrable Securities, none of the
rights under the Subscription Agreement apply to or amplify the rights of the
undersigned, and the terms and conditions contained in the Subscription
Agreement shall not be deemed to have amended the Series A Registration Rights
Agreement as would otherwise be the case under Section 4.1 of the Series A
Registration Rights Agreement.

     5. To the extent of any inconsistency or conflict between the Series A
Registration Rights Agreement and the Subscription Agreement, such
inconsistencies are hereby approved and the terms of the Subscription Agreement
shall govern.

     6. To the extent this document amends the Series A Registration Rights
Agreement, such agreement shall continue in full force and effect subject to
the terms of such amendment.

     7. Any and all actions whether previously or subsequently taken by the
officers and directors of the Company, which are consistent with and in
furtherance of the intent and purposes of the foregoing and the consummation of
the transactions contemplated herein, shall be and the same hereby are, in all
respects, ratified, approved and confirmed.

[Signature Page to Follow.]

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     The execution of this Consent and Agreement shall constitute a written
waiver of any notice as may be required by the By-laws. Upon the execution of
this Consent and Agreement, which may be executed in one or more counterparts
and by facsimile, by each Significant Holder (as defined in the Articles of
Amendment to the Articles of Incorporation of the Company, dated as of October
3, 2003, governing the Series A Stock) and the holders of a majority of the
outstanding shares of the Series A Stock, in their capacities as holders of
Series A Stock and in their capacities as parties to the Series A Registration
Rights Agreement, and with respect to the Kapoor Trust, also in its capacity as
a party to the Kapoor Registration Rights Agreement, and each of which shall be
deemed an original for all purposes, and all of which together shall constitute
one instrument, this Consent and Agreement shall be effective as of the date
first written above.

	 	 	 
	/s/ Arjun C. Waney

	 	/s/ Gulu Waney
	
 

	 	
 
	Arjun Waney

	 	Gulu Waney
	 
	 	 
	/s/ Abu Alam

	 	/s/ Arthur Przybyl
	
 

	 	
 
	Abu Alam

	 	Arthur Przybyl
	 
	 	 
	/s/ John Sabat

	 	/s/ Neil E. Shanahan
	
 

	 	
 
	John Sabat

	 	Neil Shanahan
	 
	 	 
	/s/ Shritin Shah

	 	/s/ Jai Waney
	
 

	 	
 
	Shritin Shah

	 	Jai Waney
	 
	 	 
	

	 	JRJAY Public Investments, LLP
	 
	 	 
	/s/ Jerry Treppel

	 	/s/ Jeffrey R. Jay, M.D.
	
 

	 	
 
	Jerry Treppel

	 	By: Jeffrey R. Jay, M.D.
	

	 	
 
	

	 	Its: CEO
	

	 	
 
	 
	 	 
	Pequot Navigator Onshore Fund, LP

	 	Argent Fund Management Ltd.
	/s/ Aryeh Davis

	 	/s/ K.B. Ramchand
	
 

	 	
 
	By: Aryeh Davis

	 	By: K.B. Ramchand
	
 

	 	
 
	Its: General Counsel

	 	Its: Director
	
 

	 	
 
	 
	 	 
	Arun K. Puri Living Trust

	 	Pequot Scout Fund, L.P.
	/s/ A.K. Puri

	 	/s/ Aryeh Davis
	
 

	 	
 
	By: A.K. Puri

	 	By: Aryeh Davis
	
 

	 	
 
	Its: Trustee

	 	Its:General Counsel
	
 

	 	
 
	 
	 	 
	Wheaton Heathcare Partners LP

	 	Pequot Healthcare Offshore Fund Inc.
	/s/ Jerry Treppel

	 	/s/ Aryeh Davis
	
 

	 	
 
	By: Jerry Treppel

	 	By: Aryeh Davis
	
 

	 	
 
	Its: General Partner

	 	Its: General Counsel
	
 

	 	
 
	 
	 	 
	Pequot Healthcare Institutional Fund LP

	 	Pequot Healthcare Fund LP
	/s/ Aryeh Davis

	 	/s/ Aryeh Davis
	
 

	 	
 
	By: Aryeh Davis

	 	By: Aryeh Davis
	
 

	 	
 
	Its: General Counsel

	 	Its: General Counsel
	
 

	 	
 

3

 

	 	 	 
	The John Kapoor Trust DTD 9/20/89

	 	 
	/s/ John N. Kapoor
	 	 
	
 
	 	 
	By: John N. Kapoor
	 	 
	
 
	 	 
	Its: Trustee
	 	 
	
 
	 	 
	 
	 	 
	Acknowledged, Accepted and Agreed:
	 	 
	 
	 	 
	Akorn, Inc.
	 	 
	By: /s/ Jeffrey A. Whitnell
	 	 
	
 
	 	 
	Its: CFO
	 	 
	
 
	 	 

4

 

EXHIBIT A

ARTICLES OF AMENDMENT

 

 

ARTICLES OF AMENDMENT

to

ARTICLES OF INCORPORATION

of

AKORN, INC.

     Pursuant to Section 33 of the Louisiana Business Corporation Law (“LBCL”)
and Article V(B) of its articles of incorporation (the “Articles”), Akorn,
Inc., a Louisiana corporation (the “Corporation”), acting through its
undersigned President and Chief Executive Officer, does hereby certify as
follows:

     (i) Immediately prior hereto, the authorized capital stock of the
Corporation consisted of (i) 150,000,000 shares of common stock, no par value
per share, of which 20,612,684 shares were issued and outstanding; and (ii)
5,000,000 shares of preferred stock, $1.00 par value per share, of which
257,172 shares of Series A 6.0% Participating Convertible Preferred Stock (the
“Series A Preferred Stock”) were issued and outstanding pursuant to the
Articles of Amendment filed with the Louisiana Secretary of State on October 6,
2003 (the “Series A Preferred Stock Designations”). The preferences,
limitations and relative rights of the Series A Preferred Stock are as set
forth in the Series A Preferred Stock Designations, and the authority vested in
the Board of Directors of the Corporation (the “Board of Directors”) to amend
the Articles of Incorporation to fix the relative rights, preferences and
limitations of the shares of any class and to establish and fix variations in
relative rights as between series of any preferred or special class, are as set
forth in the Articles of Amendment filed with the Louisiana Secretary of State
on March 3, 1997; and

     (ii) On August 18, 2004, the Board of Directors of the Corporation duly
adopted resolutions approving an amendment to the Corporation’s Articles to add
a new paragraph (D) to Article V, reading in its entirety as follows:

     D. A series of authorized Preferred Stock, par value $1.00 per share, of
the Corporation is hereby created having the designation and amount, the voting
powers, preferences and relative, participating, optional and other special
rights, and the qualifications, limitations and restrictions set forth below.

     SECTION 1. DESIGNATION AND AMOUNT.

     The shares of such series shall be designated as the “Series B 6.0%
Participating Convertible Preferred Stock” (the “Series B Preferred Stock”) and
the number of shares constituting such series shall be 170,000 shares of Series
B Preferred Stock.

1

 

     SECTION 2. RANK.

     The Series B Preferred Stock shall, with respect to payment of dividends,
distributions and the distribution of assets upon liquidation, winding up or
dissolution, rank (i) senior to all Junior Securities, (ii) on a parity with
all Parity Securities and (iii) junior to all Senior Securities.

     SECTION 3. DIVIDENDS AND DISTRIBUTIONS.

        (a) Payment and Accrual of Dividends.

            (i) The holders of shares of Series B Preferred Stock shall be entitled to
receive on each Dividend Payment Date, in respect of the Dividend Period ending
on (and including) the date immediately prior to such Dividend Payment Date,
dividends on each share of Series B Preferred Stock at the rate of 6.0% (the
“Dividend Rate”) per annum on the Accrued Value thereof from and after the
Issuance Date, provided that with respect to the Initial Dividend Period, the
dividends set forth above shall be prorated based on the number of days in such
period. Such dividends shall be fully cumulative and accumulate and accrue on
a daily basis (computed on the basis of a 360-day year of twelve 30-day months)
and compound quarterly in arrears on the Dividend Payment Dates at the rate
indicated above and in the manner set forth herein, whether or not they have
been declared and whether or not there are profits, surplus or other funds of
the Corporation legally available for the payment of dividends. If the
Corporation at any time does not have a sufficient number of shares of Common
Stock duly authorized and reserved for issuance upon conversion of all of the
outstanding shares of Series B Preferred Stock, shares of the Series B
Preferred Stock shall accrue dividends at a rate equal to 10.0% per annum of
the Accrued Value, accruing and compounding in the manner set forth in this
Section 3(a) from such date until such shares are converted into shares of
Common Stock, in each case in accordance with this Article V(D).

            (ii) Such dividends shall, at the option of the Company, either be paid in
cash or accrue and compound and be added to the Accrued Value on the applicable
Dividend Payment Dates, provided, however, that all dividends payable on any
given Dividend Payment Date must either (i) all be paid in cash or (ii) all
accrue and compound and be added to the Accrued Value, in each case on the
Dividend Payment Date. Each such dividend which is payable in cash shall be
payable on the Dividend Payment Date to the holders of record of shares of the
Series B Preferred Stock, as they appear on the transfer books of the
Corporation at the close of business on the day immediately preceding such
Dividend Payment Date. Any dividend that is not otherwise paid in cash on the
applicable Dividend Payment Date (whether due to the Company’s election not to
pay such dividend in cash, its inability to pay such dividend in cash, or
otherwise) shall automatically, and without any action on the part of the
Corporation, accrue and compound and be added to the Accrued Value on such
Dividend Payment Date.

        (b) Additional Dividends. In addition to dividends payable pursuant to
Section 3(a) hereof, in the event any dividends are declared or paid or any
other distribution is made on or with respect to the Common Stock, the holders
of the Series B Preferred Stock as of the record date established by the Board
of Directors for such dividend or distribution on the Common Stock shall be
entitled to receive as additional dividends (the “Additional Dividends”) an
amount (whether in the form of cash, securities or other property) equal to the
amount (and in

2

 

the form) of the dividends or distribution that such holder would have
received had the Series B Preferred Stock been converted into Common Stock
(without regard to any limitation on conversion contained herein, the
availability of authorized and unissued shares for issuance upon conversion, or
otherwise) as of the date immediately prior to the record date of such dividend
or distribution on the Common Stock; provided, however, that if the Corporation
declares and pays a dividend or makes a distribution on the Common Stock
consisting in whole or in part of Common Stock or Convertible Securities, then
no such dividend or distribution shall be payable in respect of the Series B
Preferred Stock on account of the portion of such dividend or distribution on
the Common Stock payable in Common Stock or Convertible Securities to the
extent that the applicable anti-dilution adjustment under Section 7(b)(i) below
shall be made in connection therewith. The record date for any such Additional
Dividends shall be the record date for the applicable dividend or distribution
on the Common Stock, and any such Additional Dividends shall be payable on the
same payment date as the payment date for the dividend on the Common Stock
established by the Board of Directors.

        (c) Restricted Payments.

            (i) Junior Securities. So long as any shares of Series B Preferred Stock
remain outstanding, the Corporation shall not, directly or indirectly, make any
Junior Securities Distribution unless (A) all accrued and unpaid dividends on
the shares of Series B Preferred Stock shall have been paid in cash and (B)
sufficient consideration shall have been paid or set apart for the payment of
the dividend for the current Dividend Period with respect to the Series B
Preferred Stock and the current dividend period with respect to any Parity
Securities.

            (ii) Parity Securities. So long as any shares of Series B Preferred Stock
remain outstanding, the Corporation shall not make any Parity Securities
Distribution unless (A) all accrued and unpaid dividends on the shares of
Series B Preferred Stock shall have been paid in cash and (B) sufficient
consideration shall have been paid or set apart for the payment of the dividend
for the current Dividend Period with respect to the Series B Preferred Stock
and the current dividend period with respect to any Parity Securities;
provided, that, dividends may be declared and paid on Parity Securities if
dividends are declared and paid on the Series B Preferred Stock (in accordance
with the terms of Section 3(a)) ratably in proportion to the respective
aggregate amounts of dividends accumulated and unpaid on such Parity Securities
and accumulated and unpaid on the Series B Preferred Stock.

        (d) Priority With Respect to Junior Securities. Holders of shares of
Series B Preferred Stock shall be entitled to receive the dividends provided
for in this Section 3 in preference to and in priority over any dividends upon
any Junior Securities.

     SECTION 4. REDEMPTION.

     The Corporation shall have no right to redeem any shares of Series B
Preferred Stock.

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     SECTION 5. LIQUIDATION, DISSOLUTION OR WINDING UP.

        (a) In the event the Corporation shall (i) commence a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or state
bankruptcy, insolvency or similar law, (ii) consent to the entry of an order
for relief in an involuntary case under such law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation, or of any substantial part of its
property, (iii) make an assignment for the benefit of its creditors, (iv) admit
in writing its inability to pay its debts generally as they become due, (v)
enter into a transaction which results in a Change of Control of the
Corporation, or (vi) otherwise liquidate, dissolve or wind up (any such event,
a “Liquidation”), each holder of Series B Preferred Stock shall be entitled to
receive out of assets of the Corporation available for distribution to its
shareholders, in preference to any distribution to holders of Junior Securities
an amount of cash with respect to each share of Series B Preferred Stock held
by such holder equal to the Liquidation Preference.

        (b) No full preferential payment on account of any Liquidation shall be
made to the holders of any class of Parity Securities unless there shall
likewise be paid at the same time to the holders of the Series B Preferred
Stock the full amounts to which such holders are entitled with respect to such
Liquidation. If, upon any Liquidation, after the distribution of the
liquidation preferences to Senior Securities, if any, the assets of the
Corporation are not sufficient to pay in full the liquidation payments payable
to the holders of the outstanding Series B Preferred Stock and outstanding
shares of Parity Securities, then the holders of all such shares shall share
ratably in such distribution of assets in accordance with the full respective
preferential payments that would be payable on such shares of Series B
Preferred Stock and such shares of Parity Securities if all amounts payable
thereon were payable in full.

        (c) After the payment to the holders of shares of the Series B Preferred
Stock of the full amount of any liquidating distribution to which they are
entitled under this Section 5, the holders of the Series B Preferred Stock as
such shall have no right or claim to any of the remaining assets of the
Corporation.

     SECTION 6. VOTING RIGHTS.

        (a) General. Each holder of Series B Preferred Stock shall have full
voting rights and powers, and shall be entitled to vote on all matters put to a
vote or consent of shareholders of the Corporation, other than matters on which
only one or a limited number of specified classes or series of shares (other
than the Series B Preferred Stock) or other instruments is entitled by law or
these articles of incorporation to vote or consent, with each holder of shares
of Series B Preferred Stock having the number of votes equal to the quotient
obtained by dividing (x) the sum of (i) the aggregate Stated Value of such
shares as of the record date for the vote or consent which is being taken, or
if no such record date is established, on the date such vote is taken or any
consent of shareholders is solicited plus (ii) an amount equal to the aggregate
of all accrued but unpaid dividends (whether or not declared) on such shares as
of such date by (y) the Conversion Price as of such date. The holders of the
Series B Preferred Stock, the holders of the Series A Preferred Stock, and the
holders of Common Stock shall vote together as a single class on all matters
submitted to a vote of the shareholders of the Corporation, except in cases
where a vote of the holders of the Series B Preferred Stock, voting separately
as a class, is

4

 

required by law or by this Article V(D). The holders of the Series B
Preferred Stock shall vote as part of a single class with the holders of Common
Stock, the holders of the Series A Preferred Stock and the holders of other
voting stock and instruments of the Corporation, if any, on all matters
submitted to a vote of the shareholders of the Corporation, except in cases
where a vote of the holders of the Series B Preferred Stock or the holders of
only one or more other specified classes or series of shares or other
instruments, voting separately as a class, is required by law or by these
articles of incorporation. Holders of Series B Preferred Stock shall be
entitled to notice of all shareholders meetings in accordance with the
procedures set forth in the Corporation’s Bylaws.

        (b) Voting With Respect to Certain Matters. In addition to any matters
requiring a separate vote of the Series B Preferred Stock under applicable law,
the Corporation shall not, without the prior consent or approval of the holders
of at least 50.01% of the issued and outstanding shares of Series B Preferred
Stock, voting as a single class:

            (i) amend, alter, repeal, restate, or supplement its Articles of
Incorporation, Bylaws or this Article V(D) in a manner that alters or changes,
in any adverse manner, the powers, preferences, privileges or rights of the
Series B Preferred Stock or which otherwise would adversely affect the rights,
privileges or preferences of the Series B Preferred Stock;

            (ii) authorize, issue or otherwise create any shares of Senior Securities,
Parity Securities, additional shares of Series B Preferred Stock, or any other
debt or equity securities of the Corporation that by their terms are
convertible into, or exchangeable or exercisable for, shares of Senior
Securities, Parity Securities or additional shares of Series B Preferred Stock,
or reissue any shares of Series B Preferred Stock which have been reacquired by
the Corporation;

            (iii) effect any transaction which would result in a Change of Control of
the Corporation;

            (iv) authorize or otherwise effectuate a reverse stock split of the Series
B Preferred Stock;

            (v) increase the par value of the Common Stock;

            (vi) enter into any agreement, commitment, understanding or other
arrangement to take any of the actions in subparagraphs (i) through (v) above;
or

            (vii) cause or authorize any subsidiary of the Corporation to engage in
any of the foregoing actions.

     SECTION 7. CONVERSION.

        (a) Terms of Conversion. Each share of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time, and from time to
time, on the terms and conditions set forth in this Section 7, into a number of
fully paid and non-assessable shares of Common Stock equal to the quotient
obtained by dividing (x) the sum of (i) the Stated Value

5

 

plus (ii) an amount equal to the aggregate of all accrued but unpaid
dividends (whether or not declared) on such share calculated through and
including the date of such conversion by (y) the Conversion Price in effect on
the date of such conversion.

        (b) Adjustment of Conversion Price. The Conversion Price shall be subject
to adjustment from time to time as follows:

            (i) Stock Dividends, Splits, etc. In case the Corporation shall at any
time or from time to time after the Issuance Date (A) declare a dividend or
make a distribution on the outstanding shares of Common Stock or securities
convertible into Common Stock, in either case, in shares of Common Stock or (B)
effect a subdivision, combination, consolidation or reclassification of the
outstanding shares of Common Stock into a greater or lesser number of shares of
Common Stock, then, and in each such case, the Conversion Price in effect
immediately prior to such event or the record date therefor, whichever is
earlier, shall be adjusted by multiplying such Conversion Price by a fraction
of which (x) the numerator is the number of shares of Common Stock that were
outstanding immediately prior to such event and (y) the denominator is the
number of shares of Common Stock outstanding immediately after such event. An
adjustment made pursuant to this Section 7(b)(i) shall become effective (x) in
the case of any such dividend or distribution, immediately after the close of
business on the date for the determination of holders of shares of Common Stock
entitled to receive such dividend or distribution, or (y) in the case of any
such subdivision, combination, consolidation or reclassification, at the close
of business on the day upon which such corporate action becomes effective.

            (ii) Below Market or Conversion Price Issuances. In case the Corporation
shall at any time or from time to time after the Issuance Date issue or sell
any Common Stock or Convertible Security (collectively, “Additional Shares”)
without consideration or for a consideration per share (or having a conversion,
exchange or exercise price per share) less than the greater of (A) the Closing
Price per share of Common Stock on the Business Day immediately preceding the
earlier of the issuance, or public announcement of the issuance, of such
Additional Shares and (B) the Conversion Price as of the date of such issuance
then, and in each such case, the Conversion Price shall be reduced to an amount
determined by multiplying the Conversion Price in effect on the day immediately
prior to such date by a fraction of which (x) the numerator is the sum of (i)
the product of (A) the number of shares of Common Stock outstanding immediately
prior to such sale or issuance multiplied by (B) the greater of (1) the then
applicable Conversion Price per share and (2) the Closing Price per share of
Common Stock on the date preceding the earlier of the issuance or public
announcement of the issuance of such Additional Shares (the greater of (1) and
(2) above hereinafter referred to as the “Adjustment Price”) and (ii) the
aggregate consideration receivable by the Corporation for the total number of
shares of Common Stock so issued (or into or for which the Convertible
Securities are convertible, exercisable or exchangeable), and (y) the
denominator equals the product of (i) the sum of (A) the total number of shares
of Common Stock outstanding immediately prior to such sale or issue and (B) the
number of additional shares of Common Stock issued (or into or for which the
Convertible Securities may be converted, exercised or exchanged), multiplied by
(ii) the Adjustment Price. An adjustment made pursuant to this subsection (ii)
shall be made on the next Business Day following the date on which any such
issuance is made and shall be effective retroactively to the close of business
on the date of such issuance. Notwithstanding the

6

 

foregoing, no adjustment (other than as provided for in Section
7(b)(iv)(5)(D)) shall be made pursuant to this Section 7(b)(ii) in connection
with any Excluded Issuances.

            (iii) Special Dividends; Repurchases. In case the Corporation after the
Issuance Date shall (1) distribute to all holders of shares of Common Stock or
other series of capital stock of the Corporation (other than the Series B
Preferred Stock) evidences of its indebtedness, assets (excluding any regular
periodic cash dividend but including any extraordinary cash dividend), capital
stock (other than Common Stock) or rights to subscribe for capital stock (other
than Common Stock), or (2) purchase or otherwise acquire for value any shares
of Common Stock in an Above Market Repurchase, in each such case the Conversion
Price in effect immediately prior to the date of such distribution (or the date
immediately prior to the date of the public announcement of such distribution,
whichever is earlier) or date of such purchase (or the date immediately prior
to the date of the public announcement of such purchase), as applicable, shall
be adjusted by multiplying such Conversion Price by a fraction of which (x) the
numerator is the remainder (if greater than zero) of (i) the Closing Price per
share of Common Stock on such date, minus (ii) the Fair Market Value as of such
date of the portion of assets, evidences of indebtedness, capital stock or
subscription rights so distributed or paid applicable to one share of Common
Stock, and (y) the denominator is the Closing Price per share of Common Stock
on such date, such adjustment to become effective immediately prior to the
opening of business on the day following the date of distribution or purchase;
provided, however, that no adjustment shall be made pursuant to clause (1) of
this subparagraph (b)(iii) (A) to the extent each holder of Series B Preferred
Stock receives such evidences of indebtedness, assets, capital stock or rights
to subscribe for capital stock, as applicable, as Additional Dividends in
accordance with the terms of Section 3(b), (B) if such issuance is an Excluded
Issuance or (C) if an adjustment shall otherwise be made with respect to such
distribution or issuance pursuant to Section 7(b)(ii); and further provided,
however, that if in any case the numerator of such fraction shall be zero or
less than zero, no adjustment shall be made in such case. The Corporation
shall provide any holder of Series B Preferred Stock, upon receipt of a written
request therefor, with any indenture or other instrument defining the rights of
the holders of any indebtedness, assets, subscription rights or capital stock
referred to in this subparagraph (b)(iii).

            (iv) General. For the purposes of any adjustment of the Conversion Price
pursuant to paragraph (ii) of this Section 7(b), the following provisions shall
be applicable:

                    (1) In the case of the issuance of Common Stock or Convertible Securities
for cash in a public offering or private placement, the aggregate consideration
shall be deemed to be the amount of cash paid before deducting any discounts,
commissions or placement fees payable by the Corporation to any underwriter or
placement agent in connection with the issuance and sale thereof.

                    (2) In the case of the issuance of Common Stock for a consideration in
whole or in part other than cash, such consideration shall be deemed to be the
Fair Market Value thereof.

                    (3) Subparagraph (2) above notwithstanding, in the case of the issuance of
Additional Shares to the owners of the non-surviving entity in connection with
any merger in which the Corporation is the surviving corporation, the amount of

7

 

consideration therefore shall be deemed to be the Fair Market Value of
such portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock or Convertible Securities, as the case may
be.

                    (4) If Common Stock is sold as a unit with other securities, the aggregate
consideration received for such Common Stock shall be deemed to be net of the
Fair Market Value of such other securities.

                    (5) In the case of the issuance of Convertible Securities:

                         (A) The aggregate maximum number of shares of Common Stock (as set forth
in the instruments relating thereto, without regard to any provision contained
therein for a subsequent reduction of such number) deliverable upon conversion
of or in exchange for, or upon the exercise of, such Convertible Securities and
subsequent conversion, exchange or exercise thereof shall be deemed to have
been issued at the time such Convertible Securities were issued and for a
consideration equal to the consideration received by the Corporation for any
such Convertible Securities, plus the minimum amount of consideration (as set
forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent increase of consideration), if any, to be
received by the Corporation upon the conversion, exercise or exchange of such
Convertible Securities;

                         (B) With respect to any Convertible Securities issued after the Issuance
Date for which an adjustment to the Conversion Price previously has been made
pursuant to Section 7(b)(ii), on any increase in the number of shares of Common
Stock deliverable upon exercise, conversion or exchange of, or a decrease in
the exercise price of, such Convertible Securities, the applicable Conversion
Price shall forthwith be readjusted retroactively to give effect to such
increase or decrease;

                         (C) With respect to any Convertible Securities issued after the Issuance
Date for which an adjustment to the Conversion Price has previously not been
made pursuant to Section 7(b)(ii), if there is any increase in the number of
shares of Common Stock deliverable upon exercise, conversion or exchange of, or
a decrease in the exercise price of, such Convertible Securities, such
Convertible Securities shall be treated as if they had been cancelled and
reissued and an adjustment to the Conversion Price with respect to such deemed
issuance shall be made pursuant to Section 7(b)(ii), if applicable;

                         (D) With respect to any Convertible Securities issued prior to the
Issuance Date, if there is any increase in the number of shares of Common Stock
deliverable upon exercise, conversion or exchange of, or a decrease in the
exercise price of, such Convertible Securities other than a change resulting
from the anti-dilution provisions thereof, such Convertible Securities shall be
treated as if they had been cancelled and reissued and an adjustment to the
Conversion Price with respect to such deemed issuance shall be made pursuant to
Section 7(b)(ii), if applicable; and

                         (E) No further adjustment of the Conversion Price adjusted upon the
issuance of any such Convertible Securities shall be made as a result of

8

 

the actual issuance of Common Stock upon the exercise, conversion or
exchange of any such Convertible Securities.

            (v) Rights Distributions. Rights or warrants issued by the Corporation to
all holders of Common Stock entitling the holders thereof to subscribe for or
purchase capital stock of the Corporation, which rights or warrants (1) are
deemed to be transferred with such shares of Common Stock, (2) are not
exercisable and (3) are also issued in respect of future issuances of Common
Stock, including shares of Common Stock issued upon conversion of shares of
Series B Preferred Stock, in each case in clauses (1) through (3) until the
occurrence of a specified event, shall for purposes of subparagraphs (b)(ii)
and (b)(iii) not be deemed issued until the occurrence of the earliest such
specified event.

            (vi) Calculations. All calculations of the Conversion Price shall be made
to the nearest five decimal places. Anything in Section 7(b) to the contrary
notwithstanding, in no event shall the then current Conversion Price be
increased as a result of any calculation made at any time pursuant to Sections
7(b)(ii) through 7(b)(iv). No adjustment to the Conversion Price pursuant to
paragraph 7(b) shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Conversion Price; provided, however,
that any adjustments which by reason of this paragraph 7(b)(vii) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. Notwithstanding any other provision of this Section
7(b), no adjustment to the Conversion Price shall reduce the Conversion Price
below $0.01, and any such purported adjustment shall instead reduce the
Conversion Price to $0.01.

            (vii) Outstanding Shares. The number of shares of Common Stock at any
time outstanding shall include all shares of Common Stock outstanding at such
time and any shares of Common Stock issuable upon conversion of or in exchange
for any convertible or exchangeable security or upon the exercise of any
option. The number of shares of Common Stock at any time outstanding shall not
include any shares of Common Stock then owned or held by or for the account of
the Corporation or any Subsidiary, and the disposition of any shares so owned
or held shall be considered an issue or sale of Common Stock.

            (viii) Successive Adjustments. Successive adjustments in the Conversion
Price shall be made, without duplication, whenever any event specified in
Sections 7(b)(i) through 7(b)(iii) shall occur.

        (c) Reorganization, Consolidation, Merger, Asset Sale.

            (i) In case of any capital reorganization or reclassification of
outstanding shares of Common Stock (other than a reclassification covered by
Section 7(b)), or in case of any consolidation or merger of the Corporation
with or into another Person, or in case of any sale, lease, transfer,
conveyance or other disposition (other than by way of merger or consolidation)
of all or substantially all of the Corporation’s assets, on a consolidated
basis, in one transaction or a series of related transactions, to any Person
(including any group that is deemed to be a Person) not otherwise constituting
a Liquidation in accordance with Section 5 (each of the foregoing being
referred to as a “Transaction”), in each case which is effected in such a
manner that the holders of Common Stock are entitled to receive (either
directly or upon

9

 

subsequent liquidation) stock or other securities or property (including
cash) with respect to or in exchange for Common Stock, shares of Series B
Preferred Stock then outstanding shall thereafter be convertible into, in lieu
of the Common Stock issuable upon such conversion prior to the consummation of
such Transaction, the kind and amount of shares of stock and other securities
and property (including cash) receivable upon the consummation of such
Transaction by a holder of that number of shares of Common Stock into which one
share of Series B Preferred Stock was convertible (without regard to any
limitation on conversion contained herein, the availability of authorized and
unissued shares for issuance upon conversion, or otherwise) immediately prior
to the consummation of such Transaction. In any such case, the Corporation or
the person formed by the consolidation or resulting from the merger or which
acquires such assets or which acquires the Corporation’s shares, as the case
may be, shall make or cause to be made appropriate provisions (as determined in
good faith by the Board of Directors) in the applicable agreement of merger or
consolidation, its certificate or articles of incorporation or other
constituent documents to ensure that the provisions of Sections 2-3, 4(b)-(f)
and 5-7 herein will continue to be applicable to the Series B Preferred Stock
or any such other shares of stock and other securities (other than Common
Stock) and property deliverable upon conversion of the shares of Series B
Preferred Stock remaining outstanding following the Transaction. In case
securities or property other than Common Stock shall be issuable or deliverable
upon conversion as aforesaid, then all references in this Section 7 shall be
deemed to apply, so far as appropriate and as nearly as may be, to such other
securities or property. The provisions of this Section 7(c) shall similarly
apply to successive Transactions. The Corporation shall give written notice to
the holders of Series B Preferred Stock at least 30 days prior to the date on
which any Transaction or Change of Control or similar transaction affecting the
Corporation shall take place.

            (ii) Notwithstanding anything contained herein to the contrary, the
Corporation will not effect any Transaction unless, prior to the consummation
thereof, the Surviving Person, if other than the Corporation, shall mail, by
first-class mail, postage prepaid, to each record holder of shares of Series B
Preferred Stock, at such holder’s address as it appears on the transfer books
of the Corporation, (A) a written instrument assuming the obligation to deliver
to such holder such cash, property and securities to which, in accordance with
the foregoing provisions, such holder is entitled, and (B) an opinion of
outside counsel for such Surviving Person stating that such assumption
agreement is a valid, binding and enforceable agreement of the Surviving
Person.

            (iii) Nothing contained in this Section 7(c) shall limit the rights of
holders of the Series B Preferred Stock to convert the Series B Preferred Stock
or to vote their shares of Series B Preferred Stock in connection with a
Transaction.

        (d) Reports. Whenever the number of shares of Common Stock into which
each share of Series B Preferred Stock is convertible is adjusted as provided
in this Section 7, the Corporation shall promptly mail to the holders of record
of the outstanding shares of Series B Preferred Stock, at their respective
addresses as the same shall appear in the Corporation’s transfer books, a
certificate signed by an executive officer stating that the number of shares of
Common Stock into which the shares of Series B Preferred Stock are convertible
has been adjusted (setting forth in reasonable detail and certifying the
calculation of such adjustment), the new number of shares of Common Stock (or
describing the new stock, securities, cash or other property) into which each
share of Series B Preferred Stock is convertible as a result of such

10

 

adjustment, a brief statement of the facts requiring such adjustment and
when such adjustment became effective. The Corporation shall give the holders
of Series B Preferred Stock written notice at least 20 days prior to the date
on which the Corporation closes its books or takes a record (i) with respect to
any dividend or distribution upon Common Stock, (ii) with respect to any pro
rata subscription offer to holders of Common Stock or (iii) for determining
rights to vote with respect to any Transaction.

        (e) Conversion Procedures.

            (i) The holder of any shares of Series B Preferred Stock may exercise its
right to convert any or all such outstanding shares into shares of Common Stock
at any time by surrendering for such purpose to the Corporation, at its
principal office or at such other office or agency maintained by the
Corporation for that purpose, a certificate or certificates representing the
shares of Series B Preferred Stock to be converted, duly endorsed to the
Corporation in blank, accompanied by a written notice stating that such holder
elects to convert all or a specified whole number of such shares in accordance
with the provisions of this Section 7. The Corporation will pay any and all
documentary, stamp or similar issue or transfer tax that may be payable in
respect of any issue or delivery of shares of Common Stock to the holder on
conversion of the Series B Preferred Stock pursuant hereto.

            (ii) As promptly as practicable, and in any event within three Business
Days after the surrender of such certificate or certificates and the receipt of
such notice relating thereto and, if applicable, payment of all transfer taxes
(or the demonstration to the reasonable satisfaction of the Corporation that
such taxes are inapplicable), the Corporation shall deliver or cause to be
delivered (i) certificates (which shall bear legends, if appropriate)
registered in the name of such holder representing the number of full shares of
Common Stock to which the holder of shares of Series B Preferred Stock so
converted shall be entitled, provided that, if the Corporation’s transfer agent
is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer program, and so long as the certificates therefore do not
bear a legend (pursuant to the terms of the Subscription Agreement) and the
holder thereof is not then required to return such certificate for the
placement of a legend thereon (pursuant to the terms of the Subscription
Agreement), the Corporation shall cause its transfer agent to promptly
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of the holder or its nominee with DTC through its
Deposit Withdrawal Agent Commission system, (ii) if less than the full number
of shares of Series B Preferred Stock evidenced by the surrendered certificate
or certificates are being converted, a new certificate or certificates for the
number of shares evidenced by such surrendered certificate or certificates less
the number of shares converted and (iii) payment of all amounts to which a
holder is entitled pursuant to Section 7(f) hereof. All shares of Common Stock
issuable upon conversion of the Series B Preferred Stock will be made without
charge to the holders of Series B Preferred Stock and upon issuance will be
fully paid and non-assessable, free and clear of all taxes, liens, charges and
encumbrances with respect to the issuance thereof. Such conversion shall be
deemed to have been made at the close of business on the date of receipt of
such notice and of such surrender of the certificate or certificates
representing the shares of Series B Preferred Stock to be converted so that the
rights of the holder thereof as to the shares being converted shall cease
except for the right to receive shares of Common Stock and any payment of
amounts due pursuant to Section 7(f), and the person entitled to receive the
shares of Common Stock shall be treated for all

11

 

purposes as having become the record holder of such shares of Common Stock
at such time. Any shares of Common Stock so delivered on or following the date
on which such shares of Common Stock have been registered under the Securities
Act pursuant to the Subscription Agreement and continue to be subject to resale
under a then-effective registration statement, or otherwise may be sold by the
holder pursuant to Rule 144 promulgated under the Securities Act, shall not
bear any restrictive legend.

            (iii) If a conversion of Series B Preferred Stock is to be made in
connection with a Transaction or Change of Control or a similar transaction
affecting the Corporation (other than a tender or exchange offer), the
conversion of any shares of Series B Preferred Stock may, at the election of
the holder thereof, be conditioned upon the consummation of such transaction,
in which case such conversion shall not be deemed to be effective until such
transaction has been consummated. In connection with any tender or exchange
offer for shares of Common Stock, holders of Series B Preferred Stock shall
have the right to tender (or submit for exchange) shares of Series B Preferred
Stock in such a manner so as to preserve the status of such shares as Series B
Preferred Stock until immediately prior to such time as shares of Common Stock
are to be purchased (or exchanged) pursuant to such offer, at which time that
portion of the shares of Series B Preferred Stock so tendered which is
convertible into the number of shares of Common Stock to be purchased (or
exchanged) pursuant to such offer shall be deemed converted into the
appropriate number of shares of Common Stock. Any shares of Series B Preferred
Stock not so converted shall be returned to the holder as Series B Preferred
Stock.

            (iv) The Corporation shall not close its books against the transfer of
Series B Preferred Stock or of Common Stock issued or issuable upon conversion
of Series B Preferred Stock in any manner which unreasonably interferes with
the timely conversion of Series B Preferred Stock.

        (f) Fractional Shares. In connection with the conversion of any shares of
Series B Preferred Stock pursuant to this Section 7, no fractions of shares of
Common Stock shall be issued, but in lieu thereof the Corporation shall pay a
cash adjustment in respect of such fractional interest in an amount equal to
such fractional interest multiplied by the Closing Price per share of Common
Stock on the day on which such shares of Series B Preferred Stock are deemed to
have been converted. If more than one share of Series B Preferred Stock shall
be surrendered for conversion at one time by the same holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be computed
on the basis of the total number of shares of Series B Preferred Stock so
surrendered.

        (g) Reservation of Shares. The Corporation shall at all times reserve and
keep available, free from liens, charges and security interests and not subject
to any preemptive rights, solely for issuance upon conversion of the Series B
Preferred Stock, the number of shares of Common Stock from time to time
issuable upon conversion of all shares of the Series B Preferred Stock at the
time outstanding and to ensure that the shares of Common Stock may be issued
without violation of any applicable law or regulation or of any requirement of
any securities exchange or inter-dealer quotation system on which the shares of
Common Stock may be listed or traded.

12

 

        (h) Certain Events. If an event not specifically provided for in this
Section 7 occurs which would have an inequitable or dilutive effect on the
relative percentage ownership interests of the holders of Series B Preferred
Stock as those specifically provided for in this Section 7, then the Board of
Directors shall make an appropriate adjustment in the Conversion Price so as to
protect the rights of the holders of Series B Preferred Stock.

        (i) Conversion Disputes. In the case of any dispute with respect to a
conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with Section 7(e)(ii) above. If
such dispute involves the calculation of the Conversion Price, and such dispute
is not promptly resolved by discussion between the relevant holder and the
Corporation, the Corporation shall submit the disputed calculations to an
independent outside accountant via facsimile within three business days of
receipt of the written notice of conversion. The accountant, at the
Corporation’s sole expense, shall promptly audit the calculations and notify
the Corporation and the holder of the results no later than three business days
from the date it receives the disputed calculations. The accountant’s
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall then issue the appropriate number of shares of Common Stock in accordance
with this Section 7.

        (j) Conversion on the Option of the Corporation.

            (i) Provided the Corporation has a sufficient number of shares of Common
Stock duly authorized and reserved for issuance upon conversion of all of the
outstanding shares of Series B Preferred Stock, upon delivery of written notice
of conversion by the Corporation to the holders of Series B Preferred Stock
within 15 days after the occurrence of any Conversion Trigger Date, which
notice shall specify the applicable Conversion Trigger Date, all (and not less
than all) of the then outstanding shares of Series B Preferred Stock shall be
immediately and automatically converted into fully paid and non-assessable
shares of Common Stock effective as of the date specified in such notice not
more than 30 days from the specified Conversion Trigger Date. The number of
shares of Common Stock to which a holder of a share of Series B Preferred Stock
shall be entitled upon such conversion shall be determined by dividing (x) the
sum of (i) the Stated Value plus (ii) an amount equal to the aggregate of all
accrued but unpaid dividends (whether or not declared) on such share as of the
close of business on the Business Day immediately preceding the specified
Conversion Trigger Date by (y) the Conversion Price in effect at the close of
business on the Business Day immediately preceding the specified Conversion
Trigger Date.

            (ii) Mechanics. Any conversion pursuant to this Section 7(j) shall occur
automatically and without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent. Upon the occurrence of such automatic
conversion of the Series B Preferred Stock, the holders of the Series B
Preferred Stock shall, a reasonable time thereafter, surrender the certificates
representing such shares (converted pursuant to this Section 7(j)) at the
office of the Corporation or any transfer agent for the Series B Preferred
Stock. Thereupon, there shall be issued and delivered to such holder promptly
at such office and in its name as shown on the Corporation’s stock records, a
certificate or certificates for the number of shares of Common Stock into which
such shares of Series B Preferred Stock surrendered were convertible on the
date as of which such automatic conversion occurred. All certificates
evidencing shares of

13

 

Series B Preferred Stock which are required to be surrendered for
conversion in accordance with the provisions hereof shall, from and after the
date of such conversion, be deemed to have been retired and cancelled and the
shares of Series B Preferred Stock represented thereby converted into Common
Stock for all purposes, notwithstanding the failure of the holder or holders
thereof to surrender such certificates.

     SECTION 8. REACQUIRED SHARES.

     Any shares of Series B Preferred Stock converted, purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof.

     SECTION 9. NO PREEMPTIVE RIGHTS.

     Holders of Series B Preferred Stock shall not have any preemptive right
pursuant to this Article V(D) to subscribe to any additional issue of stock or
to any security convertible into such stock. Nothing herein shall limit the
power of the Corporation to grant any of the foregoing rights to persons by
contract or otherwise or the power of any person, including, without
limitation, the holders of Series B Preferred Stock, to exercise any of the
foregoing rights granted to them by contract or otherwise.

     SECTION 10. GENERAL PROVISIONS.

        (a) Headings. The headings of the sections, paragraphs, subparagraphs,
clauses and subclauses of this Article V(D) are for convenience of reference
only and shall not define, limit or affect any of the provisions hereof.

        (b) Waivers. In the event that the holders of at least 50.01% of the
issued and outstanding shares of Series B Preferred Stock, voting as a single
class shall consent to waive compliance by the Corporation with any provision
of, or a breach by the Corporation of any provision of, this Article V(D), all
holders of outstanding shares of Series B Preferred Stock shall be bound by
such waiver.

     SECTION 11. DEFINITIONS.

     For the purposes of this Article V(D):

     “Above Market Repurchase” shall mean any purchase (by tender or exchange
offer, open market purchase, privately negotiated purchase or otherwise) of all
or any portion of the Corporation’s Common Stock where such purchase is for
aggregate consideration having a Fair Market Value as of the earlier of (i) the
date of such purchase or (ii) the date immediately prior to the date of the
public announcement of such purchase, that exceeds the product of (x) the
aggregate number of shares being purchased, multiplied by (y) the Closing Price
of the Common Stock on such date.

     “Accrued Value” means, with respect to a share of Series B Preferred
Stock, as at any date, the sum of (as adjusted for any split, subdivision,
combination, consolidation,

14

 

recapitalization or similar event with respect to the Series B Preferred
Stock) (i) the Stated Value plus (ii) an amount equal to the aggregate of all
accrued but unpaid dividends (whether or not declared) on such share through
and including such date which have been added to Accrued Value pursuant to
Section 3(a)(ii).

     “Additional Dividends” has the meaning set forth in Section 3(b) above.

     “Additional Shares” has the meaning set forth in Section 7(b)(ii) above.

     “Adjustment Price” has the meaning set forth in Section 7(b)(ii) above.

     “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated by
the Securities and Exchange Commission under the Exchange Act.

     “Available Shares” shall have the meaning ascribed thereto in the
Subscription Agreements.

     “Business Day” means any day other than a Saturday, Sunday, or a day on
which commercial banks in the City of New York are authorized or obligated by
law or executive order to close.

     “Change of Control” means (i) any sale, lease, transfer, conveyance or
other disposition (other than by way of merger or consolidation) of all or
substantially all of the Corporation’s assets, on a consolidated basis, in one
transaction or a series of related transactions, to any Person (including any
group that is deemed to be a Person) other than the Initial Purchasers or their
respective Affiliates; (ii) any Person (including any group that is deemed to
be a Person) other than the Initial Purchasers or any of their respective
Affiliates, is or becomes the “beneficial owner” (within the meaning of Rule
13d-3 promulgated under the Exchange Act) directly or indirectly, of more than
50% of the combined voting power of the Voting Securities of the Corporation
(or the surviving entity or entities of a transaction or a series of related
transactions if other than the Corporation); (iii) the Continuing Directors
cease for any reason to constitute a majority of the members of the Board of
Directors then in office; (iv) a merger or consolidation of the Corporation
with any other Person, other than a merger or consolidation resulting in the
Voting Securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the Voting Securities of the Corporation or such surviving
entity outstanding immediately after such merger or consolidation; or (v) the
Corporation adopts, voluntarily or involuntarily, a plan of liquidation or
dissolution.

     “Closing Price” per share of Common Stock on any date shall be the closing
sale price on such day or, in case no such sale takes place on such day, the
average of the reported closing bid and asked prices, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Common Stock or such other securities are listed or admitted to
trading or, if not quoted or listed or admitted to trading on any national
securities exchange or quotation system, the last quoted sale price or, if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated

15

 

Quotation System or such other system then in use, or, if on any such date
the Common Stock or such other securities are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker, selected by the Board of Directors and reasonably
acceptable to the holders of a majority of the outstanding shares of Series B
Preferred Stock, making a market in the Common Stock or such other securities
of the Corporation.

     “Common Stock” means the common stock, no par value per share, of the
Corporation.

     “Continuing Directors” means the individuals who are members of the
Corporation’s Board of Directors as of the Issuance Date; provided, however,
that if the election, or nomination for election by the Corporation’s
shareholders, of any new director was approved by a vote of at least a majority
of the Continuing Directors, such new director shall be considered a
“Continuing Director”.

     “Conversion Price” means the Initial Conversion Price, subject to
adjustment as provided in Section 7(b).

     “Conversion Trigger Date” shall mean any date after August 23, 2005 as to
which the Closing Price per share of Common Stock for at least 20 consecutive
Trading Days immediately preceding such date, including the last Trading Day of
such period, is greater than or equal to $5.00 per share (as adjusted for any
split, subdivision, combination, consolidation, recapitalization or similar
event with respect to the Common Stock).

     “Convertible Securities” shall mean any options or warrants to purchase or
rights to subscribe for Common Stock, securities by their terms convertible
into or exchangeable for Common Stock, or options or warrants to purchase or
rights to subscribe for such convertible or exchangeable securities.

     “Dividend Payment Date” means each of March 31, June 30, September 30 and
December 31, except that if such date is not a Business Day then the Dividend
Payment Date shall be the next day that is a Business Day.

     “Dividend Period” means the Initial Dividend Period and, thereafter, each
quarterly period from and including a Dividend Payment Date to the next
following Dividend Payment Date (but without including such later Dividend
Payment Date).

     “Dividend Rate” has the meaning set forth in Section 3(a)(i).

     “Exchange Act” means the Securities Exchange Act of 1934, as amended and
the rules and regulations promulgated thereunder.

     “Excluded Issuances” means the issuance or reissuance of any shares of
Common Stock or Convertible Securities (whether treasury shares or newly issued
shares) pursuant to or in connection with (1) a dividend or distribution on, or
subdivision, combination, consolidation or reclassification of, the outstanding
shares of Common Stock requiring an adjustment in the Conversion Price pursuant
to Section 7(b)(i), (2) any Convertible Security outstanding as of the Issuance
Date (except as otherwise provided in Section 7(b)(iv)(5)(D)), including,
without limitation, warrants originally issued to holders of Series B Preferred
Stock pursuant to the

16

 

Subscription Agreements, (3) the conversion of shares of Series B
Preferred Stock, (4) the grant or exercise of any stock or stock options to
employees, directors or consultants of the Corporation that may be granted to
or exercised by any employee, director or consultant under any stock option or
similar benefit plan of the Corporation now existing or to be implemented in
the future, (5) any transaction involving the Corporation’s issuance of
securities in connection with an acquisition (the primary purpose of which is
not to raise equity capital), (6) any transaction involving the Corporation’s
issuance of securities in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), (7) any
issuance of securities by the Corporation as consideration for the acquisition
of a license by the Corporation, (8) the issuance of securities pursuant to any
financing from a bank or similar financial or lending institution approved by
the Board of Directors, or (9) the issuance of any Replacement Common Stock;
provided, however, that issuances of securities described in the forgoing
sub-clauses (4), (6), (7) and (8) subsequent to the Issuance Date which exceed,
in the aggregate, 10% of the outstanding Common Stock of the Corporation
outstanding as of the Issuance Date (as adjusted for any split, subdivision,
combination, consolidation, recapitalization or similar event with respect to
the Common Stock), as determined on a fully-diluted basis, shall not be deemed
to be Excluded Issuances.

     “Fair Market Value” with respect to any securities, assets or property
shall mean the fair value thereof as determined by an independent investment
banking or appraisal firm experienced in the valuation of such securities or
property selected in good faith by the Board of Directors and acceptable to the
holders of a majority of the outstanding shares of Series B Preferred Stock;
provided, that, the value of any securities that trade on a national securities
exchange or inter-dealer quotation system shall be the Closing Price thereof as
of the date such value is determined.

     “Initial Conversion Price” means $2.70.

     “Initial Dividend Period” means the dividend period commencing on the
Issuance Date and ending on (and including) the date immediately prior to the
first Dividend Payment Date to occur thereafter.

     “Initial Purchasers” means the initial Purchasers of the Series B
Preferred Stock pursuant to the Subscription Agreements.

     “Issuance Date” means with respect to any share of Series B Preferred
Stock, the date on which the Corporation initially issues such share of Series
B Preferred Stock, regardless of the number of times transfer of such share is
made on the stock records of the Corporation and regardless of the number of
certificates which may be issued to evidence such share.

     “Junior Securities” shall mean the Corporation’s Common Stock and all
classes and series of capital stock of the Corporation now or hereafter
authorized, issued or outstanding which by their terms expressly provide that
they are junior to the Series B Preferred Stock, or which do not specify their
rank, with respect to payment of dividends and the distribution of assets upon
liquidation, winding up or dissolution. This definition of Junior Securities
shall include, without limitation, any Convertible Securities exercisable or
exchangeable for or convertible into any Junior Securities.

17

 

     “Junior Securities Distribution” means the declaration or payment on
account of, or setting apart for payment money for a sinking or other similar
fund for, the purchase, redemption or other retirement of, any Junior
Securities or any Convertible Securities exercisable or exchangeable for or
convertible into any shares of Junior Securities, or any distribution in
respect thereof (except for (i) dividends on Junior Securities which are
payable solely in additional shares of Junior Securities, or by the increase in
the liquidation value of Junior Securities, in each case, as required by the
terms of such Junior Securities, or (ii) cashless exercises of options), either
directly or indirectly, and whether in cash, obligations, Common Stock,
Convertible Securities or other property, or the purchase or redemption by any
corporation or other entity directly or indirectly controlled by the
Corporation of any of the Junior Securities or any Convertible Securities
exercisable or exchangeable for or convertible into any Junior Securities.

     “Liquidation” has the meaning set forth in Section 5(a) above.

     “Liquidation Preference” means the greater of (x) the sum of (i) the
Stated Value plus (ii) an amount equal to the aggregate of all accrued but
unpaid dividends (whether or not declared) on such share and (y) the amount
that would be payable to such holder in the Liquidation in respect of Common
Stock issuable upon conversion of such share of Series B Preferred Stock if all
outstanding shares of Series B Preferred Stock were converted into Common Stock
immediately prior to the Liquidation in accordance with Section 7 hereof.

     “Parity Securities” means the Series A Preferred Stock and each class or
series of capital stock issued by the Corporation after the date hereof the
terms of which specifically provide that such class or series will rank on a
parity with the Series B Preferred Stock with respect to payment of dividends
and the distribution of assets upon liquidation, winding up or dissolution.
This definition of Parity Securities shall include, without limitation, any
Convertible Securities exercisable or exchangeable for or convertible into any
Parity Securities.

     “Parity Securities Distribution” means the declaration or payment on
account of, or setting apart for payment money for a sinking or other similar
fund for, the purchase, redemption or other retirement of (other than by
conversion into or exchange for Junior Securities), any Parity Securities or
any Convertible Securities exercisable or exchangeable for or convertible into
any shares of Parity Securities, or any distribution in respect thereof (except
for (i) dividends on Parity Securities which are payable solely in additional
shares of Parity Securities, or by the increase in the liquidation value of
Parity Securities, in each case, as required by the terms of such Parity
Securities or (ii) cashless exercises of options), either directly or
indirectly, and whether in cash, obligations, Common Stock, Convertible
Securities or other property, or the purchase or redemption by any corporation
or other entity directly or indirectly controlled by the Corporation of any of
the Parity Securities or any Convertible Securities exercisable or exchangeable
for or convertible into any Parity Securities.

     “Person” means an individual, corporation, limited liability company or
partnership, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof, or other entity of any
kind.

     “Senior Securities” means each class or series of capital stock issued by
the Corporation after the date hereof the terms of which specifically provide
that such class or series will rank

18

 

senior to the Series B Preferred Stock with respect to payment of
dividends and the distribution of assets upon liquidation, winding up or
dissolution. This definition of Senior Securities shall include, without
limitation, any Convertible Securities exercisable or exchangeable for or
convertible into any Senior Securities.

     “Series A Preferred Stock” means the Corporation’s Series A 6.0%
Participating Convertible Preferred Stock.

     “Series B Preferred Stock” has the meaning set forth in Section 1 above.

     “Stated Value” means, with respect to a share of Series B Preferred Stock,
$100 (as adjusted for any split, subdivision, combination, consolidation,
recapitalization or similar event with respect to the Series B Preferred
Stock).

     “Subscription Agreements” means the Subscription Agreements for the
purchase of Series B Preferred Stock executed by each of the Initial Purchasers
on or before August 23, 2004, by and among the Company and the respective
Initial Purchasers described therein.

     “Subsidiary” of any Person means any corporation or other entity of which
a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.

     “Surviving Person” means the continuing or surviving Person of a merger,
consolidation or other corporate combination, the Person receiving a transfer
of all or a substantial part of the properties and assets of the Corporation,
or the Person consolidating with or merging into the Corporation in a merger,
consolidation or other corporate combination in which the Corporation is the
continuing or surviving Person, but in connection with which the Series B
Preferred Stock or Common Stock of the Corporation is exchanged, converted or
reinstated into the securities of any other Person or cash or any other
property; provided, however, if such Surviving Person is a direct or indirect
Subsidiary of a Person, the parent entity shall be deemed to be a Surviving
Person.

     “Trading Day” means a day on which the principal national securities
exchange on which the Common Stock is quoted, listed or admitted to trading is
open for the transaction of business or, if the Common Stock is not quoted,
listed or admitted to trading on any national securities exchange (or the
Nasdaq Stock Market), any Business Day.

     “Transaction” has the meaning set forth in Section 7(c) above.

     “Voting Securities” mean the Common Stock, the Series A Preferred Stock,
the Series B Preferred Stock and any other securities of the Corporation having
the voting power under ordinary circumstances with respect to the election of
directors of the Corporation.

19

 

     These
Articles of Amendment are executed as of the      day of August,
2004.

	 	 	 	 	 
	 	AKORN, INC.

 	 
	 	By:  	 	 
	 	 	Arthur S. Przybyl, President 	 
	 	 	and CEO 	 
	 

ACKNOWLEDGMENT

STATE OF ILLINOIS

COUNTY OF MACON

     BEFORE ME, the undersigned authority, personally came and appeared Arthur
S. Przybyl, to me known to be the person who signed the foregoing instrument as
President and CEO of Akorn, Inc. and who acknowledged and declared, in the
presence of the two witnesses whose names are subscribed below, that he
signed such instrument as his free act and deed in the capacity and for the
purposes mentioned therein.

     IN WITNESS WHEREOF, each of the undersigned has herewith affixed his or
her hand on this      day of August, 2004, in the aforesaid county and state.

	 	 	 	 	 
	WITNESSES:
	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	
 

	 	 	 	
 
	
	 	 	 	Arthur S. Przybl
	 
	 	 
	 	 
	
 

	 	 	 	 
	 
	 	 	 	 
	

	 	 	 	 
	

	 	
 	 	 
	

	 	Notary Public	 	 

20

 

EXHIBIT B

SUBSCRIPTION AGREEMENT

 

 

 

SUBSCRIPTION AGREEMENT

     SUBSCRIPTION AGREEMENT (this “Agreement”) made as of the date set forth on
the signature page hereof between Akorn, Inc., a Louisiana corporation (the
“Company”), and the undersigned (the “Subscriber”).

WITNESSETH:

     WHEREAS, the Company is offering in a private placement to accredited
investors (the “Offering”) of up to an aggregate of (i) 170,000 shares of its
Series B 6% Participating Convertible Preferred Stock (the “Series B Preferred
Stock”) at a price equal to $100.00 per share (the “Offering Price”), and (ii)
warrants to purchase shares of common stock of the Company (“Common Stock”)
equal to thirty percent (30%) of the total number of shares of Common Stock
into which the Series B Preferred Stock is convertible, at an exercise price
per share equal to $3.50 (the “Warrants”). The Warrants are issued for a five
(5) year period. The shares of Series B Preferred Stock and Warrants offered
hereby are sometimes referred to as the “Securities” and all Securities, all
shares of Common Stock issued or issuable upon conversion or exercise of such
Securities, as the case may be, and all shares of Replacement Common Stock
(defined below) are collectively referred to herein as the “Purchased
Securities”; and

     WHEREAS, the Subscriber desires to purchase that number of Securities set
forth on the signature page hereof on the terms and conditions hereinafter set
forth; and

     WHEREAS, the Company has engaged Leerink Swann & Company (the “Placement
Agent”) as placement agent for the Offering on a “best-efforts” basis.

     NOW, THEREFORE, in consideration of the premises and the mutual
representations and covenants hereinafter set forth, the parties hereto agree
as follows:

I. SUBSCRIPTION FOR SECURITIES AND REPRESENTATIONS BY SUBSCRIBER

     1.1 Subject to the terms and conditions hereinafter set forth, the
Subscriber hereby irrevocably subscribes for and agrees to purchase from the
Company such Securities as is set forth, and at the purchase price set forth,
upon the signature page hereof and the Company agrees to sell such Securities
to the Subscriber for said purchase price. The purchase price is payable by
wire transfer of immediately available funds contemporaneously with the
execution and delivery of this Agreement by the Subscriber. All wires should
be sent to:

JP Morgan Chase

55 Water Street

New York, NY 10041

ABA# 021 000 021

Account#: 323 059945

Attn: Henry Reinhold

1

 

     Certificates for the shares of Series B Preferred Stock and the Warrants
will be delivered by the Company to the Subscriber promptly following the
Closing (as herein defined).

     1.2 The Subscriber recognizes that the purchase of Securities involves a
high degree of risk in that (i) the Company will require funds in addition to
the proceeds of the Offering; (ii) an investment in the Company is highly
speculative and only investors who can afford the loss of their entire
investment should consider investing in the Company; (iii) the Subscriber may
not be able to liquidate its investment; (iv) transferability of the Securities
is extremely limited; and (v) in the event of a disposition, the Subscriber
could sustain the loss of its entire investment.

     1.3 The Subscriber represents that the Subscriber is an “accredited
investor” as such term is defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933, as amended (the “Act”), as indicated by the
responses to the questions contained in Section VII hereof, and that the
Subscriber is able to bear the economic risk and illiquidity of an investment
in the Securities.

     1.4 The Subscriber hereby acknowledges and represents that (i) the
Subscriber has prior investment experience, including investment in non-listed
and unregistered securities, or that the Subscriber has employed the services
of an investment advisor, attorney and/or accountant to read all of the
documents furnished or made available by the Company both to the Subscriber and
to all other prospective investors to evaluate the merits and risks of such an
investment on the Subscriber’s behalf; (ii) the Subscriber recognizes the
highly speculative nature of an investment in the Securities; and (iii) the
Subscriber is able to bear the economic risk and illiquidity which the
Subscriber assumes by investing in the Securities.

     1.5 The Subscriber (i) hereby represents that the Subscriber has been
furnished by the Company during the course of this transaction with and has
carefully read the Company’s SEC Filings (as hereafter defined), including
without limitation the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2003, the additional risk factors specific to the
Securities, the Common Stock, and the Offering contained in Schedule 1.5 hereto
(together with the SEC Filings, the “Offering Documents”), and all other
information regarding the Company which the Subscriber has requested or desired
to know; (ii) has been afforded the opportunity to ask questions of and receive
answers from duly authorized officers or other representatives of the Company
concerning the terms and conditions of the Offering; and (iii) has received any
additional information which the Subscriber has requested.

     1.6 (a) To the extent necessary, the Subscriber has retained, at its own
expense, and relied upon the advice of appropriate professionals regarding the
investment, tax and legal merits and consequences of this Agreement and its
purchase of the Securities hereunder.

            (b) The Subscriber represents that (i) the Subscriber was contacted
regarding the sale of the Securities by the Placement Agent (or an authorized
agent or representative thereof) with whom the Subscriber had a prior
substantial pre-existing relationship and (ii) no Securities were offered or
sold to it by means of any form of general solicitation or general advertising,
and in connection therewith the Subscriber did not (A) receive or review any
advertisement, article, notice or other communication published in a newspaper
or magazine or similar media or broadcast over television or radio, whether
closed circuit or generally available;

2

 

or (B) attend any seminar, meeting or industry investor conference whose
attendees were invited by any general solicitation or general advertising.

     1.7 The Subscriber hereby acknowledges that the Offering has not been
reviewed by the United States Securities and Exchange Commission (the “SEC”)
because of the Company’s representations that this Offering is intended to be
exempt from the registration requirements of Section 5 of the Act pursuant to
Sections 3(b), 4(2) and/or 4(6) thereof and Regulation D promulgated under the
Act. The Subscriber agrees that the Subscriber will not, directly or
indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit
any offers to buy, purchase or otherwise acquire or take a pledge of) any of
the Securities, except in compliance with the Act and the rules and regulations
promulgated thereunder.

     1.8 The Subscriber understands that none of the Securities have been
registered under the Act by reason of a claimed exemption under the provisions
of the Act which depends, in part, upon the Subscriber’s investment intention.
In this connection, the Subscriber hereby represents that the Subscriber is
purchasing the Securities for the Subscriber’s own account for investment and
not with a view toward the resale or distribution thereof to others. The
Subscriber, if an entity, was not formed for the purpose of purchasing the
Securities. The Subscriber understands that Rule 144 promulgated under the Act
requires, among other conditions, a one-year holding period prior to the resale
(in limited amounts) of securities acquired in a non-public offering without
having to satisfy the registration requirements under the Act.

     1.9 The Subscriber understands and hereby acknowledges that the Company is
under no obligation to register the Securities under the Act or any state
securities or “blue sky” laws other than as set forth in Section V. The
Subscriber consents that the Company may, if it desires, permit the transfer of
the Securities out of the Subscriber’s name only when the Subscriber’s request
for transfer is accompanied by an opinion of counsel reasonably satisfactory to
the Company that neither the sale nor the proposed transfer results in a
violation of the Act or any applicable state “blue sky” laws (collectively,
“Securities Laws”).

     1.10 The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Securities indicating that such
Securities have not been registered under the Act or any state securities or
“blue sky” laws and setting forth or referring to the restrictions on
transferability and sale thereof contained in this Agreement. The Subscriber is
aware that the Company will make a notation in its appropriate records and
issue “stop transfer” instructions to its transfer agent with respect to the
restrictions on the transferability of such Securities.

     1.11 The Subscriber understands that the Company will review this
Agreement and, if such Subscriber is an individual, hereby gives authority to
the Company to call Subscriber’s bank or place of employment (in a call in
which the Placement Agent participates) or otherwise review the financial
standing of the Subscriber; and it is further agreed that upon their mutual
agreement the Placement Agent and the Company reserve the unrestricted right,
without further documentation or agreement on the part of the Subscriber, to
reject or limit any subscription, to accept subscriptions for Securities and to
close the Offering to the Subscriber at any time.

3

 

     1.12 The Subscriber hereby represents that the address of the Subscriber
furnished by the Subscriber on the signature page hereof is the Subscriber’s
principal residence if the Subscriber is an individual or its principal
business address if it is a corporation or other entity.

     1.13 The Subscriber represents that the Subscriber has full power and
authority (corporate, statutory and otherwise) to execute and deliver this
Agreement and to purchase the Securities subscribed for hereby. This Agreement
constitutes the legal, valid and binding obligation of the Subscriber,
enforceable against the Subscriber in accordance with its terms.

     1.14 If the Subscriber is a corporation, partnership, limited liability
company, trust, employee benefit plan, individual retirement account, Keogh
Plan, or other entity, then (a) it is authorized and qualified to become an
investor in the Company and the person signing this Agreement on behalf of such
entity has been duly authorized by such entity to do so, and (b) it is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization.

     1.15 The Subscriber represents and warrants that the Subscriber is not (a)
a broker or dealer admitted to membership in the National Association of
Securities Dealers, Inc. (“NASD”), (b) a controlling stockholder of an NASD
member, or (c) a person associated with a member of the NASD.

     1.16 The Subscriber represents and warrants that it has not engaged,
consented to nor authorized any broker, finder or intermediary to act on its
behalf, directly or indirectly, as a broker, finder or intermediary in
connection with the transactions contemplated by this Agreement. The
Subscriber shall indemnify and hold harmless the Company from and against all
fees, commissions or other payments owing to any such person or firm acting on
behalf of such Subscriber hereunder.

     1.17 The Subscriber acknowledges that (a) the Company has engaged,
consented to and authorized the Placement Agent in connection with the
transactions contemplated by this Agreement, (b) the Company shall pay the
Placement Agent a commission and reimburse the Placement Agent’s expenses and
the Company shall indemnify and hold harmless the Subscriber from and against
all fees, commissions or other payments owing by the Company to the Placement
Agent or any other person or firm acting on behalf of the Company hereunder and
(c) registered representatives of the Placement Agent and/or its designees
(including, without limitation, registered representatives of the Placement
Agent and/or its designees who participate in the Offering and sale of the
securities sold in the Offering) will be paid a portion of the commissions paid
to the Placement Agent.

     1.18 The Subscriber, whose name appears on the signature line below, shall
be the beneficial owner of the Securities for which such Subscriber subscribes.

     1.19 The Subscriber agrees that from the time the Subscriber was first
contacted by the Placement Agent regarding the Offering, until a point in time
equal to the earlier of (i) the date that the Registration Statement (as
defined in Section 5.2(a)) is declared effective by the SEC) or (ii) four
months from the date hereof, the Subscriber has not and shall not, directly or
indirectly, through related parties, affiliates or otherwise, sell or purchase
or otherwise deal in or with any

4

 

equity security of the Company while in possession of any material
non-public information of the Company or in violation of any applicable
securities law or regulation.

     1.20 The Subscriber understands, acknowledges and agrees with the Company
as follows:

            (a) The Company may terminate the Offering or reject any subscription at
any time in its sole discretion. The execution of this Agreement by the
Subscriber or solicitation of the investment contemplated hereby shall create
no obligation on the part of the Company or the Placement Agent to accept any
subscription or complete the Offering.

            (b) The Subscriber hereby acknowledges and agrees that the subscription
hereunder is irrevocable by the Subscriber, and that, except as required by
law, the Subscriber is not entitled to cancel, terminate or revoke this
Agreement or any agreements of the Subscriber hereunder and that if the
Subscriber is an individual this Agreement shall survive the death or
disability of the Subscriber and shall be binding upon and inure to the benefit
of the parties and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.

            (c) No federal or state agency or authority has made any finding or
determination as to the accuracy or adequacy of the Offering Documents or as to
the fairness of the terms of the Offering nor any recommendation or endorsement
of the Securities. Any representation to the contrary is a criminal offense.
In making an investment decision, the Subscriber must rely on its own
examination of the Company and the terms of the Offering, including the merits
and risks involved.

II. REPRESENTATIONS BY THE COMPANY

     The Company hereby represents and warrants to the Subscriber that:

     2.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Louisiana and has the power and authority to conduct its business as presently
conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the nature of
the business presently conducted by it or the properties owned, leased or
operated by it, makes such qualification or licensing necessary and where the
failure to be so qualified or licensed would have a material adverse effect
upon the business, prospects or financial condition of the Company.

     2.2 Capitalization and Voting Rights. Upon Closing, the authorized
capital stock of the Company will be One Hundred Fifty Million (150,000,000)
shares of Common Stock and Five Million (5,000,000) shares of preferred stock,
of which 20,612,684 shares of Common Stock, 257,172 shares Series A 6%
Participating Convertible Preferred Stock (the “Series A Preferred Stock”), and
no shares of Series B Preferred Stock are issued and outstanding as of July 31,
2004. All issued and outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable. Except as set forth in this
Agreement or in the SEC Filings (as hereafter defined), there are no
outstanding options, warrants, agreements, commitments, convertible securities,
preemptive rights or other rights to subscribe for or to purchase any shares of
capital stock of the Company nor are there any agreements, promises or
commitments to issue

5

 

any of the foregoing. Except as set forth in the SEC Filings, in this
Agreement and as otherwise required by law, there are no restrictions upon the
voting or transfer of the Purchased Securities pursuant to the Company’s
Articles of Incorporation, as amended (the “Articles of Incorporation”),
By-laws or other governing documents or any agreement or other instruments to
which the Company is a party or by which the Company is bound.

     2.3 Authorization; Enforceability. The Company has the corporate right and
corporate authority to enter into this Agreement and to consummate the
transactions contemplated hereby. All corporate action on the part of the
Company, its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Agreement by the Company, the
authorization, sale, issuance and delivery of the Purchased Securities and the
performance of the Company’s obligations hereunder has been taken. This
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies,
and to limitations of public policy. The Purchased Securities have been duly
and validly authorized and, upon the issuance and delivery thereof and, in the
case of the Securities, payment therefor as contemplated by this Agreement,
will be free and clear of liens, duly and validly authorized and issued, fully
paid and nonassessable and will not impose personal liability on the holder
thereof. The issuance and sale of the Purchased Securities contemplated hereby
will not give rise to any preemptive rights or rights of first refusal on
behalf of any person.

     2.4 No Conflict; Governmental Consents.

            (a) The execution, delivery and performance by the Company of this
Agreement, the consummation of the transactions contemplated hereby and the
offer and sale of the Purchased Securities will not result in the violation of
any law, statute, rule, regulation, order, writ, injunction, judgment or decree
of any court or governmental authority to or by which the Company is bound, or
of any provision of the Articles of Incorporation or By-laws of the Company,
and will not conflict with, or result in a breach or violation of, any of the
terms or provisions of, or constitute (with due notice or lapse of time or
both) a default under, or give to others any rights of termination, amendment
(including without limitation, the triggering of any anti-dilution provisions),
acceleration or cancellation of any lease, loan agreement, mortgage, security
agreement, trust indenture or other agreement or instrument to which the
Company is a party or by which it is bound or to which any of its properties or
assets is subject, nor result in the creation or imposition of any lien upon
any of the properties or assets of the Company.

            (b) No consent, waiver, approval, authorization or other order of any
governmental authority or other third-party is required to be obtained by the
Company in connection with the authorization, execution, delivery and
performance of this Agreement or with the authorization, issuance and sale of
the Purchased Securities, except for such consents, waivers, approvals,
authorizations or orders as may be required to be obtained or made, and which
shall have been obtained or made at or prior to the Closing Date.

     2.5 Licenses. The Company has all licenses, permits and other
governmental authorizations currently required for the conduct of its business
or ownership of properties and is

6

 

in all material respects complying therewith, except for any licenses,
permits or other governmental authorizations which would not materially
adversely affect the business, property, financial condition, results of
operations or prospects of the Company.

     2.6 Litigation. The Company knows of no pending or threatened legal or
governmental proceedings against the Company which could materially adversely
affect the business, property, financial condition, prospects, results of
operations or prospects of the Company.

     2.7 Accuracy of Reports. All reports required to be filed by the Company
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
since December 31, 2003, have been duly and timely filed with the SEC. All
such reports complied at the time of their respective filing dates in all
material respects with the requirements of the Exchange Act or the Act, as
applicable, and all rules and regulations thereunder of their respective forms.
None of such reports contained (as of their respective dates) any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements contained therein,
in light of the circumstances under which they were made, not misleading.

     2.8 Investment Company. The Company is not an “investment company” within
the meaning of such term under the Investment Company Act of 1940, as amended,
and the rules and regulations of the SEC thereunder.

     2.9 Intellectual Property. The Company owns or possesses sufficient
rights to use all patents, patent rights, trademarks, copyrights, licenses,
inventions, trade secrets, trade names and know-how that are necessary for the
conduct of its business as now conducted except where the failure to own or
possess would not have a material adverse effect on the business, assets,
financial condition, prospects or results of operation of the Company (the
“Company Intellectual Property”). Except as set forth in the SEC Filings, (i)
the Company has not received any written notice of, and has no knowledge of,
any infringement by the Company of intellectual property rights of any third
party that, individually or in the aggregate, would have a material adverse
effect on the business, assets, financial condition, prospects or results of
operation of the Company and (ii) the Company has not received any written
notice of any infringement by a third party of any Company Intellectual
Property that, individually or in the aggregate, would have a material adverse
effect on the business, assets, financial condition, prospects or results of
operation of the Company.

     2.10 Insurance. The Company and each of its subsidiaries has in force
fire, casualty, product liability and other insurance policies, with extended
coverage, sufficient in amount to allow it to replace any of its material
properties or assets which might be damaged or destroyed or sufficient to cover
liabilities to which the Company may reasonably become subject, and such types
and amounts of other insurance with respect to its business and properties, on
both a per occurrence and an aggregate basis, as are customarily carried by
persons engaged in the same or similar business as the Company. No default or
event has occurred that could give rise to a default under any such policy.

7

 

     2.11 Anti-Takeover Provisions. The Company and its board of directors
have taken all necessary action, if any, in order to render inapplicable any
control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under its Certificate of Incorporation or the laws of the state of its
incorporation which is or could become applicable to any Subscriber as a result
of the transactions contemplated by this Agreement, including, without
limitation, the Company’s issuance of the Securities and the shares of Common
Stock into which such Securities are convertible or exercisable, as the case
may be, and any and all Subscriber’s ownership of the Securities and the shares
of Common Stock into which such Securities are convertible or exercisable, as
the case may be, provided that neither the anti-dilution nor change of control
approval rights of holders of outstanding securities of the Company shall be
deemed to be included in this representation to the extent such rights may
become available to them following the Closing Date as a result of changes in
circumstances occurring after the Closing Date.

     2.12 No Material Adverse Change. Since the filing of the Company’s most
recent SEC Report on Form 10-Q, (i) there has not been any material adverse
change (financial or otherwise) in the assets, properties, financial condition,
prospects, operating results or business of the Company, and (ii) there has
been no event or condition of any character that might have a material adverse
effect (financial or otherwise) on the assets, properties, financial condition,
prospects, operating results or business of the Company.

     2.13 Financial Statements. The financial statements included in the
Company’s most recent Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 and all other reports filed by the Company with the SEC
pursuant to the Exchange Act since the filing of such Annual Report on Form
10-K and prior to the date hereof (collectively, the “SEC Filings”) present
fairly and accurately in all material respects the financial position of the
Company as of the dates shown and its results of operations and cash flows for
the periods shown, and such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis (except as may be indicated thereon or in the notes thereto
and subject, in the case of unaudited financial statements, to normal
adjustments). Except as set forth in the financial statements of the Company
included in the SEC Filings filed prior to the date hereof, to the Company’s
knowledge, the Company has no liabilities, contingent or otherwise, except
those which individually or in the aggregate are not material to the financial
condition or operating results of the Company.

     2.14 Compliance with Laws. Neither the Company nor, to the Company’s
knowledge, any Person (as hereafter defined) acting on the Company’s behalf and
in accordance with the Company’s instructions, has conducted any general
solicitation or general advertising (as those terms are used in Regulation D of
the Act) in connection with the offer or sale of the Securities. Neither the
Company nor any of its Affiliates (as hereafter defined), nor, to the Company’s
knowledge, any Person acting on the Company’s or on the behalf of its
Affiliates and in accordance with the Company’s instructions, has, directly or
indirectly, made any offers or sales of any security of the Company or
solicited any offers to buy any security of the Company, under circumstances
that would adversely affect reliance by the Company on Section 4(2) of the Act
for the exemption from registration for the transactions contemplated hereby or
would require registration of the Securities under the Act. There are no
proceedings pending or to the

8

 

Company’s knowledge threatened against the Company relating to the
continued trading of the Company’s Common Stock on the OTC Bulletin Board®.

     2.15 No Violation. The Company is not in violation of its Articles of
Incorporation, Bylaws or other organizational documents. The Company is not in
default (and no event has occurred that with notice or lapse of time or both
would put the Company in default) under, nor has there occurred any event
giving others (with notice or lapse of time or both) any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company is a party, except for actual or possible
violations, defaults or rights that would not, individually or in the
aggregate, have a material adverse effect on the business, property, financial
condition, results of operations or prospects of the Company. Except as set
forth in the Offering Documents, the business of the Company is not being
conducted in violation of any law, ordinance or regulation of any governmental
entity, except for possible violations the sanctions for which either
individually or in the aggregate have not had and would not have a material
adverse effect on the business, property, financial condition, results of
operations or prospects of the Company.

     2.16 Tax Matters. The Company has timely filed all material federal,
state, local and foreign income and franchise and other tax returns required to
be filed by any jurisdiction to which it is subject and has paid all taxes due
in accordance therewith, and no tax deficiency has been determined adversely to
the Company which has had (nor does the Company have any knowledge of any tax
deficiency which, if determined adversely to the Company would reasonably be
expected to have) a material adverse effect on the business, assets, financial
condition or results of operation of the Company.

     2.17 Disclosure. None of the representations and warranties of the
Company appearing in this Agreement, when considered together as a whole,
contains, or on the Closing Date will contain, any untrue statement of a
material fact or omits, or on the Closing Date will omit, to state any material
fact required to be stated herein or therein in order for the statements herein
or therein, in light of the circumstances under which they were made, not to be
misleading.

III. TERMS OF SUBSCRIPTION

     3.1 The Offering is for up to 170,000 shares of Series B Preferred Stock
and Warrants equal to thirty percent (30%) of the total number of shares of
Common Stock into which the Series B Preferred Stock is convertible. The
Securities are offered on a “best efforts” basis.

     3.2 Upon the mutual consent of the Company and the Placement Agent, this
Offering may close (the “Closing”) prior to the sale of all 170,000 shares of
Series B Preferred Stock and there is no assurance that all 170,000 shares of
Series B Preferred Stock will be sold. The Closing shall occur at the
discretion of the Company and the Placement Agent (the “Closing Date”). The
purchase price is payable by wire transfer of immediately available funds as
provided in Section 1.1.

     3.3 The Subscriber hereby authorizes and directs the Company to deliver
the Securities to be issued to the Subscriber pursuant to this Agreement
directly to the Subscriber’s

9

 

account maintained by the Placement Agent or, if no such account exists,
to the residential or business address indicated on the signature page hereto.

     3.4 The Subscriber hereby authorizes and directs the Company to return any
funds related to unaccepted subscriptions to the same account from which the
funds were drawn, including any customer account maintained with the Placement
Agent.

IV. CONDITIONS TO OBLIGATIONS OF THE SUBSCRIBERS AND THE COMPANY

     4.1 The Subscribers’ obligation to purchase the Securities at the Closing
is subject to the fulfillment on or prior to the Closing Date of the following
conditions, which conditions may be waived at the option of each Subscriber to
the extent permitted by law:

            (a) Representations and Warranties. The representations and warranties
made by the Company in Section II hereof shall be true and correct in all
material respects when made, and shall be true and correct in all material
respects on the Closing Date with the same force and effect as if they had been
made on and as of said date.

            (b) Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Company on or prior to such purchase shall
have been performed or complied with in all material respects.

            (c) No Legal Order Pending. There shall not then be in effect any legal or
other order enjoining or restraining the transactions contemplated by this
Agreement.

            (d) No Law Prohibiting or Restricting Such Sale. There shall not be in
effect any law, rule or regulation prohibiting or restricting such sale or
requiring any consent or approval of any person to issue the Securities which
consent or approval shall not have been obtained (except as may otherwise be
provided in this Agreement).

            (e) Legal Opinion. Upon the Closing, counsel to the Company shall have
delivered to the Placement Agent for the benefit of the Subscribers a legal
opinion with respect to such legal matters relating to this Agreement and the
Offering as the Placement Agent may reasonably require.

            (f) Officer’s Certificate. The Company shall have delivered to the
Placement Agent on behalf of the Subscribers a certificate, dated the Closing
Date, duly executed on behalf of the Company by its Chief Executive Officer to
the effect set forth in clauses (a) and (b) above.

            (g) CFO’s Certificate. The Company shall have delivered to the Placement
Agent on behalf of the Subscribers a certificate, dated the Closing Date, duly
executed by its Chief Financial Officer or other appropriate officer,
certifying that the attached copies of the Company’s Articles of Incorporation,
by-laws and the resolutions of the Board of Directors, or a committee to which
it has delegated its authority, approving this Agreement and the transactions
contemplated hereby, are all true, complete and correct and remain unamended
and in full force and effect.

10

 

            (h) Amount Invested. The Company shall have received on or before the
Closing not less $10,000,000 in the aggregate from other Subscribers in
connection with the Offering.

     4.2 The Company’s obligation to sell the Securities at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, which conditions may be waived at the option of the Company to the
extent permitted by law:

            (a) Acknowledgements, Representations and Warranties. The
acknowledgements, representations and warranties made by the Subscriber in
Section I hereof shall be true and correct in all material respects when made,
and shall be true and correct in all material respects on the Closing Date with
the same force and effect as if they had been made on and as of said date;
provided, however, that any acknowledgement, representation or warranty made by
the Subscriber that is not true and correct and as a result the Subscriber is
not an “accredited investor” under Rule 501 under Regulation D of the Act or
the Company is not able to rely upon a private placement exemption under Rule
506 under Regulation D of the Act for the issuance of the Securities will
automatically be deemed to be material. If any such representations,
warranties or acknowledgements shall not be true and accurate in any respect
prior to the Closing, the undersigned shall give immediate written notice of
such fact to the Company, to the Placement Agent, and to his representatives,
if any, specifying which representations, warranties or acknowledgements are
not true and accurate and the reason therefor.

            (b) Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Subscriber on or prior to such purchase shall
have been performed or complied with in all material respects.

            (c) No Legal Order Pending. There shall not then be in effect any legal
or other order enjoining or restraining the transactions contemplated by this
Agreement.

            (d) No Law Prohibiting or Restricting Such Sale. There shall not be in
effect any law, rule or regulation prohibiting or restricting such sale or
requiring any consent or approval of any person to issue the Securities which
consent or approval shall not have been obtained (except as may otherwise be
provided in this Agreement).

            (e) Amount Invested. The Company shall have received on or before the
Closing not less $10,000,000 in the aggregate from other Subscribers in
connection with the Offering.

V. REGISTRATION RIGHTS.

     5.1 As used in this Agreement, the following terms shall have the
following meanings:

11

 

            (a) “Affiliate” shall mean, with respect to any Person (as defined below),
any other Person controlling, controlled by, or under direct or indirect common
control with, such Person (for the purposes of this definition “control,” when
used with respect to any specified Person, shall mean the power to direct the
management and policies of such person, directly or indirectly, whether through
ownership of voting securities, by contract or otherwise; and the terms
“controlling” and “controlled” shall have meanings correlative to the
foregoing).

            (b) “Business Day” shall mean a day, Monday through Friday, on which banks
are generally open for business in each of New York, New York; Boston,
Massachusetts; and Buffalo Grove, Illinois.

            (c) “Holders” shall mean the Subscriber and any person holding Registrable
Securities as defined below, or any person to whom the rights under Section V
have been transferred in accordance with Section 5.9 hereof, and who, if known
by the Company, shall be specifically named by the Company as selling
stockholders in the Registration Statement (as defined below).

            (d) “Person” shall mean any person, individual, corporation, limited
liability company, partnership, trust or other nongovernmental entity or any
governmental agency, court, authority or other body (whether foreign, federal,
state, local or otherwise).

            (e) The terms “register,” “registered” and “registration” refer to the
registration effected by preparing and filing with the SEC a registration
statement in compliance with the Act, and the declaration or ordering by the
SEC of the effectiveness of such registration statement.

            (f) “Registrable Securities” shall mean the shares of Common Stock
issuable upon conversion of the Series B Preferred Stock and exercise of the
Warrants and any shares of capital stock issued or issuable, from time to time,
as a distribution on or in exchange for or otherwise with respect to any of the
foregoing (including the Series B Preferred Stock and the Warrants), whether as
default payments, on account of anti-dilution or other adjustments or otherwise
(including without limitation all shares of Replacement Common Stock, if any);
provided, however, that securities shall only be treated as Registrable
Securities if and only for so long as they (A) have not been disposed of
pursuant to a registration statement declared effective by the SEC, (B) have
not been sold in a transaction exempt from the registration and prospectus
delivery requirements of the Act so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the consummation of
such sale, and (C) are held by a Holder or a permitted transferee pursuant to
Section 5.9.

            (g) “Registration Expenses” shall mean all expenses incurred by the
Company in complying with Section 5.2 hereof, including, without limitation,
all registration, qualification and filing fees, printing expenses, escrow
fees, fees and expenses of counsel for the Company, blue sky fees and expenses
and the expense of any special audits incident to, or required by, any such
registration (but excluding the aggregate fees of legal counsel for all
Holders).

            (h) “Registration Statement” shall have the meaning ascribed to such term
in Section 5.2 (a).

12

 

            (i) “Registration Period” shall have the meaning ascribed to such term in
Section 5.4 (a).

            (j) “Required Senior Lenders” shall mean “Required Lenders” as such term
is defined in the Senior Credit Agreement.

            (k) “Selling Expenses” shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and the aggregate
fees and expenses of legal counsel for all Holders.

            (l) “Senior Credit Agreement” shall mean that certain Credit Agreement
dated as of October 7, 2003 by and among the Company, Akorn (New Jersey), Inc.,
the financial institutions from time to time party thereto, as lenders, and
LaSalle Bank, National Association, as administrative agent, as such Credit
Agreement may be amended, restated, supplemented or otherwise modified from
time to time.

     5.2 The Company shall, as soon as practicable, but not later than thirty
(30) days after the Closing Date (the “Filing Date”), (i) use its reasonable
best efforts to file with the SEC a registration statement on Form S-1 (the
“Registration Statement”) with respect to the resale of the Registrable
Securities and use its reasonable best efforts to have such Registration
Statement declared effective by the SEC within 90 days from the Closing Date
and (ii) cause such Registration Statement to remain effective for the
Registration Period. Without limiting the generality of the foregoing, within
three business days after any Registration Statement that includes Registrable
Securities is declared effective by the SEC, the Company shall cause legal
counsel selected by the Company to deliver to the transfer agent for the
Registrable Securities (with copies to any Holder whose Registrable Securities
are included in such Registration Statement), an opinion of such counsel
providing that such Registrable Securities are available for resale under the
Act pursuant to the Registration Statement. If such Registration Statement is
not declared effective within such 90 day period from the Closing Date, the
Holders will have the following rights:

            (a) If the Registration Statement is not declared effective within 120
days from the Closing Date (or if the SEC issues any stop order(s) suspending
the effectiveness of the Registration Statement for a period of more than 60
days during such 120 day period), then for each 30 day period following the end
of such 120 day period until the earlier to occur of (i) the Registration
Statement becomes effective, (ii) the end of the Registration Period, or (iii)
the exercise by the Holder of the option to sell such Holder’s shares of Series
B Preferred Stock pursuant to Section 5.2(b) below, and the Company’s
satisfaction of its obligation under Section 5.2(b) below, the Company will pay
to each Holder an amount equal to 1.0% of the purchase price set forth upon the
signature page hereof for the shares of Series B Preferred Stock purchased by
such Holder, and for any partial 30 day period the Company shall pay a prorated
amount based on the number of days in such partial period. Payments of amounts
due under this Section 5.2(a), if any, shall be made by the Company to each
Holder (i) 270 days from the Closing Date, and (ii) on the last day of each
calendar year thereafter.

13

 

            (b) If the Registration Statement is not declared effective within 270
days from the Closing Date, each Holder will have the right, for a period of 60
days following the end of such 270 day period, to sell to the Company, and the
Company shall have the obligation to purchase from each Holder, the shares of
Series B Preferred Stock held by such Holder, for cash, at a purchase price
equal to 115% of the purchase price set forth upon the signature page hereof
for the shares of Series B Preferred Stock purchased by such Holder prorated in
the event such right is not exercised as to all such shares. Holder shall
exercise this right by completing and delivering the notice of exercise
attached hereto as Exhibit A together with the stock certificate for the shares
duly endorsed in blank (together, the “Notice of Exercise”) within such 60 day
period. Payment of the purchase price under this Section 5.2(b) shall be made
by the Company within 15 days of receipt of the Notice of Exercise by the
Company to each exercising Holder who delivers such notice within the requisite
60 day period.

            (c) (i) Notwithstanding the foregoing clauses (a) and (b) (the “Penalty
Provisions”), the Company and each Holder hereby acknowledge that (i) the
Holder’s right to receive payments in cash pursuant to the Penalty Provisions
is subordinate to the Company’s obligations under the Senior Credit Agreement
as in effect on the date hereof, (ii) the Company cannot make any payment in
cash to the Holders pursuant to the Penalty Provisions without (x) the prior
written consent of the Required Senior Lenders or (y) unless the Company’s
obligations under the Senior Credit Agreement are satisfied. Nothing in this
Section 5.2(c) shall prohibit the accrual and compounding of dividends pursuant
to the terms of the Series B Preferred Stock and the conversion of the Series B
Preferred Stock into shares of Common Stock issuable as a result of any such
accrual and compounding of dividends, as provided in paragraph D to Article V
of the Articles of Incorporation of the Company, as amended.

                   (ii) The Company may, in its sole discretion, in place of any cash payment
otherwise due to the Holder pursuant to Section 5.2(a) above (each a “Penalty
Cash Payment”), pay to such Holder when such Penalty Cash Payment is otherwise
due, for no further consideration, the number of fully paid, validly issued and
non-assessable shares of Common Stock, free from all taxes, liens, claims and
encumbrances (the “Replacement Common Stock”) equal to the number obtain by
dividing the amount of (x) the Penalty Cash Payment by (y) the Closing Price
(defined below) on the date immediately preceding the date such Penalty Cash
Payment is otherwise due. Any fractions of shares of Replacement Common Stock
shall be rounded up to the nearest whole number of shares. The Company
covenants that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued and otherwise unreserved Common Stock,
a sufficient number of shares of Replacement Common Stock, free from preemptive
rights or any other contingent purchase rights of persons other than the
Holder. For purposes of this Agreement, the “Closing Price” per share of
Common Stock on any date shall mean the closing sale price on such day or, in
case no such sale takes place on such day, the average of the reported closing
bid and asked prices, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the Common Stock or such other securities
are listed or admitted to trading or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the NASD Automated
Quotation System or such other system then in use, or, if on any such date the
Common Stock or such other securities are not quoted by any such organization,
the average of

14

 

the closing bid and asked prices as furnished by a professional market
maker, selected by the Board of Directors and reasonably acceptable to the
holders of a majority of the outstanding shares of Series B Preferred Stock,
making a market in the Common Stock or such other securities of the Company.

     5.3 All Registration Expenses incurred in connection with any
registration, qualification, exemption or compliance pursuant to Section 5.2
shall be borne by the Company. All Selling Expenses relating to the sale of
securities registered by or on behalf of Holders shall be borne by such Holders
pro rata on the basis of the number of securities so registered.

     5.4 In the case of the registration, qualification, exemption or
compliance effected by the Company pursuant to this Agreement, the Company
shall, upon reasonable request, inform each Holder as to the status of such
registration, qualification, exemption and compliance. At its expense the
Company shall:

            (a) use its reasonable best efforts to keep such registration, and any
qualification, exemption or compliance under state securities laws which the
Holders reasonably request the Company to obtain, continuously effective as to
all Registrable Securities until the earlier of: (i) the Holders having
completed the distribution of the Registrable Securities described in the
Registration Statement relating thereto; or (ii) with respect to any Holder,
such time as all Registrable Securities then held by such Holder may be sold in
compliance with Rule 144 under the Act within any three-month period. The
period of time during which the Company is required hereunder to keep the
Registration Statement effective is referred to herein as “the Registration
Period”;

            (b) advise the Holders (or in the case of (ii) below, advise the Placement
Agent):

                   (i) when the Registration Statement or any amendment thereto has been
filed with the SEC and when the Registration Statement or any post-effective
amendment thereto has become effective;

                   (ii) of any request by the SEC for amendments or supplements to the
Registration Statement or the prospectus included therein or for additional
information;

                   (iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for such purpose;

                   (iv) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Registrable Securities included therein
for sale in any jurisdiction or the initiation or threatening of any proceeding
for such purpose; and

                   (v) subject to the limitations set forth in Section 5.7(b)(ii) hereof, of
the happening of any event that requires the making of any changes in the
Registration Statement or the prospectus so that, as of such date, the
statements therein are not misleading and do not omit to state a material fact
required to be stated therein or necessary to make the statements therein (in
the case of the prospectus, in the light of the circumstances under which they
were made) not misleading;

15

 

            (c) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of any Registration Statement at the earliest
possible time;

            (d) furnish to each Holder, without charge, at least one copy of such
Registration Statement and any post-effective amendment or supplement thereto,
including financial statements and schedules, and, if the Holder so requests in
writing, all exhibits (excluding those incorporated by reference) in the form
filed with the SEC;

            (e) during the Registration Period, deliver to each Holder, without
charge, a reasonable number of copies of the prospectus included in such
Registration Statement and any amendment or supplement thereto as such Holder
may reasonably request; and the Company consents to the use, consistent with
the provisions hereof, of the prospectus and any amendment or supplement
thereto by each of the selling Holders of Registrable Securities in connection
with the offering and sale of the Registrable Securities covered by the
prospectus and any amendment or supplement thereto;

            (f) during the Registration Period, deliver to each Holder, upon request,
(i) a copy of the full Registration Statement (excluding exhibits); (ii) all
exhibits excluded by the parenthetical to the immediately preceding clause (i);
and (iii) such other documents as may be reasonably requested by the Holder.

            (g) prior to any public offering of Registrable Securities pursuant to the
Registration Statement, register or qualify or obtain an exemption for the
offer and sale under the securities or blue sky laws of such jurisdictions as
any such Holders reasonably request in writing, provided that the Company shall
not for any such purpose be required to qualify generally to transact business
as a foreign corporation in any jurisdiction where it is not so qualified or to
consent to general service of process in any such jurisdiction, and do any and
all other acts or things reasonably necessary or advisable to enable the offer
and sale in such jurisdictions of the Registrable Securities covered by the
Registration Statement;

            (h) cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold
pursuant to the Registration Statement, free of any restrictive legends to the
extent not required at such time and in such denominations and registered in
such names as Holders may request;

            (i) upon the occurrence of any event contemplated by Section 5.4(b)(v)
above, the Company shall promptly prepare a post-effective amendment to the
Registration Statement or a supplement to the related prospectus, or file any
other required document so that, as thereafter delivered to purchasers of the
Registrable Securities included therein, the prospectus will not include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading;

16

 

            (j) use its reasonable best efforts to comply in all material respects
with all applicable rules and regulations of the SEC, and make generally
available to the Holders not later than 45 days (or 90 days if the fiscal
quarter is the fourth fiscal quarter) after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement satisfying the provisions of Section
11(a) of the Act; and

            (k) at the request of any Subscriber, the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to any Registration Statement required to be filed hereunder and
the prospectus used in connection with such Registration Statement as may be
necessary in order to change the plan of distribution set forth in such
Registration Statement.

     5.5 The Holders shall have no right to take any action to restrain, enjoin
or otherwise delay any registration pursuant to Section 5.2 hereof as a result
of any controversy that may arise with respect to the interpretation or
implementation of this Agreement.

     5.6 (a) To the extent permitted by law, the Company shall indemnify each
Holder, each underwriter of the Registrable Securities and each person
controlling such Holder and each such underwriter within the meaning of Section
15 of the Act, and each director, officer, partner, member, employee and agent
of each such Holder and each such underwriter, with respect to which any
registration, qualification or compliance has been sought, contemplated by or
required pursuant to this Agreement, against all claims, losses, expenses,
costs, damages and liabilities (or action in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened
(subject to Section 5.6(c) below), arising out of or based on (i) any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus or offering circular, or any amendment or
supplement thereof, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they were made,
or (ii) any violation or alleged violation by the Company of the Act, the
Exchange Act, or any rule or regulation promulgated under the Act or the
Exchange Act, and shall reimburse each Holder, each underwriter of the
Registrable Securities and each person controlling such Holder and each such
underwriter, for reasonable legal and other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action as and when incurred; provided that the Company shall not
be liable in any such case to the extent that any untrue statement or omission
or allegation thereof is made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Holder or
underwriter and stated to be specifically for use in such registration
statement, prospectus or offering circular; provided that the Company shall not
be liable in any such case where the claim, loss, damage or liability arises
out of or is related to the failure of the Holder to comply with the covenants
and agreements contained in Section 5.7 hereof, and except that the foregoing
indemnity agreement is subject to the condition that, insofar as it relates to
any such untrue statement or alleged untrue statement or omission or alleged
omission made in the preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the SEC at the time the registration statement
becomes effective or in the amended prospectus filed with the SEC pursuant to
Rule 424(b) of the Act or in the prospectus subject to completion under Rule
434 of the Act, which together meet the requirements of

17

 

Section 10(a) of the Act (the “Final Prospectus”), such indemnity
agreement shall not inure to the benefit of any such Holder, any such
underwriter or any such controlling person, if a copy of the Final Prospectus
furnished by the Company to the Holder for delivery was not furnished to the
person or entity asserting the loss, liability, claim or damage at or prior to
the time such furnishing is required by the Act and the Final Prospectus would
have cured the defect giving rise to such loss, liability, claim or damage.
Except as otherwise set forth herein, the Company shall reimburse each Holder,
upon such Holder’s demand, for all reasonably necessary expenses and costs
which are incurred, as and when incurred, by such Holder as a result of the
indemnification claims described in this Section 5.6(a). Such demand may be
made from time to time prior to resolution of the claim. In no event shall the
Company be liable for the expenses and costs of more than one attorney on
behalf of the Holders unless in the reasonable judgment of a Holder, based
upon written advice of its counsel, a conflict of interest exists between the
Holders with respect to such claims, in which case the Company shall reimburse
the Holders for additional attorneys.

            (b) Each Holder will severally and not jointly, if Registrable Securities
held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, each underwriter of the
Registrable Securities and each person who controls the Company and each
underwriter of the Registrable Securities within the meaning of Section 15 of
the Act, against all claims, losses, expenses, costs, damages and liabilities
(or actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened (subject to Section
5.6(c) below), arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any registration statement,
prospectus or offering circular, or any amendment or supplement thereof,
incident to any such registration, qualification or compliance or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances in which they were made, and will reimburse the
Company, such directors and officers, each underwriter of the Registrable
Securities and each person controlling the Company and each underwriter of the
Registrable Securities for reasonable legal and any other expenses or costs
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action as and when incurred, in each case to
the extent, but only to the extent, that such untrue statement or omission or
allegation thereof is made in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of the Holder and stated
to be specifically for use in such registration statement, prospectus or
offering circular; provided that the indemnity shall not apply to the extent
that such claim, loss, damage or liability results from the fact that a current
copy of the prospectus or offering circular was not made available to the
Holder and such current copy of the prospectus or offering circular would have
cured the defect giving rise to such loss, claim, expense, costs, damage or
liability. Notwithstanding the foregoing, in no event shall a Holder be liable
for any such claims, losses, expenses, costs, damages or liabilities in excess
of the proceeds received by such Holder in that offering, except in the event
of fraud by such Holder and such fraud gave rise in whole or in part to such
loss, claim, expense, cost, damage or liability.

            (c) Each party entitled to indemnification under this Section 5.6 (the
“Indemnified Party”) shall give notice to the party required to provide
indemnification (the “Indemnifying Party”) promptly after such Indemnified
Party has actual knowledge of any claim

18

 

as to which indemnity may be sought, and shall permit the Indemnifying
Party to assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall conduct
the defense of such claim or litigation, shall be approved by the Indemnified
Party (whose approval shall not unreasonably be withheld), and the Indemnified
Party may participate in such defense with its own counsel at such Indemnified
Party’s expense unless the named parties to any proceeding covered hereby
(including any impleaded parties) include both the Company or any others the
Company may designate and one or more Indemnified Persons, and representation
of the Indemnified Persons and such other parties by the same counsel would be
inappropriate due to actual or potential differing interests between them, and
provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Agreement, unless such failure is materially prejudicial to the
Indemnifying Party in defending such claim or litigation. An Indemnifying
Party shall not be liable for any settlement of an action or claim effected
without its written consent (which consent will not be unreasonably withheld).

            (d) If the indemnification provided for in this Section 5.6 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, cost or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party thereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, cost 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 which resulted in such
loss, liability, claim, damage, cost or expense as well as any other relevant
equitable considerations. The relative fault of the 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 or which
should have been 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; provided,
however, that (a) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation, and (c) contribution (together with any
indemnification or other obligations under this Agreement) by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.

     5.7 (a) Subject to the limitations set forth in Section 5.7(b)(ii) below,
upon receipt of any notice from the Company of the happening of any event
requiring the preparation of a supplement or amendment to a prospectus relating
to Registrable Securities so that, as thereafter delivered to the Holders, such
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, each Holder shall forthwith discontinue
disposition of Registrable Securities pursuant to the registration statement
contemplated by Section 5.2 until its receipt of copies of the supplemented or
amended prospectus from the Company and, if so directed by the Company, each
Holder shall deliver to the Company all copies, other than permanent file
copies then in such Holder’s possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.

19

 

            (b) Any Holder which owns five percent (5%) or more (and with respect to
5.7(b)(ii), “any Holder” regardless of how many shares of Common Stock the
Holder owns) of the Company’s outstanding Common Stock shall suspend, upon
request of the Company, any disposition of Registrable Securities pursuant to
the Registration Statement and prospectus contemplated by Section 5.2 during
(i) any period not to exceed one 180-day period within any one 12-month period
the Company requires in connection with an underwritten offering of equity
securities and (ii) any period, not to exceed two 45-day periods within any
12-month period, when the Company determines in good faith that offers and
sales pursuant thereto should not be made by reason of the presence of material
undisclosed circumstances or developments with respect to which the disclosure
that would be required in such a prospectus is premature and may reasonably be
expected to have an adverse effect on the Company. The period of time in which
the disposition of Registrable Securities pursuant to the Registration
Statement and prospectus is so suspended shall be referred to as a “Black-Out
Period.” The Company agrees to so advise the Holders promptly of the
commencement and termination of any such Black-Out Period, and the Holders
agree to keep the fact of such Black-Out Period confidential.

            (c) As a condition to the inclusion of its Registrable Securities, each
Holder shall furnish to the Company such information regarding such Holder, the
securities of the Company owned beneficially or of record by such Holder and
the distribution proposed by such Holder as the Company may request in writing
to the extent such information is required in connection with any registration,
qualification or compliance referred to in this Section V.

            (d) With respect to any sale of Registrable Securities pursuant to a
Registration Statement filed pursuant to this Section V, each Holder hereby
covenants with the Company not to make any sale of the Registrable Securities
without effectively causing the prospectus delivery requirements under the Act
to be satisfied.

            (e) At the end of the Registration Period, the Holders of Registrable
Securities included in the Registration Statement shall discontinue sales of
shares pursuant to such Registration Statement upon receipt of notice from the
Company of its intention to remove from registration the shares covered by such
Registration Statement which remain unsold.

     5.8 (a) So long as any Holder (or any of their respective affiliates)
beneficially owns any of the Registrable Securities, the Company shall maintain
the listing or eligibility for quotation of all Registrable Securities then
issued on each national securities exchange, automated quotation system or
electronic bulletin board on which shares of Common Stock are currently listed.
The Company shall use its reasonable best efforts to continue the trading of
its Common Stock on the OTC Bulletin Board®, or on the Nasdaq SmallCap Market,
the Nasdaq National Market, the American Stock Exchange or the New York Stock
Exchange and will comply in all material respects with the reporting, filing
and other obligations under the bylaws or rules of the NASD, such exchanges or
such electronic system, as applicable.

            (b) With a view to making available to the Holders the benefits of certain
rules and regulations of the SEC which at any time permit the sale of the
Registrable Securities to the public without registration, the Company shall
use its reasonable best efforts:

20

 

                   (i) to make and keep public information available, as those terms are
understood and defined in Rule 144 under the Act, at all times;

                   (ii) to file with the SEC in a timely manner all reports and other
documents required of the Company under the Exchange Act; and

                   (iii) so long as a Holder owns any Registrable Securities, to furnish to
such Holder upon any reasonable request a written statement by the Company as
to its compliance with Rule 144 under the Act, and of the Exchange Act, and a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents of the Company as such Holder may reasonably
request in availing itself of any rule or regulation of the SEC allowing a
Holder to sell any such securities without registration.

     5.9 The rights and obligations of the Holders under this Section V may not
be assigned or transferred to or assumed by any transferee or assignee except
(i) to a transferee that acquires at least 20% of such Holder’s Registrable
Securities or (ii) to an Affiliate or limited or general partner of a Holder;
provided that such transfer was not in violation of this Agreement or the
Securities Laws.

VI. MISCELLANEOUS

     6.1 Any notice or other communication given hereunder shall be deemed
sufficient in writing and sent by (a) telecopy or facsimile at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received); or (b) registered or certified
mail, return receipt requested, or delivered by hand against written receipt
therefor, addressed to Akorn, Inc., Facsimile: (847) 279-6123, Attention: Chief
Financial Officer, with a copy to Leerink Swann & Company, One Federal Street,
Boston, Massachusetts 02110, Facsimile (617) 918-4900, Attention: Stuart R.
Barich. Notices shall be deemed to have been given or delivered on the date of
mailing, except notices of change of address, which shall be deemed to have
been given or delivered when received.

     6.2 This Agreement shall not be changed, modified or amended except by a
writing signed by the parties to be charged, and this Agreement may not be
discharged except by performance in accordance with its terms or by a writing
signed by the party to be charged.

     6.3 Upon the execution and delivery of this Agreement by the Subscriber,
this Agreement shall become a binding obligation of the Subscriber with respect
to the purchase of Securities as herein provided, subject to acceptance by the
Company and the Placement Agent; subject, however, to the right hereby reserved
to the Company to enter into the same agreements with other subscribers and to
add and/or delete other persons as subscribers.

     6.4 Notwithstanding the place where this Agreement may be executed by any
of the parties hereto, the parties expressly agree that all the terms and
provisions hereof shall be construed in accordance with and governed by the
laws of the State of New York without regard to principles of conflicts of law.

     6.5 The holding of any provision of this Agreement to be invalid or
unenforceable by a court of competent jurisdiction shall not affect any other
provision of this Agreement, which

21

 

shall remain in full force and effect. If any provision of this Agreement
shall be declared by a court of competent jurisdiction to be invalid, illegal
or incapable of being enforced in whole or in part, such provision shall be
interpreted so as to remain enforceable to the maximum extent permissible
consistent with applicable law and the remaining conditions and provisions or
portions thereof shall nevertheless remain in full force and effect and
enforceable to the extent they are valid, legal and enforceable, and no
provisions shall be deemed dependent upon any other covenant or provision
unless so expressed herein.

     6.6 It is agreed that a waiver by either party of a breach of any
provision of this Agreement shall not operate, or be construed, as a waiver of
any subsequent breach by that same party.

     6.7 The parties agree to execute and deliver all such further documents,
agreements and instruments and take such other and further action as may be
necessary or appropriate to carry out the purposes and intent of this
Agreement.

     6.8 This Agreement may be executed in two or more counterparts each of
which shall be deemed an original, but all of which shall together constitute
one and the same instrument.

     6.9 On or before 9:00 a.m., New York time, on the first business day
following the Closing Date, the Company shall file a Current Report on Form 8-K
describing the terms of the transactions contemplated by this Agreement in the
form required by the Exchange Act and attaching the material terms of this
Agreement (including, without limitation, this Agreement, and the form of
Warrant) as exhibits to such filing (including all attachments, the “8-K
Filing”). As of the filing of the 8-K Filing with the SEC, the Subscriber
shall not be in possession of any material, nonpublic information that it
received from the Company or any of its respective officers, directors,
employees or agents, that is not disclosed in the 8-K Filing. The Company shall
not, and shall cause each of its respective officers, directors, employees and
agents, not to, provide the Subscriber with any material, nonpublic information
regarding the Company from and after the filing of the 8-K Filing with the SEC
without the express written consent of the Subscriber. Neither the Company nor
the Subscriber shall issue any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without the prior approval of the Subscriber, to
make any press release or other public disclosure with respect to such
transactions (i) in substantial conformity with the 8-K Filing or (ii) as may
be required by applicable law, rule or regulation (provided that in the case of
clause (i) the Subscriber shall be consulted by the Company in connection with
any such press release or other public disclosure prior to its release).
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of the Subscriber, or include the name of the Subscriber in any filing with the
SEC or any regulatory agency, without the prior written consent of the
Subscriber, except (i) for disclosure thereof in the 8-K Filing or Registration
Statement or (ii) as required by law or regulations or any order of any court
or other governmental agency, in which case the Company shall provide the
Subscriber with prior notice of such disclosure.

     6.10 Nothing in this Agreement shall create or be deemed to create any
rights in any person or entity not a party to this Agreement, except for the
Placement Agent and the holders of Registrable Securities.

22

 

     6.11 Any pronoun herein shall include all genders and/or the plural or
singular as appropriate from the context.

     6.12 Each Subscriber acknowledges that it has independently evaluated the
merits of the transactions contemplated by this Agreement, that it has
independently determined to enter into the transactions contemplated hereby and
thereby, that it is not relying on any advice from or evaluation by any other
Subscriber, and that it is not acting in concert with any other Subscriber in
making its purchase of securities hereunder or in monitoring its investment in
the Company. The Subscribers and, to its knowledge, the Company agree that the
Subscribers have not taken any actions that would deem such Subscribers to be
members of a “group” for purposes of Section 13(d) of the Exchange Act, and the
Subscribers have not agreed to act together for the purpose of acquiring,
holding, voting or disposing of equity securities of the Company. Each
Subscriber further acknowledges that BayStar Capital II, LP has retained
Drinker Biddle & Reath LLP (“DB&R”) to act as its counsel in connection with
the transactions contemplated by this Agreement and that DB&R has not acted as
counsel for any of the other Subscribers in connection therewith and none of
the other Subscribers have the status of a client of DB&R for conflict of
interest or other purposes as a result thereof.

     6.13 The representations and warranties of the Subscriber and the Company
contained in Sections 1 and 2 of this Agreement shall survive the Closing for a
period of one (1) year; provided, however, that nothing in this Section 6.13
shall prejudice the enforceability of any other provision of this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

23

 

     VII. CONFIDENTIAL INVESTOR QUESTIONNAIRE

     7.1 The Subscriber represents and warrants that he, she or it comes within
one category marked below, and that for any category marked, he, she or it has
truthfully set forth, where applicable, the factual basis or reason the
Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO THIS
SECTION VII WILL BE KEPT STRICTLY CONFIDENTIAL. The undersigned agrees to
furnish any additional information which the Company deems necessary in order
to verify the answers set forth below.

	 	 	 	 	 	 	 
	Category A
	 	     	 	The undersigned is an individual (not a partnership, corporation, etc.)
whose individual net worth, or joint net worth with his or her spouse,
presently exceeds $1,000,000.
	 
	 	 	 	 	 	 
	

	 	 	 	 	 	Explanation. In calculating net
worth you may include equity in
personal property and real
estate, including your principal
residence, cash, short-term
investments, stock and
securities. Equity in personal
property and real estate should
be based on the fair market
value of such property less debt
secured by such property.
	 
	 	 	 	 	 	 
	Category B
	 	     	 	The undersigned is an individual (not a partnership, corporation, etc.)
who had an individual income in excess of $200,000 in each of the two
most recent years, or joint income with his or her spouse in excess of
$300,000 in each of those years (in each case including foreign income,
tax exempt income and full amount of capital gains and losses but
excluding any income of other family members and any unrealized capital
appreciation) and has a reasonable expectation of reaching the same
income level in the current year.
	 
	 	 	 	 	 	 
	Category C
	 	     	 	The undersigned is a director or executive officer of the Company.
	 
	 	 	 	 	 	 
	Category D
	 	     	 	The undersigned is a bank; a savings and loan association; insurance
company; registered investment company; registered business development
company; licensed small business investment company or “SBIC”; or
employee benefit plan within the meaning of Title 1 of Employee
Retirement Income Security Act or “ERISA” and (a) the investment
decision is made by a plan fiduciary which is either a bank, savings
and loan association, insurance company or registered investment
advisor, or (b) the plan has total assets in excess of $5,000,000 or is
a self-directed plan with investment decisions made solely by persons
that are accredited investors.
	 
	 	 	 	 	 	 
	 
	 	 	 	
 
	 
	 	 	 	 	 	 
	 
	 	 	 	
 
	 
	 	 	 	(describe entity)

24

 

	 	 	 	 	 
	Category E

	 	     
	 	The undersigned is a private business development company as defined in
section 202(a)(22) of the Investment Advisors Act of 1940.
	 
	 	 	 	 
	

	 	 	 	
 
	 
	 	 	 	 
	

	 	 	 	
 
	

	 	 	 	(describe entity)
	 
	 	 	 	 
	Category F

	 	     
	 	The undersigned is either a corporation, partnership, Massachusetts
business trust, or nonprofit organization within the meaning of Section
501(c)(3) of the Internal Revenue Code, in each case not formed for the
specific purpose of acquiring the Securities and with total assets in
excess of $5,000,000.
	 
	 	 	 	 
	

	 	 	 	
 
	 
	 	 	 	 
	

	 	 	 	
 
	

	 	 	 	(describe entity)
	 
	 	 	 	 
	Category G

	 	     
	 	The undersigned is a trust with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the Securities where
the purchase is directed by a “sophisticated person” as defined in
Regulation 506(b)(2)(ii) under the Act.
	 
	 	 	 	 
	Category H

	 	     
	 	The undersigned hereby certifies that it is an accredited investor
because all of its equity owners are accredited investors. The
Company, in its sole discretion, may request information regarding the
basis on which such equity owners are accredited.
	 
	 	 	 	 
	Category I

	 	     
	 	The undersigned hereby certifies that it is an accredited investor
because it has total assets in excess of $5,000,000 and was not formed
for the specific purpose of acquiring the Securities.
	 
	 	 	 	 
	Category J

	 	     
	 	The undersigned is not within any of the categories above and is
therefore not an accredited investor.

The Company will notify a prospective Subscriber whether such Subscriber is
eligible to purchase Securities pursuant to this Agreement (and the Company, in
its sole discretion, retains the right to accept or reject all such purchases).
The undersigned agrees that it will notify the Company at any time on or prior
to the Closing Date in the event that the representations and warranties in
this Investor Questionnaire shall cease to be true, accurate and complete.

25

 

     7.2 SUITABILITY (please answer each question)

            (a) For all Subscribers, please list types of prior investments:

            (b) For all Subscribers, please state whether you have participated in
other private placements before:

YES             NO      

            (c) If your answer to question (b) above was “YES”, please indicate
frequency of such prior participation in private placements of:

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Biotechnology,
	 	 	 	 	 	 	 	 	 	 	Pharmaceutical and
	 	 	Public	 	Private	 	Other Life Science
	 	 	Companies
	 	Companies
	 	Companies *

	Frequently
	 	 	     	 	 	 	     	 	 	 	     	 
	Occasionally
	 	 	     	 	 	 	     	 	 	 	     	 
	Never
	 	 	     	 	 	 	     	 	 	 	     	 

*indicate how many companies, whether public or private, are in the
biotechnology, pharmaceutical or other life sciences
sectors.

            (d) For trust, corporate, partnership and other institutional Subscribers,
do you expect your total assets to significantly decrease in the foreseeable
future?

YES             NO      

            (e) For all Subscribers, do you have any other investments or contingent
liabilities which you reasonably anticipate could cause you to need sudden cash
requirements in excess of cash readily available to you?

YES             NO      

            (f) For all Subscribers, are you familiar with the risk aspects and the
non-liquidity of investments such as the securities for which you seek to
subscribe?

YES             NO      

26

 

            (g) For all Subscribers, do you understand that there is no guarantee of
financial return on this investment and that you run the risk of losing your
entire investment?

YES             NO      

     7.3 MANNER IN WHICH TITLE IS TO BE HELD. (circle one)

            (a) Individual Ownership

            (b) Community Property

            (c) Joint Tenant with Right of Survivorship (both parties must sign)

            (d) Partnership*

            (e) Tenants in Common

            (f) Company*

            (g) Trust*

            (h) Other

     *If Securities are being subscribed for by an entity, the attached
Certificate of Signatory must also be completed.

27

 

     7.4 NASD AFFILIATION.

     Are you affiliated or associated with an NASD member firm (please check one)?

YES             NO      

     If yes, please describe:**

      

     

     

     

     

     7.5 STOCK OWNERSHIP

     Do you beneficially own any shares of the Company’s Common Stock or any
securities convertible into or exercisable for shares of the Company’s Common
Stock?

YES             NO      

     If yes, please describe, including number of shares:

      

     

     

     

     

     7.6 COMPANY RELIANCE ON THIS QUESTIONNAIRE

     The undersigned is informed of the significance to the Company of the
foregoing representations and answers contained in this Section VII and such
answers have been provided under the assumption that the Company and its
counsel will rely on them.

28

 

	 	 	 	 	 	 	 	 	 
	SIGNATURE PAGE
	 	Date Signed:                    , 2004
	 
	 	 	 	 	 	 	 	 
	Number of shares of Series B Preferred Stock:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	
 	 
	 
	 	 	 	 	 	 	 	 
	Multiplied by Offering Price per share:
	 	 	x	 	 	$	100.00	 
	 
	 	 	 	 	 	 	
 	 
	 
	 	 	 	 	 	 	 	 
	Equals subscription amount:
	 	 	=	 	 	 	 	 
	 
	 	 	 	 	 	 	
 	 

“INVESTOR” (Name in which securities should be issued)

		
	By: 	

		
	Print Name: 	

		
	Title: 	

Address

City, State and Zip Code

Telephone-Business

Facsimile-Business
 

Tax ID # or Social Security #
 

*The attached Certificate of Signatory must also be completed.

29

 

     This Subscription Agreement is agreed to and accepted as of      , 2004.

	 	 	 
	

	 	AKORN, INC.
	 
	 	 
	

	 	By:
	 
	 	 
	

	 	
 
	

	 	Name:
	

	 	Title:

30

 

CERTIFICATE OF SIGNATORY

(To be completed if Securities are being subscribed for by an entity)

     I,                     , am the                      of
                     (the “Entity”).

     I certify that I am empowered and duly authorized by the Entity to execute
and carry out the terms of the Subscription Agreement and to purchase and hold
the Securities, and certify further that the Subscription Agreement has been
duly and validly executed on behalf of the Entity and constitutes a legal and
binding obligation of the Entity.

     IN WITNESS WHEREOF, I have set my hand this       day of      , 2004.

	 	 	 
	 
	 	 
	

	 	
 
	

	 	(Signature)

31

 

SCHEDULE 1.5

ADDITIONAL RISK FACTORS

1. Additional Capital. The Company may require funds in addition to those
being raised in this Offering to operate and grow the Company’s business. The
Company may seek additional funds through public and private financing,
including equity and debt offerings. However, adequate funds through the
financial markets or from other sources may not be available when needed or on
terms favorable to the Company or to the Subscriber. In addition, because the
Company’s Common Stock currently is traded on the OTC Bulletin Board®, the
Company may experience further difficulty accessing the capital markets.
Without sufficient additional funding, the Company may be required to delay,
scale back or abandon some or all of the Company’s product development,
manufacturing, acquisition, licensing and marketing initiatives, or operations.
Further, such additional financing, if obtained, may require the granting of
rights, preferences or privileges senior to those of the Common Stock and
Series B Preferred Stock and result in substantial dilution of the existing
ownership interests of the Common Stockholders, Series B Preferred Stockholders
and potentially the holders of warrants as well.

2. Registration. Despite the Company’s reasonable best efforts under the terms
of this Agreement, there can be no assurance that any registration statement
filed with respect to the Securities will become or remain effective. In
addition, there is no assurance regarding the price for which the Securities
may be sold or that there will be buyers for the Securities offered for sale
under such a registration statement. Therefore, the Subscriber may bear the
economic risk of the Subscriber’s investment for an indefinite period of time
and may not be able to sell the Securities at any price on the open market or
otherwise.

3. Limited market for Common Stock and no established market for the Series B
Preferred Stock and Warrants. The Common Stock is not listed on any exchange
or on the Nasdaq Stock Market®, although it is quoted on the OTC Bulletin
Board®. We are in the process of seeking a listing on an exchange for our
Common Stock. Currently, there is no market for the Series B Preferred Stock
and the Warrants. We do not expect to qualify for or seek such listing for the
Warrants in the foreseeable future. There can be no assurance that you will be
able to sell your shares of Series B Preferred Stock or Warrants, or the Common
Stock issuable upon conversion or exercise, respectively, at any time in the
future or at all or that a more active trading market will develop in the
foreseeable future. In addition, the price at which you may be able to sell is
very unpredictable because there are very few trades in the Common Stock.
Because the Common Stock is so thinly traded, a large block of shares traded
can lead to a dramatic fluctuation in the share price.

4. Concentrated ownership of Common Stock creates a risk of sudden changes in
our share price. The sale by any of our large shareholders of a significant
portion of that shareholder’s holdings could have a material adverse effect on
the market price of the Common Stock. In addition, the issuance of shares of
the Series B Preferred Stock and their subsequent conversion into Common Stock
in connection with this offering would have the immediate effect of increasing
the public float of the Common Stock. Such increase may cause the market price
of our Common Stock to decline or fluctuate significantly.

32

 

5. Future Dilution. If the price per share of the Company’s Common Stock at
the time of exercise or conversion of any preferred stock, warrants, options,
convertible subordinated debt, or any other convertible securities
(collectively, “Convertible Securities”), including all of the Convertible
Securities set forth in the Company’s SEC Filings, is in excess of the various
exercise or conversion prices of such Convertible Securities, exercise or
conversion of such Convertible Securities would have a dilutive effect on the
Company’s Common Stock. The amount of such dilution, however, cannot currently
be determined as it would depend on the difference between the stock price and
the price at which the Convertible Securities were exercised or converted at
the time of such exercise or conversion.

6. General. The Subscriber should be aware that the risk factors of the
Company set forth in this Schedule 1.5, the Agreement and the Company’s SEC
Filings, including without limitation the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, are in no way inclusive of all the
potential risks associated with the Company. The Subscriber should not rely
upon the disclosures contained herein in any decision to provide financing to
the Company, but should complete its own independent investigation as to the
suitability and as to the risk and potential loss involved with providing
financing to the Company.

33

 

EXHIBIT A

AKORN, INC.

NOTICE OF EXERCISE UNDER

SECTION 5.2(B) OF THE

SUBSCRIPTION AGREEMENT DATED AUGUST      , 2004

To AKORN, INC.:

The undersigned holder (“Holder”) of shares of Series B 6% Participating
Convertible Preferred Stock (the “Series B Preferred Stock”) hereby irrevocably
elects to exercise the Holder’s right pursuant to Section 5.2(b) of the above
referenced Subscription Agreement, to sell      shares of Series B
Preferred Stock represented by certificate no.       (the “Stock Certificate”) to
the Company for the price of $      in cash, which sum represents the
aggregate purchase price for such shares of Series B Preferred Stock (as
determined under Section 5.2(b) of the Subscription Agreement) to which this
Notice of Exercise relates. The Stock Certificate is enclosed with this
notice, duly endorsed in blank.

	 	 	 
	

	 	HOLDER:
	 
	 	 
	

	 	
 
	

	 	[Name of holder as specified on the face of
the stock certificate]
	 
	 	 
	

	 	
 
	

	 	[Signature of person signing on behalf of
holder]
	 
	 	 
	

	 	
 
	

	 	[Print name and title (if any) of person
signing on behalf of holder (if different)
{i.e. “John Smith, President"}]
	 
	 	 
	 
	 	 
	

	 	
 
	 
	 	 
	

	 	
 
	

	 	[Address]
	 
	 	 
	

	 	
 
	

	 	[Date]

34

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