Exhibit 10.40
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 777 Westchester Avenue, Fourth 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 750 Walnut Avenue, Third Floor, Cranford, New
Jersey 07016 (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 903 Murray
Road, P.O. Box 1960, East Hanover, Morris 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:
- ------------------------- --------------------------------------------
John Moran Steve Schilit
Executive Vice President
WITNESS: JL DISTRIBUTORS, INC.
(CREDITOR)
By:
- ------------------------- --------------------------------------------
Steve Schilit John Moran, Vice President
EXHIBIT "A"
True copy of subordinated note