SUBORDINATION AGREEMENT
THIS
SUBORDINATION AGREEMENT
(this
“Agreement”),
dated
as of June 6, 2006 (the “Effective
Date”),
is
made by and between Xxxx
X.
Xxxxxxx (“Senior
Creditor”)
and
Xxxx
Xxxxxx Xxxxxx Acquisition Fund, LLC (together
with its successors and assigns, “Subordinated
Creditor”).
RECITALS
A. Patient
Safety Technologies, Inc., a Delaware corporation (“Borrower”),
and
Senior Creditor propose to enter into that certain Secured Convertible Note
and
Warrant Purchase Agreement dated as of June 6, 2006 (as the same may be amended,
restated, or otherwise modified from time to time, the “Senior
Creditor Agreement”),
pursuant to which Borrower will execute and deliver a Secured Convertible
Promissory Note in the amount of $1,100,000 (the “Senior
Note”).
The
funds advanced to or owed by Borrower under the Senior Note shall be referred
to
collectively herein as the “Senior
Loans.”
To
secure the Senior Loans, Borrower will grant to Senior Creditor a security
interest in certain of Borrower’s real and personal property assets. Capitalized
terms used herein without definition have the meanings assigned thereto in
the
Senior Creditor Agreement.
B. Borrower
has executed one or more promissory notes in favor of Subordinated Creditor
(the
“Subordinated
Notes”)
and
one or more security agreement, mortgages or other agreement pursuant to which
Borrower has granted a security interest in favor of Subordinated Creditor
(the
“Subordinated
Security Agreements”)
by and
between Subordinated Creditor and Borrower.
C. Subordinated
Creditor and Senior Creditor desire to establish and agree upon their respective
rights, priorities and interests governing their respective relationships with
Borrower and any collateral for the loans granted pursuant to the Subordinated
Loan Documents and the Senior Loan Documents at all times on and after the
Effective Date.
AGREEMENT
NOW,
THEREFORE, in consideration of the foregoing, Senior Creditor and Subordinated
Creditor hereby agree as follows:
1. DEFINITIONS
As
used
herein, the following terms shall have the following meanings:
“Senior
Debt”
means
any and all indebtedness and obligations (including, without limitation,
principal, premium (if any), interest, fees, charges, expenses, costs,
professional fees and expenses, and reimbursement obligations) at any time
or
from time to time owing from Borrower to Senior Creditor under the Senior Loan
Documents or otherwise, including but not limited to such amounts as may accrue
or be incurred before or after default or workout or the commencement of any
liquidation, dissolution, bankruptcy, receivership, or reorganization case
by or
against Borrower, whether or not allowed by the court in any such
proceeding.
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“Senior
Loan Documents”
means
the Senior Note, the Senior Creditor Agreement, the Collateral Documents and
any
other security agreement, promissory note, UCC financing statement, or any
other
agreement, instrument or document executed by Borrower pursuant to or in
connection with the Senior Debt or the Senior Creditor Agreement, as any of
the
foregoing may from time to time be amended, modified, supplemented, extended,
renewed, restated or replaced.
“Subordinated
Debt”
means
any and all indebtedness and obligations (including, without limitation,
principal, premium (if any), interest, fees, charges, expenses, costs,
professional fees and expenses, and reimbursement obligations) at any time
or
from time to time owing from Borrower to Subordinated Creditor under the
Subordinated Loan Documents or otherwise, including but not limited to such
amounts as may accrue or be incurred before or after default or workout or
the
commencement of any liquidation, dissolution, bankruptcy, receivership, or
reorganization case by or against Borrower.
“Subordinated
Loan Documents”
means
the Subordinated Notes, the Subordinated Security Agreements and any promissory
note, loan or credit or similar agreement, any financing statement, or any
other
agreement, instrument or document executed by Borrower in favor of Subordinated
Creditor, as the same may from time to time be amended, modified, supplemented,
extended, renewed, restated or replaced.
Unless
otherwise specified, all references in this Agreement to a “Section” shall refer
to the corresponding Section in or to this Agreement. Other capitalized terms
used herein and not otherwise defined herein shall have the meaning given such
terms in the Uniform Commercial Code as in effect in the State of California,
as
in effect from time to time (the “UCC”).
2. SUBORDINATION
(a) On
the
terms and conditions set forth below, Subordinated Creditor’s right to payment
and performance of the Subordinated Debt and any and all liens and security
interests securing the Subordinated Debt are hereby subordinated to Senior
Creditor’s right to full and indefeasible payment and performance of the Senior
Debt and all liens and security interests securing the Senior Debt. Subject
to
and except as set forth in Section 3, Subordinated Creditor shall not ask,
demand, xxx for, take or receive from Borrower, by setoff or in any other
manner, the whole or any part of any monies which may now or hereafter be owing
by Borrower to Subordinated Creditor, or be owing by any other person to
Subordinated Creditor under a guaranty or similar instrument, on account of
the
Subordinated Debt, nor any collateral security for any of the foregoing,
including, without limitation, any personal property collateral granted to
Subordinated Creditor pursuant to the Subordinated Loan Documents, unless and
until the Senior Debt shall have been fully paid in cash or converted to common
stock of Borrower pursuant to the terms of the Senior Note.
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(b) Subordinated
Creditor shall not create, maintain or perfect any security interest in or
lien
on any property of Borrower (other than any security interests or liens that
may
exist and be perfected on the date hereof in favor of Subordinated Creditor
in
certain of Borrower’s personal property under and as described in the
Subordinated Loan Documents, which liens and security interests shall be, and
hereby are agreed to be, junior and subordinated to the security interests
and
liens securing the Senior Debt). If, notwithstanding the foregoing, any lien
shall be created or shall arise in favor of Subordinated Creditor, whether
by
operation of law or otherwise, in or on any property of Borrower to secure
all
or any portion of the Subordinated Debt, then the liens granted by Borrower
in
any such property in favor of Senior Creditor to secure the Senior Debt shall
in
all respects be first and senior liens, superior to such liens that may be
created or arise, and superior to any security interest or lien that may exist
on the date hereof, in either case which liens are in favor of Subordinated
Creditor securing the Subordinated Debt notwithstanding (i) the date, manner
or
order of creation, attachment or perfection of any such security interests
or
liens, (ii) the provisions of the UCC or any other applicable statutes or
court decisions that would provide otherwise in the absence of this agreement,
(iii) the provisions of any contract between Subordinated Creditor and Borrower,
and (iv) whether Subordinated Creditor or any agent or bailee thereof holds
possession of any part any such collateral. In the event Subordinated Creditor
shall have or obtain possession of any such property or shall, in contravention
of this agreement, foreclose upon or enforce its security interest or lien
upon
any such property, whether by self-help, judicial action or otherwise, then
(i)
all such property shall be immediately delivered to Senior Creditor or, if
not
deliverable, all cash or non-cash proceeds and profits of such property shall
be
paid over to Senior Creditor, without any deduction or offset, and (ii) until
duly deliver or paid to Senior Creditor, any such property or cash or non-cash
proceeds and profits of such property shall be held in trust for the benefit
of
Senior Creditor, in the case of each of clause (i) and clause (ii), unless
and
until all of the Senior Debt shall have been paid in cash in full or converted
to common stock of Borrower pursuant to the terms of the Senior
Note.
(c) The
subordination contained in this Agreement is intended to define the rights
and
duties of Subordinated Creditor and Senior Creditor; it is not intended that
any
third party (including Borrower, any bankruptcy trustee, receiver, or
debtor-in-possession) shall benefit from it. If the effect of the subordination
contained in this Agreement would be to give any third party a priority status
to which that party would not otherwise be entitled, then that provision shall,
to the extent necessary to avoid that priority, be given no effect and the
rights and priorities of Senior Creditor and Subordinated Creditor shall be
determined in accordance with applicable law and this Agreement.
3. ASSIGNMENT
OF SUBORDINATED DEBT
Subordinated
Creditor hereby covenants to Senior Creditor that prior to the termination
of
this Agreement in accordance with Section 8, the entire Subordinated Debt
created in favor of Subordinated Creditor shall continue to be owing only to
Subordinated Creditor, and any collateral security therefor (including, without
limitation, any collateral security granted to Subordinated Creditor pursuant
to
the Subordinated Loan Documents) shall continue to be held solely for the
benefit of Subordinated Creditor, unless assigned pursuant to an assignment
in
which the assignee agrees in writing to be bound by all of the terms and
provisions of this Agreement. Any promissory note issued pursuant to the
Subordinated Loan Documents shall be legended to expressly state that it is
subject to this Agreement.
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4. SENIOR
CREDITOR’S PRIORITY
In
the
event of any distribution, division, or application, partial or complete,
voluntary or involuntary, by operation of law or otherwise, of all or any part
of the property of Borrower or the proceeds thereof to the creditors of
Borrower, or the readjustment of the Senior Debt and the Subordinated Debt,
whether by reason of liquidation, bankruptcy, arrangement, receivership,
assignment for the benefit of creditors or any other action or proceeding
involving the readjustment of all or any part of the Senior Debt or the
Subordinated Debt, or the application of the property of Borrower to the payment
or liquidation thereof, or upon the dissolution, liquidation, reorganization,
or
other winding up of Borrower’s business, or upon the sale of all or any
substantial part of Borrower’s property (any of the foregoing being hereinafter
referred to as an “Insolvency
Event”),
then,
and in any such event, Senior Creditor shall be entitled to receive the
indefeasible payment in full of the Senior Debt before Subordinated Creditor
shall be entitled to receive any payment on account of the Subordinated Debt,
and to that end and in furtherance thereof:
(a) All
payments and distributions of any kind or character, whether in cash, property,
or securities, in respect of the Subordinated Debt to which Subordinated
Creditor would be entitled if the Subordinated Debt were not subordinated
pursuant to this Agreement, shall be paid to Senior Creditor and applied in
payment of the Senior Debt;
(b) Subordinated
Creditor shall file a claim or claims, on the form required in such proceedings,
on or before thirty (30) days prior to the last date such claims or proofs
of
claim may be filed pursuant to law or the order of any court exercising
jurisdiction over such proceeding; and
(c) Notwithstanding
the foregoing, if any payment or distribution of any kind or character, whether
in cash, properties or securities, shall be received by Subordinated Creditor
on
account of the Subordinated Debt before all of the Senior Debt has been paid,
then such payment or distribution shall be received by Subordinated Creditor
in
trust for and shall be immediately paid over to Senior Creditor for application
to the payments of amounts due on the Senior Debt until the Senior Debt shall
have been paid in cash in full.
This
Agreement is a subordination agreement within the meaning of Section 510(a)
of
the United States Bankruptcy Code and shall continue in full force and effect
after the occurrence of any Insolvency Event, including, without limitation,
after the filing of any petition by or against Borrower under the United States
Bankruptcy Code and all converted or succeeding cases in respect thereof. All
references herein to Borrower shall be deemed to apply to Borrower as
debtor-in-possession and to any trustee in any insolvency proceeding relating
to
such obligor.
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5. GRANT
OF AUTHORITY
In
the
event of the occurrence of an Insolvency Event, and to enable Senior Creditor
to
enforce its rights hereunder in any of the aforesaid actions or proceedings,
Senior Creditor is hereby irrevocably authorized and empowered, in Senior
Creditor’s discretion (in its own name or in the name of Subordinated Creditor
or otherwise), but shall have no obligation (a) to demand, xxx for, collect
and receive every payment or distribution referred to in Section 4, and give
acquittance therefor and (b) to file claims and proofs of claim
if Subordinated Creditor has failed to file claims or proofs of claim on or
before thirty (30) days prior to the last date such claims or proofs of
claim may be filed pursuant to law or the order of any court exercising
jurisdiction over such proceeding, and (c) to take such other action
(including, without limitation, enforcing any lien securing payment of the
Subordinated Debt) as it may deem necessary or advisable for the exercise or
enforcement of any of the rights or interests of Senior Creditor hereunder.
Subordinated Creditor shall duly and promptly take such action as Senior
Creditor may reasonably request to execute and deliver to Senior Creditor such
authorizations, endorsements, assignments, or other instruments as Senior
Creditor may reasonably request in order to enable Senior Creditor to enforce
any and all claims with respect to, and any liens securing payment of, the
Subordinated Debt as such enforcement is contemplated herein.
To
the
extent that payments or distributions on account of the Subordinated Debt are
made in property or securities other than cash, Subordinated Creditor authorizes
Senior Creditor to sell or dispose of such property or securities on such terms
as are commercially reasonable in the situation in question. Following full
and
indefeasible payment in cash of the Senior Debt and the termination of all
commitments related thereto, Senior Creditor shall remit to the Subordinated
Creditor (with all necessary endorsements), to the extent of Subordinated
Creditor’s interest therein, all payments and distributions of cash, property,
or securities paid to and held by Senior Creditor in excess of the allowed
amount of the Senior Debt.
6. PAYMENTS
RECEIVED BY SUBORDINATED CREDITOR
Should
any payment, distribution, or security be received by the Subordinated Creditor
upon or with respect to the Subordinated Debt in contravention of this Agreement
prior to termination of this Agreement in accordance with Section 8,
Subordinated Creditor shall receive and hold the same in trust for the benefit
of Senior Creditor and shall immediately deliver the same to Senior Creditor
in
precisely the form received (except for the endorsement or assignment of
Subordinated Creditor where necessary) for application to the Senior Debt,
and,
until so delivered, the same shall be held in trust by such Subordinated
Creditor for the benefit of Senior Creditor.
7. FURTHER
ASSURANCES; COOPERATION
Subordinated
Creditor agrees to cooperate with Senior Creditor and to take all actions that
Senior Creditor may reasonably require to enable Senior Creditor to realize
the
full benefits of this Agreement.
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8. TERMINATION
OR AMENDMENT OF AGREEMENT; NO AMENDMENTS
This
Agreement shall be effective upon its execution by each of Senior Creditor
and
Subordinated Creditor. After the Effective Date, this Agreement shall remain
in
effect and shall not be revoked or amended by Subordinated Creditor, except
with
the prior written consent of the Senior Creditor. Senior Creditor and
Subordinated Creditor agree that no amendment hereto shall be binding upon
Borrower unless Borrower shall have received notice of such amendment. Subject
to Section 12, this Agreement shall terminate upon the earlier to occur of
the
following: (a) the date on which the Senior Debt shall have been paid in
cash in full or converted to common stock of Borrower pursuant to the terms
of
the Senior Note or (b) the date on which the Subordinated Debt shall have
been either converted into common stock of Borrower or otherwise paid in cash
in
full. Subordinated Creditor shall not amend, supplement or otherwise modify
any
of the Subordinated Loan Documents without the written consent of Senior
Creditor.
9. ADDITIONAL
AGREEMENTS FOR SENIOR CREDITOR
Senior
Creditor may administer and manage its credit and other relationships with
Borrower in its own best interest, without notice to or consent of Subordinated
Creditor. At any time and from time to time, Senior Creditor may enter into
any
amendment or agreement with Borrower as Senior Creditor may deem proper,
extending the time of payment of or renewing or otherwise altering the terms
of
all or any of the obligations constituting Senior Debt or affecting the
collateral security for, supporting or underlying any or all of the Senior
Debt,
and may exchange, sell, release, surrender or otherwise deal with any such
collateral without in any way thereby impairing or affecting this Agreement,
and
all such additional agreements and amendments shall be Senior Loan Documents
evidencing the Senior Debt.
10. SUBROGATION
If
cash
or other property otherwise payable or deliverable to the Subordinated Creditor
or on account of the Subordinated Debt shall have been applied pursuant to
this
Agreement to the payment of the Senior Debt, and if the Senior Debt shall have
been paid in cash in full, then Subordinated Creditor shall be subrogated to
any
rights of Senior Creditor to receive further payments or distributions
applicable to the Senior Debt until the Subordinated Debt shall have been fully
paid. No such payments or distributions received by the Subordinated Creditor
by
reason of such subrogation shall, as between Borrower and its creditors other
than Senior Creditor, on the one hand, and Subordinated Creditor, on the other
hand, be deemed to be a payment by Borrower on account of the Subordinated
Debt
owed to Subordinated Creditor.
11. SUBORDINATED
CREDITOR’S WAIVERS AND COVENANTS
(a) Without
limiting the generality of any other waiver made by Subordinated Creditor in
this Agreement, Subordinated Creditor hereby expressly waives (i) reliance
by
Senior Creditor upon the subordination and other agreements herein provided,
(ii) any and all rights to require
Senior Creditor to marshal any property or assets of Borrower or to resort
to
any of the property or assets of Borrower in any particular order or manner,
(iv) any and all rights to bring any action to contest the validity, legality,
enforceability, perfection, priority or avoidability of any of the obligations
under any or all of the Senior Loan Documents or any of the security interest
and/or liens of the Senior Creditor in or on any of the collateral for the
Senior Debt and
(v)
any claim that Subordinated Creditor may now or hereafter have against Senior
Creditor arising out of any and all actions that Senior Creditor, in good faith,
takes or omits to take (A) with respect to the creation, perfection or
continuation of liens in or on any collateral security for the Senior Debt,
(B)
with respect to the foreclosure upon, sale, release, or depreciation of, or
failure to realize upon, any of the collateral security for the Senior Debt,
(C)
with respect to the collection of any claim for all or any part of the Senior
Debt from any account debtor, guarantor or any other third party and (D) with
respect to the valuation, use, protection or release of any collateral security
for the Senior Debt.
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(b) Without
limiting the generality of any other covenant or agreement made by Subordinated
Creditor in this Agreement, Subordinated Creditor hereby covenants and agrees
that (i) Senior Creditor has not made any warranties or representations with
respect to the due execution, legality, validity, completeness or enforceability
of the Senior Creditor Agreement or any of the other Senior Loan Documents,
or
the collectibility of the Senior Debt; and (ii) Subordinated Creditor will
not interfere with or in any manner oppose a disposition of any collateral
security for the Senior Debt by Senior Creditor.
12. DEFAULTS
ON SUBORDINATED NOTES
If
a
default occurs under the Subordinated Notes or, until such time as the Senior
Debt is paid in full in cash or converted to common stock of Borrower pursuant
to the terms of the Senior Note:
(a) the
Subordinated Creditor shall not take any action in connection with the
foreclosure of the Subordinated Notes, and
(b) the
Subordinated Creditor shall not exercise or enforce, by subrogation or
otherwise, any lien, estate, right or other interest that the Subordinated
Creditor may have or obtain pursuant to the exercise of any right or remedy
under the Subordinated Notes (including, without limitation, its right to cure
defaults of Borrower or pay or satisfy liens which Borrower is otherwise
required to pay or satisfy) which is or may be prior in right or in lien to
the
rights under the Senior Loan Documents. The foregoing provisions are solely
for
the benefit of the Senior Creditor, and Borrower shall not be entitled to rely
thereon or be entitled to the benefit thereof. Borrower shall promptly give
Senior Creditor written notice of any default under the Subordinated
Notes.
13. REINSTATEMENT
OF SENIOR DEBT
To
the
extent that Senior Creditor receives payments on or in respect of the Senior
Debt or proceeds of any collateral security for the Senior Debt, which payments
or proceeds are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, receiver or
any
other party under any bankruptcy law, state or federal law, common law, or
equitable cause, then, to the extent of such payments or proceeds invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid,
the Senior Debt, or part thereof, intended to be satisfied shall be revived
and
continue in full force and effect as if such payments or proceeds had not been
received by Senior Creditor.
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14. NO
WAIVERS
Senior
Creditor shall not be prejudiced in its rights under this Agreement by any
act
or failure to act of Borrower or Subordinated Creditor or any noncompliance
of
Borrower or Subordinated Creditor with any agreement or obligation, regardless
of any knowledge thereof which Senior Creditor may have, or with which Senior
Creditor may be charged; no action permitted hereunder that has been taken
by
Senior Creditor shall in any way affect or impair the rights or remedies of
Senior Creditor in the exercise of any other right or remedy or shall operate
as
a waiver thereof; no single or partial exercise by Senior Creditor of any right
or remedy shall preclude any other or further exercise thereof; and no
modification or waiver of any of the provisions of this Agreement shall be
binding upon Senior Creditor, in each case except as expressly set forth in
a
writing duly signed and delivered by Senior Creditor.
15. INFORMATION
CONCERNING BORROWER; CREDIT ADMINISTRATION
Subordinated
Creditor hereby assumes responsibility for keeping itself informed of the
financial condition of Borrower, its subsidiaries and affiliates, any and all
endorsers and any and all guarantors of the Senior Debt and of all other
circumstances bearing upon the risk of nonpayment of the Senior Debt or the
Subordinated Debt that diligent inquiry would reveal, and Subordinated Creditor
hereby agrees that Senior Creditor shall not have any duty to advise the
Subordinated Creditor of information known to Senior Creditor regarding such
condition.
16. NOTICES
Except
as
otherwise provided herein, all notices and service of process required,
contemplated, or permitted hereunder or with respect to the subject matter
hereof shall be in writing, and shall be deemed to have been validly served,
given or delivered upon the earlier of: (i) the first business day after
transmission by facsimile or hand delivery or deposit with an overnight express
service or overnight mail delivery service; or (ii) the third business day
after
deposit in the United States mails, with proper first class postage prepaid,
and
shall be addressed to the party to be notified as follows:
If
to Senior Creditor:
Xxxx
X.
Xxxxxxx
000
Xxxxxx Xxxx
Xxxxxxx
Xxxxxxxxx, XX 00000
Facsimile:
(000) 000-0000
If
to Subordinated Creditor:
Xxxx
Xxxxxx Xxxxxx Acquisition Fund, LLC
0000
Xxxxxxx Xxxx Xxxx, Xxxxx 000
Xxx
Xxxxxxx, XX 00000
Attention:
__________________________
Facsimile:
__________________________
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17. SEVERABILITY
Wherever
possible, each provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of
this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this
Agreement.
18. GOVERNING
LAW
This
Agreement shall be governed by and interpreted in accordance with the laws
of
the State of California without regard to principles of conflict of laws that
would cause the application of laws of any other jurisdiction.
19. ASSIGNMENT
This
Agreement shall be binding upon Subordinated Creditor and its respective
successors and assigns, and shall inure to the benefit of and be enforceable
by
Senior Creditor and its successors and assigns.
20. MUTUAL
WAIVER OF JURY TRIAL
EACH
OF
SUBORDINATED CREDITOR AND SENIOR CREDITOR SPECIFICALLY WAIVES ITS RIGHT TO
TRIAL
BY JURY OF ANY CAUSE OF ACTION, CLAIM, CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY
CLAIM OR ANY OTHER CLAIM (COLLECTIVELY, “CLAIMS”)
ASSERTED BY BORROWER, SUBORDINATED CREDITOR, OR SENIOR CREDITOR AGAINST THE
OTHER PARTY OR PARTIES TO THIS AGREEMENT. This waiver extends to all such
claims, including, without limitation, claims which involve persons or entities
other than Borrower, the Subordinated Creditor, and Senior Creditor; claims
which arise out of or are in any way connected to the relationships between
or
among Borrower, the Subordinated Creditor, and Senior Creditor; and any claims
for damages, breach of contract, specific performance, or any equitable or
legal
relief of any kind.
21. COUNTERPARTS
This
Agreement and any amendments, waivers, consents or supplements hereto may be
executed in any number of counterparts, and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all of which counterparts together shall constitute
but
one and the same instrument.
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IN
WITNESS WHEREOF,
this
Agreement has been executed as of the date first above written.
|
SENIOR
CREDITOR:
Signature:
/s/ Xxxx X.
Xxxxxxx
Print
Name: XXXX
X. XXXXXXX
Title: ___________________________
|
SUBORDINATED
CREDITOR:
XXXX
XXXXXX XXXXXX ACQUISITION FUND, LLC
By:
Xxxx Xxxxxx Xxxxxx Investment Management LLC
Signature:
/s/
Xxxxxx X. Xxxx
III
Print
Name: Xxxxxx
X. Xxxx
III
Title: Managing
Member
|
The
undersigned hereby accepts and consents to the foregoing Agreement and agrees
to
be bound by all of the provisions thereof and to recognize all priorities and
other rights granted by Subordinated Creditor thereby or thereunder to Senior
Creditor and to pay Senior Creditor in accordance therewith.
BORROWER:
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