Exhibit 10.2
AGREEMENT OF SUBORDINATION & ASSIGNMENT
This AGREEMENT OF SUBORDINATION & ASSIGNMENT made and dated as
of June 20, 2003, by JL DISTRIBUTORS, INC., a corporation of
the State of Delaware with its principal corporate place of
business at ▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇ Floor, White
Plains, Westchester County, New York 10604 (hereinafter
referred to as "CREDITOR")
in favor of
FLEET CAPITAL CORPORATION, a corporation organized
and existing under the laws of the State of Rhode Island with
offices at ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇ (hereinafter referred to as "LENDER")
WITNESSES THAT:
(1) WHEREAS, FIVE STAR GROUP, INC., a corporation of the State of Delaware
with its principal corporate place of business at ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, P.O. Box
1960, East Hanover, ▇▇▇▇▇▇ County, New Jersey (hereinafter referred to as
"DEBTOR") 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);
(2) WHEREAS, pursuant to the Loan Agreement, DEBTOR has obtained the
benefits of a $25,000,000 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, it is a condition of the obligation of LENDER to execute the
Loan Agreement and to extend to DEBTOR the benefits of the Revolving Loan that
this Agreement shall have been executed and shall be in full force and effect;
and
(4) WHEREAS, CREDITOR desires that LENDER enter into the Loan Agreement and
extend the Revolving Loan to DEBTOR as aforesaid and, as a result, executes this
Agreement as an inducement to LENDER to do so;
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 DEBTOR under the Loan
Agreement, CREDITOR hereby agrees 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 DEBTOR has paid and satisfied in full all "Liabilities"
which are owed by DEBTOR to LENDER.
(ii) For purposes of this Agreement, the term "Claims" means 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 DEBTOR 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 DEBTOR's obligations to CREDITOR under (x) 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 (y) that certain $4,500,000 note dated August 2, 2002 (the
"Subordinated SellerNote"), 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 CREDITOR 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.
(c) Notwithstanding the provisions of subparagraph (a) above, DEBTOR 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: (i) No Event of Default has occurred and is continuing under the Loan
Agreement.
(ii) The amount of any permitted "principal paydown" will be
calculated and paid once each year, after LENDER's receipt
and review of BORROWER's audited fiscal year-end financial
statements prepared and submitted as required by the Loan
Agreement.
(iii) The "principal paydown" for BORROWER's 2002 fiscal
year can be made no sooner than April 1, 2003 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
(determined based on generally accepted accounting
principles, consistently applied over the period to which
they relate) for BORROWER's 2002 fiscal year .The "principal
paydown" for BORROWER's 2003 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 2003 fiscal year Net Income
after taxes cannot be made until April 1, 2004] 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
(determined 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 2004 must be based on BORROWER's 2003 Net Income
after taxes].
(iv) 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 (provided, however, that
this subsection (iv) shall not apply to any "principal
paydown" made during BORROWER's 2003 fiscal year).
(v) 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.
(vi) 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.
(vii) 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).
(viii) 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.
(ix) 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.
(x) 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).
(xi) 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.
(xii) 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.
(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 DEBTOR 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.
(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, 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.
(8) CREDITOR and DEBTOR represent to LENDER that DEBTOR now owes CREDITOR
the principal sum of $4,500,000 and that DEBTOR'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.
(9) CREDITOR and DEBTOR further agree that 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.
(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.
(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.
(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. IN WITNESS WHEREOF, each of
the undersigned has caused these presents to be properly executed as of the date
first above written.
WITNESS: FIVE STAR GROUP, INC.
(DEBTOR)
By:
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▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇
Executive Vice President
WITNESS: JL DISTRIBUTORS, INC.
(CREDITOR)
By:
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▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇, Vice President
