AGREEMENT OF SUBORDINATION & ASSIGNMENT
Exhibit
10.2
AGREEMENT
OF SUBORDINATION & ASSIGNMENT
This AGREEMENT OF SUBORDINATION &
ASSIGNMENT made and dated as of June 27, 2008, by
JL DISTRIBUTORS, INC., a
corporation of the State of Delaware with its principal corporate place of
business at ▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ (hereinafter referred
to as "CREDITOR")
and
FIVE STAR GROUP, INC., a
corporation of the State of Delaware with its principal corporate place of
business at ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ with
its mailing address at ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, P.O. Box 1960, East Hanover, ▇▇▇▇▇▇
County, New Jersey 07936 (hereinafter referred to as “BORROWER”)
and
FIVE STAR PRODUCTS, INC., a
corporation of the State of Delaware with its principal corporate place of
business at ▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ (hereinafter referred to as "GUARANTOR")
in favor
of
BANK OF AMERICA, N.A., a national banking
association organized and existing under the laws of the United States, with
offices at ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ (hereinafter referred to as
"LENDER")
WITNESSES THAT:
(1) WHEREAS, BORROWER and LENDER
are parties to a certain Loan and Security Agreement dated even date herewith
(such certain Loan and Security Agreement and all extensions, modifications
(including without limitation modifications increasing or decreasing the amount
of the Revolving Loan described below), refinancings, renewals, substitutions,
replacements and/or redatings thereof being called the "Loan Agreement" in this
Agreement); and
(2) WHEREAS, pursuant to the Loan
Agreement, BORROWER has obtained the benefits of a $35,000,000 revolving loan
facility (called the "Revolving
Loan" in this Agreement and more fully defined in Article I of the Loan
Agreement) from LENDER; and
(3) WHEREAS, GUARANTORhas
guaranteed the obligations owed by BORROWER to LENDER under the Loan
Agreement;
(4) WHEREAS, it is a condition of
the obligation of LENDER to execute the Loan Agreement and to extend to BORROWER
the benefits of the Revolving Loan that this Agreement shall have been executed
and shall be in full force and effect; and
(5) WHEREAS, CREDITOR desires that
LENDER enter into the Loan Agreement and extend the Revolving Loan to BORROWER
as aforesaid and, as a result, executes this Agreement as an inducement to
LENDER to do so; and
(6) WHEREAS, in this Agreement
BORROWER and GUARANTOR are hereinafter jointly called “DEBTOR”;
NOW, THEREFORE, in
consideration of the premises and other good and valuable consideration and in
order to induce LENDER from time to time to extend and/or to continue to extend
credit, advances or loans to BORROWER under the Loan Agreement, CREDITOR,
BORROWER and GUARANTOR all hereby agree as follows:
(1) (a) (i) Subject
to the provisions of subparagraph (b) and subparagraph (c) below, no “Claims” which CREDITOR now has
or may hereafter have or acquire against DEBTOR or any of its property or any of
its rights in any property can be paid unless and until BORROWER has paid and
satisfied in full all “Liabilities” which are owed by
BORROWER to LENDER.
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(ii) For
purposes of this Agreement, the term “Claims” means the
following:
(A) all
claims and demands (and all interest accrued or that may hereafter accrue
thereon) which CREDITOR now has or may hereafter have or acquire against
BORROWER or any of its property or any of its rights in any property which, in
each and all of the foregoing cases, arise out of BORROWER's obligations to
CREDITOR under that certain Asset Purchase Agreement dated August 31, 1998
between JL DISTRIBUTORS, INC. (as seller and then known as FIVE STAR GROUP,
INC.) and BORROWER (as buyer and then known as "FIVE STAR ACQUISITION CORP.")
relating to BORROWER’s purchase of the assets of said JL DISTRIBUTORS, INC.
(then known as FIVE STAR GROUP, INC.) and
(B) all claims and demands (and all
interest accrued or that may hereafter accrue thereon) which CREDITOR now has or
may hereafter have or acquire against GUARANTOR or any of its property or any of
its rights in any property which, in each and all of the foregoing cases, arise
out of GUARANTOR's obligations to CREDITOR under GUARANTOR’s certain $2,800,000
note, dated June 10, 2005 (the “Subordinated Seller Note”), a
copy of which is attached hereto as Exhibit "A".
(iii) For
purposes of this Agreement, the term "Liabilities" shall have the
same meaning in this Agreement that it has in the Loan Agreement.
(b) Notwithstanding
the provisions of subparagraph (a) above, DEBTOR may pay and GUARANTOR may
receive payments of interest on the Subordinated Seller Note so long as no Event
of Default has occurred and is continuing under the Loan Agreement.
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(c)
Notwithstanding the provisions of subparagraph (a) above, GUARANTOR may pay and
CREDITOR may receive limited repayments of principal (each a “principal paydown”) on the
Subordinated Seller Note if the following conditions have been
satisfied:
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(i)
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No
Event of Default has occurred and is continuing under the Loan
Agreement.
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(ii)
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The
amount of any permitted “principal paydown” will be calculated and paid
once each year, after LENDER’s receipt and review of GUARANTOR’s audited
fiscal year-end financial statements consolidated with BORROWER and
prepared and submitted as required by the Loan
Agreement.
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(iii)
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The
“principal paydown” for BORROWER’s 2008 fiscal year can be made no sooner
than April 1, 2009 and cannot exceed the lesser of (A) $1,250,000 or (B)
the sum of $1,000,000 plus 50% of BORROWER’s Net Income after taxes (as
determined in accordance with the Loan Agreement based on generally
accepted accounting principles, consistently applied over the period to
which they relate) for BORROWER’s 2008 fiscal year .The
“principal paydown” for BORROWER’s 2009 fiscal year and for each fiscal
year thereafter can be made no sooner than April 1 of the immediately
following fiscal year [e.g., the “principal
paydown” based on BORROWER’s 2009 fiscal year Net Income after taxes
cannot be made until April 1, 2010] and cannot exceed the lesser of (A)
$1,250,000 or (B) the sum of $1,000,000 plus 50% of BORROWER’s Net Income
after taxes (as determined in accordance with the Loan Agreement based on
generally accepted accounting principles, consistently applied over the
period to which they relate) for the fiscal year immediately preceding the
date of distribution [e.g., the “principal
paydown” made by BORROWER in 2010 must be based on BORROWER’s 2009 Net
Income after taxes].
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(iv)
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The
full amount of the “principal paydown” made in any fiscal year, if treated
as a scheduled payment in the year BORROWER’s Net Income after taxes was
earned, will not cause the Fixed Charge Coverage (as determined in
accordance with the Loan Agreement) to be less than 1.13 to 1.0 for the
year in which such income was
earned.
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(v)
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Immediately
prior to the “principal paydown”, the Fixed Charge Coverage (as determined
in accordance with the Loan Agreement) for the year in which BORROWER’s
Net Income after taxes was earned must be greater than 1.25 to
1.0.
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(vi)
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If
only the component of the “principal paydown” consisting of 50% of
BORROWER’s Net Income after taxes for the year in which such income was
earned is treated as a scheduled payment, the Fixed Charge Coverage (as
determined in accordance with the Loan Agreement) for the year in which
such income was earned must be at least 1.25 to
1.0.
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(vii)
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After
giving effect to the “principal paydown”, the “loan value” of “Eligible Inventory” and
“Eligible
Receivables” must exceed the outstanding principal balance of the
Revolving Loan by at least $1,500,000 (the terms “loan value”, “Eligible Inventory” and
“Eligible
Receivables” to have the same meaning herein that they have in the
Loan Agreement).
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(viii)
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The
amount of the “principal paydown”, when deducted from BORROWER’s “Tangible
Net Worth” (as determined in accordance with the Loan Agreement) will not
cause such Tangible Net Worth to be less than
$6,000,000.
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(ix)
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The
ratio of BORROWER’s “Total Debt to its Tangible Net Worth” (as determined
in accordance with the Loan Agreement) will not, when the “principal
paydown” is taken into account, cause such ratio of Total Debt to Tangible
Net Worth to be more than 6.0 to
1.0.
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(x)
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The
average “loan
value” of “Eligible Inventory” and
“Eligible
Receivables” during the three full calendar months preceding the
date of the “principal paydown” must exceed by at least $2,500,000
BORROWER’s average daily usage under the Revolving Loan during the same
three month period (the terms “loan value”, “Eligible Inventory” and
“Eligible
Receivables” to have the same meaning herein that they have in the
Loan Agreement).
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(xi)
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Each
allowed annual “principal paydown” is for one year only and is non
cumulative so that any “principal paydown” which is not made in any year
will not accrue to and cannot be used in future
years.
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(xii)
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The
“principal paydown”, if treated for accounting purposes as made in the
fiscal year from which the payment has been earned, cannot be made if the
amount and effect of the payment would have given rise to a covenant
default, if such “principal paydown” had in fact been made in such fiscal
year.
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(d) Notwithstanding
the provisions of paragraph (a) above, CREDITOR or ADDITIONAL CREDITOR (as
hereinafter defined) may exercise its right to convert the Subordinated Seller
Note into common stock of GUARANTOR in accordance with the terms of the
Subordinated Seller Note. Upon the conversion of the Subordinated
Seller Note into common stock of GUARANTOR resulting in the full and complete
extinguishment of the debt represented by the Subordinated Seller Note, all
further rights and obligations under this Agreement as it relates to GUARANTOR
and the Subordinated Seller Note (and the common stock of GUARANTOR issued in
conversion thereof) shall be terminated and extinguished.
(2) In
all events, no collateral or other security may be given by DEBTOR to CREDITOR
to secure payment of any sum due on any of the Claims, and no such collateral or
other security shall be received, accepted or retained by CREDITOR unless and
until BORROWER has paid and satisfied in full all the Liabilities.
(3) CREDITOR
waives any and all notice of the acceptance of this Agreement and of the
creation, extension, modification (including without limitation any modification
increasing or decreasing the amount of the Liabilities), refinancing, renewal,
substitution, replacement, redating and/or accrual of any of the Liabilities or
of the reliance of LENDER upon this Agreement.
(4) CREDITOR
hereby consents that, without notice to or further assent by CREDITOR, and
without impairing the subordination contained in this Agreement (a) the
obligation of DEBTOR or of any other party for or upon any of the Liabilities
may, from time to time, in whole or in part, be renewed, extended, modified,
accelerated, compromised or released by LENDER, as it may deem advisable and
whether with or without consideration, (b) any collateral and/or liens securing
any of the Liabilities may, from time to time, in whole or in part, be
exchanged, sold, impaired, released, surrendered or otherwise disposed of by
LENDER, as it may deem advisable and whether with or without consideration, and
(c) any deposit balance or balances to the credit of DEBTOR may, from time to
time, in whole or in part, be paid out, surrendered, released or otherwise
disposed of by LENDER, as it in its discretion may deem advisable and whether
with or without consideration.
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(5) CREDITOR
hereby transfers and assigns to LENDER, as collateral security for any and all
of the Liabilities, all Claims of CREDITOR against DEBTOR, and hereby authorizes
AGENT, in its own name or in the name of CREDITOR, to collect and enforce said
Claims by suit, proof of debt in any proceeding under the Bankruptcy Act, or
amendments thereto, or any decedent's estate, insolvency or liquidation
proceeding, or otherwise.
(6) Should
any payment (except as set forth in Paragraph 1(b) and Paragraph 1(c) above) or
security or anything of any value whatsoever be received by CREDITOR for or on
account of said Claims (except as set forth in Paragraph 1(d) above), prior
to the payment and satisfaction in full of the Liabilities, CREDITOR agrees that
it will forthwith deliver the same to LENDER in precisely the form received,
except for CREDITOR's endorsement or assignment where necessary, for application
on account of the Liabilities, and that until so delivered, CREDITOR shall hold
the same in trust as the property of LENDER.
(7) CREDITOR
further agrees that, should any signature, endorsement, assignment or other form
of transfer be required to effect the transfer of any such payment, security or
other thing of value to LENDER, or in any other respect to carry out the terms
of this Agreement, to make and deliver all signatures, endorsements, transfers,
assignments and other instruments required by LENDER to effectuate the purposes
of this Agreement as herein expressed or reasonably implied; and in the event of
the failure of CREDITOR to do so within 15 days of written request by LENDER,
LENDER is hereby irrevocably constituted and appointed the agent and attorney in
fact of CREDITOR to do so, with full power of substitution in the
premises.
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(8) CREDITOR
and GUARANTOR represent to LENDER that GUARANTOR now owes CREDITOR the principal
sum of $2,800,000 and
that GUARANTOR's obligation to repay such sum is evidenced by the Subordinated
Seller Note, a copy of which is attached hereto as Exhibit "A". Such
sum is owed without counterclaim, defense or offset and may be prepaid only as
so allowed by Paragraph 1(b)
and Paragraph
1(c) above or transferred to an ADDITIONAL CREDITOR or converted into
common stock of GUARANTOR only as so allowed by Paragraph 17 below and Paragraph 1 (d) above,
respectively.
(9) CREDITOR
and GUARANTOR further agree that, prior to the conversion permitted by Paragraph 1 (d) above, at no
time hereafter will any part of said indebtedness be represented by any other
negotiable instruments or writings, except the Subordinated Seller Note or such
other negotiable instruments or writings, if any, as LENDER shall request to be
executed and delivered to it for the purpose of evidencing said indebtedness or
any part thereof, and in that case said negotiable instruments or other writings
shall either be payable to LENDER or delivered to LENDER, or, if payable to
CREDITOR, shall be endorsed and/or assigned by CREDITOR and delivered to
LENDER.
(10) CREDITOR
and DEBTOR agree that the rights granted to LENDER hereunder shall continue in
full force and effect notwithstanding the fact that BORROWER's account may, from
time to time, be temporarily in a credit position and shall continue until the
Loan Agreement is terminated and all the Liabilities are paid in
full.
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(11) DEBTOR
hereby agrees that (a) it will render to LENDER upon demand, from time to time,
a statement of the account of CREDITOR with DEBTOR; (b) LENDER shall have
access, from time to time, to its books and records in order that LENDER may
make full and free examination of the state of the accounts of CREDITOR with
DEBTOR (with the right to make copies thereof); and (c) it will duly comply with
and perform each and every term of this Agreement on its part required to be
performed.
(12) DEBTOR
agrees that a breach by either DEBTOR or CREDITOR in the performance of any of
the terms of this Agreement shall be an Event of Default as that term is defined
in the Loan Agreement.
(13) The
term "DEBTOR" as used
throughout this Agreement shall include the corporation named herein as DEBTOR,
and shall also include, but not be limited to, (a) any successor individual or
individuals, association, partnership or corporation to which all or
substantially all of the business or assets of DEBTOR shall have been
transferred and (b) any other corporation into or with which DEBTOR shall have
been merged, consolidated, reorganized, or absorbed.
(14) No
waiver of any right or remedy, and no modification of this Agreement shall be
effective unless in writing signed by the party to be charged, and then only to
the extent therein set forth.
(15) The
rights and remedies of LENDER under this Agreement, shall be cumulative, and may
be exercised independently or concurrently with any other rights and remedies
LENDER may have, and such rights and remedies may be exercised from time to time
in whole or in part as LENDER in its sole discretion, may
determine.
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(16) No
delay on the part of LENDER in exercising any right, power or privilege
hereunder or elsewhere conferred shall operate as a waiver thereof.
(17) This
Agreement is binding upon the undersigned, and their respective heirs,
executors, administrators, successors or assigns, shall inure to the benefit of
LENDER and its successors and assigns, and shall be governed by, and construed
in accordance with the laws of the State of New Jersey. Notwithstanding any
other provisions of this Agreement, CREDITOR may transfer the Subordinated
Seller Note to a wholly-owned subsidiary of National Patent Development
Corporation (the “ADDITIONAL CREDITOR”); provided that the ADDITIONAL CREDITOR
agrees to become a “CREDITOR” under this Agreement pursuant to a written
instrument satisfactory to LENDER.
(18) CREDITOR
AND DEBTOR MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER DOCUMENTS CONTEMPLATED
TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS
WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THE LOAN
AGREEMENT AND MAKE THE REVOLVING LOAN.
(19) This
Agreement may be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which taken together shall constitute one and the
same agreement. Delivery of an executed counterpart of a signature
page to this Agreement by facsimile or in PDF shall be as effective as delivery
of a manually executed counterpart of this Agreement.
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IN WITNESS WHEREOF, each of the
undersigned has caused these presents to be properly executed as of the date
first above written.
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WITNESS:
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FIVE
STAR GROUP, INC.
(BORROWER)
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/s/ ▇▇▇
▇▇▇▇▇▇▇
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By: |
/s/
▇▇▇▇ ▇▇▇▇▇▇▇
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▇▇▇ ▇▇▇▇▇▇▇, Secretary
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▇▇▇▇ ▇▇▇▇▇▇▇, Vice President | ||
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WITNESS:
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FIVE STAR PRODUCTS,
INC.
(GUARANTOR)
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| /s/ ▇▇▇ ▇▇▇▇▇▇▇ | By: | /s/ ▇▇▇▇ ▇▇▇▇▇▇▇ | |
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▇▇▇ ▇▇▇▇▇▇▇,
Secretary
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▇▇▇▇
▇▇▇▇▇▇▇, President
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| WITNESS: | JL DISTRIBUTORS,
INC. (CREDITOR) |
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| /s/ ▇▇▇ ▇▇▇▇▇▇▇ | By: | /s/ ▇▇▇▇ ▇▇▇▇▇▇▇ | |
| ▇▇▇ ▇▇▇▇▇▇▇, Secretary | ▇▇▇▇ ▇▇▇▇▇▇▇, President | ||
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EXHIBIT
"A"
True copy
of Subordinated Seller Note
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