This Forbearance
Agreement (this “ Agreement ”), dated as of
July 28, 2009, is among Zila, Inc. , a Delaware
corporation (“ Borrower ”), Zila
Biotechnology, Inc. , an Arizona corporation (“ ZB
”), Zila Pharmaceuticals, Inc. , a Nevada corporation
(“ ZP ”), Zila Technical, Inc. , an
Arizona corporation (“ Zila Technical ”),
Zila Limited , a English company (“ ZL
”), Professional Dental Technologies, Inc. , a Nevada
corporation (“ PDT ”), Zila Therapeutics,
Inc. , a Nevada corporation (“ Zila Therapeutics
”), Zila Dental Technologies, Inc. , an Arkansas
corporation (“ ZDT ”), Zila Canada, Inc.
, an Arkansas corporation (“ ZC ” and together
with ZB, ZP, Zila Technical, ZL, PDT, Zila Therapeutics and ZDT,
the “ Subsidiary Guarantors ”), and TOLMAR
Holding, Inc. , a Delaware corporation (“ Lender
”).
A. Lender has
acquired from Visium Balanced Master Fund, Ltd. (“
Visium ”) and Atlas Master Fund, Ltd. (“
Atlas ”) the Third Amended and Restated Senior Secured
Convertible Notes, dated November 28, 2006 (the “
Notes ”), made by Borrower, in the aggregate principal
amount of $12,000,001.20. In connection with such acquisition, the
following agreements, among others, were assigned to Lender:
(i) the Pledge and Security Agreement, dated November 28,
2006, as amended (the “ Security Agreement ”),
among Borrower, the Subsidiary Guarantors and Balyasny Asset
Management, L.P., as agent, (ii) the Copyright Security
Agreement (as defined in the Security Agreement), (iii) the
Trademark Security Agreement (as defined in the Security
Agreement), (iv) the Patent Security Agreement (as defined in
the Security Agreement), (v) the Deposit Account Control
Agreement (as defined in the Security Agreement) and (vi) the
Purchase Agreement, dated November 13, 2006, as amended (the
“ Original Purchase Agreement ”), among,
inter alia , Borrower, Atlas and Visium.
B. Borrower,
Lender and Project Z Acquisition Sub, Inc., a Delaware corporation
(“ Acquisition Sub ”), are parties to the
Agreement and Plan of Merger, dated June 25, 2009 (the “
Merger Agreement ”), which contemplates a transaction
in which Lender will acquire all of Borrower’s outstanding
stock for cash through a reverse subsidiary merger of Acquisition
Sub with and into Borrower (the “ Merger ”).
Concurrently with the execution and delivery of this Agreement,
Borrower, Lender and Acquisition Sub are entering into the First
Amendment to Agreement and Plan of Merger, of even date herewith,
which amends the Merger Agreement to, among other things, increase
the per share consideration to be paid to Borrower’s
stockholders in the Merger.
C. The Notes
are secured by, among other documents, the Security Agreement and
certain pledges and guarantees executed by the Borrower and the
Subsidiary Guarantors (individually, an “ Obligor
” and, collectively, the “ Obligors ”) in
connection with the Security Agreement (the Notes, the Security
Agreement, the Copyright Security Agreement, the Trademark Security
Agreement, the Patent Security Agreement, the Deposit Account
Control Agreement, the Original Purchase Agreement and all
guarantees, security agreements and instruments, assignments,
certificates and other documents or agreements executed by the
Obligors or any of their affiliates evidencing, securing or
otherwise relating to the Notes are collectively referred to in
this Agreement as the “ Note Documents
”).
D. Except for
Borrower’s failure to make the payments (due and payable on
January 31, 2009 and April 30, 2009, respectively) of
accrued and unpaid interest on the principal amount of the Notes
(the “ Prior Defaults ”), the Obligors represent
and warrant to Lender that no Event of Default (as defined in the
Notes) or event which, with the giving of notice, the lapse of time
or both would constitute such an Event of Default, has occurred and
is continuing.
E. To help
facilitate consummation of the Merger, Lender desires to forbear,
for a certain period of time and subject to the terms and
conditions set forth in this Agreement, from exercising
its
rights (“
Acceleration Rights ”) under the Note to accelerate
the payment of all or part, as the case may be, of the outstanding
principal amount of the Notes and accrued and unpaid interest
thereon as a result of the Prior Defaults or as a result of
Borrower’s (i) failure to make the payments (due and
payable on July 31, 2009 and October 31, 2009) of accrued
and unpaid interest then due and payable on the principal amount of
the Notes and (ii) payments in order to cancel the Target PIPE
Warrants (as defined in the Merger Agreement) in accordance with
and as contemplated by the Merger Agreement (the “
Prospective Defaults ”).
In consideration
of the mutual covenants contained herein, for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as
follows:
1.
Acknowledgement of Recitals . Each of the above Recitals is
incorporated herein and deemed to be the agreement of Lender and
the Obligors, and each of the Obligors acknowledges that each
Recital is true and correct, and that it is being relied upon by
Lender in agreeing to the terms of this Agreement.
(a) Until the
expiration of the Forbearance Period (as defined below), Lender
will forbear from the exercise of its Acceleration Rights solely
with respect to the Prior Defaults and the Prospective Defaults;
provided, however , that (i) the Obligors shall comply
during the Forbearance Period with all covenants, agreements,
limitations, restrictions or prohibitions that would otherwise be
effective or applicable under the Note Documents during the
continuance of any default or event of default under the Note
Documents, and (ii) nothing herein shall restrict, impair or
otherwise affect any of Lender’s rights and remedies under
any agreements containing subordination provisions in favor of
Lender (including, without limitation, any rights or remedies
available to Lender as a result of th
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