Exhibit 10.3
 
EXECUTION COPY
 
ESCROW AGREEMENT
 
THIS ESCROW AGREEMENT (as the same may be amended or modified from time to time
pursuant hereto, this (“Escrow Agreement”) is made and entered into as of
January 15, 2010, by and among The Merit Group, Inc., a South Carolina
corporation (“Merit”), National Patent Development Corporation, a Delaware
corporation (“NPDC”, and together with Merit, sometimes referred to individually
as “Party” or collectively as the “Parties”), and JPMorgan Chase Bank, National
Association (the “Escrow Agent”).
 
WHEREAS, the Parties entered into that certain Stock Purchase Agreement by and
between Merit and NPDC dated as of November 24, 2009 (the “Stock Purchase
Agreement”)
 
WHEREAS, pursuant to Section 2.2(c) and Section 2.8 of the Stock Purchase
Agreement, the Parties have agreed to deposit in escrow certain funds and wish
such deposit to be subject to the terms and conditions set forth herein.
 
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
 
1.            Appointment.  The Parties hereby appoint the Escrow Agent as their
escrow agent for the purposes set forth herein, and the Escrow Agent hereby
accepts such appointment under the terms and conditions set forth herein.
 
2.            Funds.  Merit and NPDC each agree that Merit will deposit with the
Escrow Agent the sum of $300,000.00 (the “Indemnity Escrow Deposit”).  Merit and
NPDC further each agree that Merit will deposit with the Escrow Agent the sum of
$600,000.00 (the “Inventory Escrow Deposit”, and together with the Indemnity
Escrow Deposit, the “Escrow Deposits”).  The Escrow Agent shall hold the
Inventory Escrow Deposit and the Indemnity Escrow Deposit in separate accounts,
each of which shall be subject to the specific terms, conditions, and procedures
applicable to each as set forth in this Escrow Agreement.  The Escrow Agent
shall further hold the Escrow Deposits and, subject to the terms and conditions
hereof, shall invest and reinvest the Escrow Deposits and the proceeds thereof
(the “Funds”) as directed in Section 3.
 
3.            Investment of Fund.  During the term of this Escrow Agreement, the
Funds shall each be invested in the JPMorgan 100% U.S. Treasury Money Market
Mutual Fund (collectively “MMMF”) based upon the Parties independent review of
prospectuses previously delivered to the Parties. The Parties acknowledge that
an affiliate of the Escrow Agent, JP Morgan Asset Management (“JPMAM”) serves as
an investment manager for the selected MMMF and receives fees from the invested
funds for services rendered separate from the fees for services rendered by the
Escrow Agent as further provided for in this Agreement.  MMMF have rates of
compensation that may vary from time to time based upon market conditions. The
Escrow Agent will provide compensation on balances in the Fund at a rate
determined by the Escrow Agent from time to time.  Written investment
instructions, if any, shall specify the type and identity of the investments to
be purchased and/or sold.  The Escrow Agent is hereby authorized to execute
purchases and sales of investments through the facilities of its own trading or
capital markets operations or those of any affiliated entity.  The Escrow Agent
or any of its affiliates may receive compensation with respect to any investment
directed hereunder including without limitation charging an agency fee in
connection with each transaction.  The Parties recognize and agree that the
Escrow Agent will not provide supervision, recommendations or advice relating to
either the investment of moneys held in the Funds or the purchase, sale,
retention or other disposition of any investment described herein.  The Escrow
Agent shall not have any liability for any loss sustained as a result of any
investment in an investment made pursuant to the terms of this Escrow Agreement
or as a result of any liquidation of any investment prior to its maturity or for
the failure of the Parties to give the Escrow Agent instructions to invest or
reinvest the Escrow Fund.  The Escrow Agent shall have the right to liquidate
any investments held in order to provide funds necessary to make required
payments under this Escrow Agreement.
 
 
 

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4.            Disposition and Termination of the Escrow Deposits.
 
(a)  Claims Procedure for Indemnity Escrow Deposit.  The following procedures
shall govern the application of the Indemnity Escrow Deposit to satisfy any
claims that may be brought by Merit, its affiliates, and their respective
shareholders, officers, directors, employees, successors, and assigns, Five Star
Products, Inc., and Five Star Group, Inc., under Article 8 of the Stock Purchase
Agreement:
 
(i)  Merit shall deliver written notice to Escrow Agent, with a copy to NPDC of
all claims against the Indemnity Escrow Deposit. The written notice to Escrow
Agent shall specify (A) in reasonable detail the factual basis for each such
claim, (B) the amount of the Indemnity Escrow Deposit to be reserved against the
claim, and (C) that Merit has delivered a copy of such notice to NPDC (each, a
“Claim Notice”).  All claims against the Indemnity Escrow Deposit shall be
received by the Escrow Agent on or before the last Business Day by 5:00 p.m. New
York time one (1) year after the date of this Escrow Agreement, or if the one
(1) year anniversary of this Escrow Agreement is not a Business Day, on the
first Business Day thereafter.
 
(ii)  Upon receipt of a Claim Notice from Merit, Escrow Agent shall reserve the
amount set forth in the Claim Notice and confirm with NPDC that it has received
from Merit a copy of the Claim Notice.
 
(iii) Ten (10) Business Days after Escrow Agent’s receipt of any Claim Notice,
Escrow Agent shall on the first Business after the expiration of the 10 Business
Day period disburse to Merit the amount set forth in the Claim Notice, together
with interest thereon from the date of the Claim Notice, by wire transfer of
immediately available federal funds pursuant to the standing instructions set
forth on Exhibit A to this Agreement unless Escrow Agent receives a written
notice in the form attached as Exhibit B to disburse in accordance
therewith;  provided, however, that Escrow Agent will not disburse, transfer,
deliver or assign any portion of the Indemnity Escrow Deposit if it receives a
written notice from NPDC disputing any such claims as described in the following
sentence.   If, within ten (10) Business Days following receipt of a Claim
Notice from Merit on or before the 10th Business Day by 5:00 p.m. New York time,
NPDC sends a written notice to Escrow Agent, with a copy to Merit, disputing in
good faith the claims set forth in the Claim Notice, including (i) each such
amount to which NPDC objects, (ii) the basis and nature for such dispute set
forth in reasonable detail, and (iii) a statement that NPDC has delivered a copy
of such notice to Merit, then promptly upon receipt of such notice, Escrow Agent
shall (1) confirm with Merit that it has received from NPDC a copy of such
notice, (2) not disburse, transfer, deliver or assign to Merit any portion of
the Indemnity Escrow Deposit with respect to such disputed claims and (3)
reserve and hold the amount set forth in the Claim Notice until the disputed
claims shall be resolved pursuant to Section 4(e) below.  For avoidance of
doubt, and without limiting NPDC’s rights as stated above, NPDC may dispute any
claim which it reasonably believes to be contingent in nature or any claim as to
which NPDC in good faith believes that it lacks sufficient information with
which to agree or disagree with the assertions of Merit.  During the ten (10)
Business Day period, Merit will respond to reasonable requests for additional
information or clarification from NPDC regarding its claims set forth in the
Claim Notice.
 
 
 

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(iv)  If Merit and NPDC agree at or prior to the expiration of such ten (10)
Business Day period to the validity and amount of such claims, they shall
promptly give Escrow Agent joint instructions in writing advising Escrow Agent
to disburse to Merit pursuant to the standing instructions set forth on Exhibit
A to this Agreement unless Escrow Agent receives a written notice in the form
attached as Exhibit B to disburse in accordance therewith such portion of the
Indemnity Escrow Deposit agreed upon by Merit and NPDC with respect to such
claims, together with interest thereon from the date of the Claim Notice.  If
Merit and NPDC do not agree to the validity and amount of such claims within
such ten (10) Business Day period, Escrow Agent shall reserve and hold the
amount set forth in the Claim Notice until the disputed claims shall be resolved
pursuant to 4(e) below.
 
(b)  Release of Indemnity Escrow Deposit.  Within three (3) Business Days
following the date that is the earlier of one (1) year after the date of this
Escrow Agreement or receipt of written notice from Merit that it has vacated
both warehouses located in East Hanover, New Jersey and Newington, Connecticut
and settled all claims with the respective landlords of such properties (the
“Indemnity Escrow Expiration Date”), in either case if such day is not a
Business Day, then the first Business Day thereafter, if no claims pursuant to a
Claim Notice are pending, Escrow Agent shall pursuant to written instructions
disburse the Indemnity Escrow Deposit along with all interest and earnings
thereon to NPDC.  If, on Indemnity Escrow Expiration Date, there are any claims
pursuant to a Claim Notice pending, Escrow Agent shall (i) retain and continue
to hold in accordance with the terms hereof, the aggregate amount of the
Indemnity Escrow Deposit being reserved against such claims, determined in
accordance with the Claim Notice(s) received by Escrow Agent from Merit under
Section 4(a), and (ii) remit the remaining balance of the Indemnity Escrow
Deposit along with all interest and earnings thereon to NPDC.   All payments of
cash to NPDC or Merit, as applicable, shall be made by wire transfer of
immediately available federal funds in accordance with written instructions from
NPDC or Merit, as applicable, provided, however, that distributions made to
Merit under this Agreement shall be made pursuant to the standing instructions
set forth on Exhibit A to this Agreement unless Escrow Agent receives a written
notice in the form attached as Exhibit B to disburse in accordance therewith.
Merit agrees to give an Indemnity Escrow Expiration Date notice to Escrow Agent
promptly upon satisfaction of the conditions precedent set forth in this Section
4(b).
 
(c)  Claims Procedure for Inventory Escrow Deposit.  The following procedures
shall govern the application of the Inventory Escrow Deposit to satisfy any
claims that may be brought by Merit or NPDC under Article 2.2(c) of the Stock
Purchase Agreement:
 
 
 

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(i)  Pursuant to the Stock Purchase Agreement  either Merit or NPDC may receive
disbursements out of the Inventory Escrow Deposit on a quarterly basis during
the first (1st) year immediately following the date of this Escrow
Agreement.  Escrow Agent shall make such quarterly disbursements from the
Inventory Escrow Deposit only in accordance with written instructions signed by
both Merit, on the one hand, and NPDC, on the other hand, within three (3)
Business Days after Escrow Agent’s receipt of such notice.  The parties agree
that disbursements to Merit shall be delivered pursuant to the standing
instructions set forth on Exhibit A to this Agreement unless Escrow Agent
receives a written notice in the form attached as Exhibit B to disburse in
accordance therewith.
 
(ii)  Within Seventy-Five (75) days after the first (1st) anniversary of the
date of this Escrow Agreement, Merit shall deliver written notice to Escrow
Agent, with a copy to NPDC, of the total amount owed to Merit as its share of
the inventory adjustment as set forth in the Stock Purchase Agreement.  The
written notice to Escrow Agent shall specify (A) the amount of the Inventory
Escrow Deposit to be disbursed to Merit and (B) that Merit has delivered a copy
of such notice to NPDC (the “Inventory Disbursement Notice”).  Escrow Agent
shall confirm that NPDC has received a copy of the Inventory Disbursement
Notice.
 
(iii)  Ten (10) Business Days after Escrow Agent’s receipt of such Inventory
Disbursement Notice, Escrow Agent shall on the first Business after the
expiration of the 10 Business Day period disburse to Merit pursuant to the
standing instructions set forth on Exhibit A to this Agreement, unless Escrow
Agent receives a written notice in the form attached as Exhibit B to disburse in
accordance therewith, the amount set forth in the Inventory Disbursement Notice,
together with interest attributable thereto and shall disburse any funds
remaining in the Inventory Escrow Deposit, including interest to
NPDC;  provided, however, that Escrow Agent will not disburse, transfer, deliver
or assign any portion of the Inventory Escrow Deposit if, prior to the end of
the aforesaid ten (10) Business Day period  on or before the 10th Business Day
by 5:00 p.m. New York time it receives a written notice from NPDC with a copy to
Merit, disputing in good faith the disbursement amount set forth in Inventory
Disbursement Notice, including (i) each such amount to which NPDC objects, (ii)
the basis and nature for such dispute set forth in reasonable detail, and (iii)
a statement that NPDC has delivered a copy of such notice to Merit, then
promptly upon receipt of such notice, Escrow Agent shall (1) confirm with Merit
that it has received from NPDC a copy of such notice, (2) not disburse,
transfer, deliver or assign to Merit or NPDC any portion of the Inventory Escrow
Deposit and (3) reserve and hold the amount set forth in the Inventory
Disbursement Notice until the disputed claims shall be resolved pursuant to
Section 4(e) below.
 
(d)  Release of Inventory Escrow Deposit.   All payments of cash permitted
hereunder to be made to NPDC or Merit, as applicable, shall be made by wire
transfer of immediately available federal funds in accordance with written
instructions from NPDC or Merit, as applicable.  The parties agree that
disbursements to Merit shall be delivered pursuant to the standing instructions
set forth on Exhibit A to this Agreement unless Escrow Agent receives a written
notice in the form attached as Exhibit B to disburse in accordance therewith.
 
 
 

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(e)  Dispute.  If (a) there is any dispute among any of the parties to this
Escrow Agreement with respect to any portion of the Indemnity Escrow Deposit or
the Inventory Escrow Deposit, as the case may be, (a “Dispute”); or (b) Escrow
Agent shall be uncertain as to its duties or rights hereunder or shall receive
instructions, claims or demands from any party hereto that, in its opinion,
conflict with any of the provisions of this Escrow Agreement (the portion of the
Indemnity Escrow Deposit in controversy under Section 4(a) or the Inventory
Escrow Deposit under Section 4(c) hereinafter the “Disputed Amount”), Escrow
Agent shall not comply with any such claims or demands from either NPDC or Merit
as long as such Dispute may continue, and in so refusing to comply with such
claims or demands of NPDC or Merit, Escrow Agent shall be entitled to refrain
from taking any action, and it shall make no delivery or other disposition of
the Disputed Amount until it has received a final court order from a court of
competent jurisdiction directing disposition of the Disputed Amount, or until it
has received appropriate written instructions signed by both NPDC, on the one
hand, and Merit, on the other hand. A judgment or order of a court under any
provision of this Escrow Agreement shall not be deemed to be final until the
time within which an appeal may be taken therefrom has expired and no appeal has
been taken, or until the entry of a judgment or order from which no appeal may
be taken.  Notwithstanding anything to the contrary in this Agreement, Escrow
Agent may deposit the Disputed Amount with the clerk of any court of competent
jurisdiction upon commencement of an action in the nature of interpleader or in
the course of any court proceedings.
 
(f)  Disbursement of the Escrow Deposits in Accordance with Joint Instructions.
Notwithstanding the provisions of Section 4(a) or 4(c) above, Escrow Agent, upon
receipt of written instructions regarding the disbursement of either or both of
the Escrow Deposits signed by both Merit, on the one hand, and NPDC, on the
other hand, shall disburse the Indemnity Escrow Deposit or the Inventory Escrow
Deposit, or a portion thereof, in accordance with such instructions.  If such
joint written instructions direct the Escrow Agent to disburse all or any
portion of the Indemnity Escrow Deposit to NPDC, Escrow Agent shall also
disburse to NPDC all interest and earnings attributable thereto.  The parties
agree that disbursements to Merit shall be delivered pursuant to the standing
instructions set forth on Exhibit A to this Agreement unless Escrow Agent
receives a written notice in the form attached as Exhibit B to disburse in
accordance therewith.
 
(g) The Escrow Agent shall act solely upon the Notice or Instructions that it
receives from the Parties and shall not be responsible for determining whether
any Notices or Instructions are in accordance with the Stock Purchase Agreement.
 
5.            Escrow Agent.  (a) The Escrow Agent shall have only those duties
as are specifically and expressly provided herein, which shall be deemed purely
ministerial in nature, and no other duties shall be implied.  The Escrow Agent
shall neither be responsible for, nor chargeable with, knowledge of, nor have
any requirements to comply with, the terms and conditions of any other
agreement, instrument or document between the Parties, in connection herewith,
if any, including without limitation the Stock Purchase Agreement, nor shall the
Escrow Agent be required to determine if any person or entity has complied with
any such agreements, nor shall any additional obligations of the Escrow Agent be
inferred from the terms of such agreements, even though reference thereto may be
made in this Escrow Agreement.  In the event of any conflict between the terms
and provisions of this Escrow Agreement, those of the Stock Purchase Agreement,
any schedule or exhibit attached to the Escrow Agreement, or any other agreement
among the Parties, the terms and conditions of this Escrow Agreement shall
control  with respect to the Escrow Agent and solely with respect to the Parties
other than the Escrow Agent the Stock Purchase Agreement shall control.  The
Escrow Agent may rely upon and shall not be liable for acting or refraining from
acting upon any written notice, document, instruction or request furnished to it
hereunder and believed by it to be genuine and to have been signed or presented
by the proper Party or Parties without inquiry and without requiring
substantiating evidence of any kind.  The Escrow Agent shall be under no duty to
inquire into or investigate the validity, accuracy or content of any such
document, notice, instruction or request.  The Escrow Agent shall have no duty
to solicit any payments which may be due it or the Funds, including, without
limitation, the Escrow Deposits nor shall the Escrow Agent have any duty or
obligation to confirm or verify the accuracy or correctness of any amounts
deposited with it hereunder.
 
 
 

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(b)           The Escrow Agent shall not be liable for any action taken,
suffered or omitted to be taken by it in good faith except to the extent that a
final adjudication of a court of competent jurisdiction determines that the
Escrow Agent’s gross negligence or willful misconduct was the primary cause of
any loss to either Party.  The Escrow Agent may execute any of its powers and
perform any of its duties hereunder directly or through attorneys, and shall be
liable only for its gross negligence or willful misconduct (as finally
adjudicated in a court of competent jurisdiction) in the selection of any such
attorney.  The Escrow Agent may consult with counsel, accountants and other
skilled persons to be selected and retained by it.  The Escrow Agent shall not
be liable for any action taken, suffered or omitted to be taken by it in
accordance with, or in reliance upon, the advice or opinion of any such counsel,
accountants or other skilled persons.  In the event that the Escrow Agent shall
be uncertain or believe there is some ambiguity as to its duties or rights
hereunder or shall receive instructions, claims or demands from any party hereto
which, in its opinion, conflict with any of the provisions of this Escrow
Agreement, it shall be entitled to refrain from taking any action and its sole
obligation shall be to keep safely all property held in escrow until it shall be
given a direction in writing by the Parties which eliminates such ambiguity or
uncertainty to the satisfaction of Escrow Agent or by a final and non-appealable
order or judgment of a court of competent jurisdiction.  The Parties agree to
pursue any redress or recourse in connection with any dispute without making the
Escrow Agent a party to the same.  Anything in this Escrow Agreement to the
contrary notwithstanding, in no event shall the Escrow Agent be liable for
special, incidental, punitive, indirect or consequential loss or damage of any
kind whatsoever (including but not limited to lost profits), even if the Escrow
Agent has been advised of the likelihood of such loss or damage and regardless
of the form of action.
 
6.            Succession.  (a) The Escrow Agent may resign and be discharged
from its duties or obligations hereunder by giving thirty (30) days advance
notice in writing of such resignation to the Parties specifying a date when such
resignation shall take effect.  If the Parties have failed to appoint a
successor escrow agent prior to the expiration of thirty (30) days following
receipt of the notice of resignation, the Escrow Agent may petition any court of
competent jurisdiction for the appointment of a successor escrow agent or for
other appropriate relief, and any such resulting appointment shall be binding
upon all of the parties hereto.  Escrow Agent’s sole responsibility after such
thirty (30) day notice period expires shall be to hold the Funds (without any
obligation to reinvest the same) and to deliver the same to a designated
substitute escrow agent, if any, or in accordance with the directions of a final
order or judgment of a court of competent jurisdiction, at which time of
delivery Escrow Agent’s obligations hereunder shall cease and terminate, subject
to the provisions of Sections 7 and 8 hereunder.  The Escrow Agent shall have
the right to withhold an amount equal to any amount due and owing to the Escrow
Agent, plus any costs and expenses the Escrow Agent shall reasonably believe may
be incurred by the Escrow Agent in connection with the termination of the Escrow
Agreement.
 
 
 

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(b)           Any entity into which the Escrow Agent may be merged or converted
or with which it may be consolidated, or any entity to which all or
substantially all the escrow business may be transferred, shall be the Escrow
Agent under this Escrow Agreement without further act.
 
7.            Compensation and Reimbursement.  Each of NPDC and Merit agrees to
(a) pay the Escrow Agent for the services to be rendered hereunder 50% of the
fees described in Schedule 2 attached hereto, and (b) pay or reimburse the
Escrow Agent upon request for all expenses, disbursements and advances,
including, without limitation reasonable attorney’s fees and expenses, incurred
or made by it in connection with the performance of this Escrow Agreement. As
between Merit and NPDC, to the extent that either party pays more than their
proportionate share of expenses to the Escrow Agent under this Section, NPDC and
Merit shall each be responsible for 50% of the amount paid to the Escrow Agent.
 
8.            Indemnity.  The Parties shall jointly and severally indemnify,
defend and save harmless the Escrow Agent and its affiliates and their
respective successors, assigns, agents and employees (each an “Indemnitee”) from
and against any and all losses, damages, claims, liabilities, penalties,
judgments, settlements, litigation, investigations, costs or expenses
(including, without limitation, the fees and expenses of outside counsel)
(collectively “Losses”) arising out of or in connection with (a) the Escrow
Agent’s execution and performance of this Escrow Agreement, tax reporting or
withholding, the enforcement of any rights or remedies under or in connection
with this Escrow Agreement, or as may arise by reason of any act, omission or
error of the Indemnitee, except in the case of any Indemnitee to the extent that
such Losses are finally adjudicated by a court of competent jurisdiction to have
been primarily caused by the gross negligence or willful misconduct of such
Indemnitee, or (b) its following any instructions or other directions, whether
joint or singular, from the Parties, except to the extent that its following any
such instruction or direction is expressly forbidden by the terms hereof.  The
Parties hereto acknowledge that the foregoing indemnities shall survive the
resignation, replacement or removal of the Escrow Agent or the termination of
this Escrow Agreement.  The Parties hereby grant the Escrow Agent a lien on,
right of set-off against and security interest in, the Funds for the payment of
any claim for indemnification, fees, expenses and amounts due hereunder.  In
furtherance of the foregoing, the Escrow Agent is expressly authorized and
directed, but shall not be obligated, to charge against and withdraw from the
Funds for its own account or for the account of an Indemnitee any amounts due to
the Escrow Agent or to an Indemnitee under this Section 8.
 
9.            Patriot Act Disclosure/Taxpayer Identification Numbers/Tax
Reporting.
 
(a)           Patriot Act Disclosure.  Section 326 of the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) requires the Escrow Agent to
implement reasonable procedures to verify the identity of any person that opens
a new account with it.  Accordingly, the Parties acknowledge that Section 326 of
the USA PATRIOT Act and the Escrow Agent’s identity verification procedures
require the Escrow Agent to obtain information which may be used to confirm the
Parties identity including without limitation name, address and organizational
documents (“Identifying Information”).  The Parties agree to provide the Escrow
Agent with and consent to the Escrow Agent obtaining from third parties any such
Identifying Information required as a condition of opening an account with or
using any service provided by the Escrow Agent.
 
 
 

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(b)           Taxpayer Identification Numbers (“TINs”)
 
The Parties have provided the Escrow Agent with their respective fully executed
Internal Revenue Service (“IRS”) Form W-8, or W-9 and/or other required
documentation.  The Parties each represent that its correct TIN assigned by the
IRS, or any other taxing authority, is set forth in the delivered forms, as well
as in the Substitute IRS Form W-9 set forth on the signature page of this Escrow
Agreement.
 
(c)           Tax Reporting
 
Merit and NPDC further represent to the Escrow Agent that the transaction
memorialized in the Stock Purchase Agreement does not constitute an installment
sale requiring any tax reporting or withholding of imputed interest or original
issue discount to the IRS or other taxing authority.
 
In addition, all interest or other income earned under the Escrow Agreement
shall be allocated to 50% to NPDC and 50% to Merit and reported, as and to the
extent required by law, by the Escrow Agent to the IRS, or any other taxing
authority, on IRS Form 1099 or 1042S (or other appropriate form) as income
earned from the Escrow Deposits by the NPDC and Merit whether or not said income
has been distributed during such year.  Any other tax returns required to be
filed will be prepared and filed by the NPDC and/or the Merit with the IRS and
any other taxing authority as required by law, including but not limited to any
applicable reporting or withholding pursuant to the Foreign Investment in Real
Property Tax Act (“FIRPTA”).  NPDC and Merit acknowledge and agree that Escrow
Agent shall have no responsibility for the preparation and/or filing of any tax
return or any applicable FIRPTA reporting or withholding with respect to the
Escrow Deposits or any income earned by the Escrow Deposits.  NPDC and Merit
further acknowledge and agree that any taxes payable from the income earned on
the investment of any sums held in the Escrow Deposits shall be paid by
NPDC.  In the absence of written direction from the NPDC and Merit, all proceeds
of the Funds shall be retained in the Funds and reinvested from time to time by
the Escrow Agent as provided in this Escrow Agreement.  Escrow Agent shall
withhold any taxes it deems appropriate, including but not limited to required
withholding in the absence of proper tax documentation, and shall remit such
taxes to the appropriate authorities.
 
10.           Notices.  All communications hereunder shall be in writing and
shall be deemed to be duly given and received:
 
(a) upon delivery, if delivered personally, or upon confirmed transmittal, if by
facsimile;
(b) on the next Business Day (as hereinafter defined) if sent by overnight
courier; or
(c) four (4) Business Days after mailing if mailed by prepaid registered mail,
return receipt requested, to the appropriate notice address set forth below or
at such other address as any party hereto may have furnished to the other
parties in writing by registered mail, return receipt requested.
 
 
 

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If to Merit:
With a copy to:
   
The Merit Group, Inc.
 
Parker Poe Adams & Bernstein LLP
1310 Union Street
 
401 South Tryon Street, Suite 3000
Spartanburg, South Carolina 29302
 
Charlotte, North Carolina 28202
Attention:  Jay Baker
 
Attention: Richard K. Schell
Fax:  (864) 699-3505
 
Fax: (704) 335-9690

If to NPDC:
With a copy to:
     
National Patent Development Corporation
 
Day Pitney LLP
Attention; Harvey P. Eisen, Chairman of the Board
 
One Canterbury Green
c/o Bedford Oak Avisors, LLC
 
201 Broad Street
100 South Bedford Road
 
Stamford, Connecticut  06901
Mt. Kisco, NY 10549
 
Attention: Robert F. Wrobel
Fax: (914) 272-5779
 
Fax: (203) 977-7301

If to the Escrow Agent:
JPMorgan Chase Bank, N.A.
 
Escrow Services
 
4 New York Plaza, 21st Floor
 
New York, New York 10004
 
Attention:  Michael Kuzmicz/Greg Kupchynsky
 
Fax No.:     (212) 623-6168

 
Notwithstanding the above, in the case of communications delivered to the Escrow
Agent pursuant to (a), (b) and (c) of this Section 10, such communications shall
be deemed to have been given on the date received by an officer of the Escrow
Agent or any employee of the Escrow Agent who reports directly to any such
officer at the above-referenced office.  In the event that the Escrow Agent, in
its sole discretion, shall determine that an emergency exists, the Escrow Agent
may use such other means of communication as the Escrow Agent deems
appropriate.  “Business Day” shall mean any day other than a Saturday, Sunday or
any other day on which the Escrow Agent located at the notice address set forth
above is authorized or required by law or executive order to remain closed.
 
11.           Security Procedures.  (a) In the event funds transfer instructions
are given (other than in writing at the time of execution of this Escrow
Agreement), whether in writing, by facsimile or otherwise, the Escrow Agent is
authorized to seek confirmation of such instructions by telephone call-back to
the person or persons designated on schedule 1 hereto (“Schedule 1”), and the
Escrow Agent may rely upon the confirmation of anyone purporting to be the
person or persons so designated.  Each funds transfer instruction shall be
executed by an authorized signatory, a list of such authorized signatories is
set forth on Schedule 1.  The persons and telephone numbers for call-backs may
be changed only in a writing actually received and acknowledged by the Escrow
Agent.  If the Escrow Agent is unable to contact any of the authorized
representatives identified in Schedule 1, the Escrow Agent is hereby authorized
to seek confirmation of such instructions by telephone call-back to any one or
more of Merit or NPDC’s executive officers, (“Executive Officers”), as the case
may be, which shall include the titles of CEO, president or any vice president,
as the Escrow Agent may select.  Such “Executive Officer” shall deliver to the
Escrow Agent a fully executed incumbency certificate, and the Escrow Agent may
rely upon the confirmation of anyone purporting to be any such officer.  The
Escrow Agent and the beneficiary’s bank in any funds transfer may rely solely
upon any account numbers or similar identifying numbers provided by Merit or
NPDC to identify (a) the beneficiary, (b) the beneficiary’s bank, or (c) an
intermediary bank.  The Escrow Agent may apply any of the escrowed funds for any
payment order it executes using any such identifying number, even when its use
may result in a person other than the beneficiary being paid, or the transfer of
funds to a bank other than the beneficiary’s bank or an intermediary bank
designated.  The Parties acknowledge that these security procedures are
commercially reasonable.
 
 
 

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(b)           Escrow Agent, NPDC, Regions and Stonehenge agree that the Regions
Standing Instructions and instructions contained in the Specified Notice shall
be effective as the funds transfer instructions of Merit without requiring a
verifying callback, whether or not authorized, if such Regions Standing
Instructions and instructions contained in the Specified Notice are consistent
with previously authenticated Regions Standing Instructions and instructions
contained in the Specified Notice for that beneficiary.  The Parties acknowledge
that such Regions Standing Instructions and instructions contained in the
Specified Notice are a security procedure and are commercially reasonable.
 
12.           Compliance with Court Orders.  In the event that any escrow
property shall be attached, garnished or levied upon by any court order, or the
delivery thereof shall be stayed or enjoined by an order of a court, or any
order, judgment or decree shall be made or entered by any court order affecting
the property deposited under this Escrow Agreement, the Escrow Agent is hereby
expressly authorized, in its sole discretion, to obey and comply with all writs,
orders or decrees so entered or issued, which it is advised by legal counsel of
its own choosing is binding upon it, whether with or without jurisdiction, and
in the event that the Escrow Agent obeys or complies with any such writ, order
or decree it shall not be liable to any of the parties hereto or to any other
person, entity, firm or corporation, by reason of such compliance
notwithstanding such writ, order or decree be subsequently reversed, modified,
annulled, set aside or vacated.
 
 
 

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13.           Miscellaneous.  The provisions of this Escrow Agreement may be
waived, altered, amended or supplemented, in whole or in part, only by a writing
signed by the Escrow Agent and the Parties.  Neither this Escrow Agreement nor
any right or interest hereunder may be assigned in whole or in part by the
Escrow Agent or any Party, except as provided in Section 6, without the prior
consent of the Escrow Agent and the other parties.  This Escrow Agreement shall
be governed by and construed under the laws of the State of New York. Each Party
irrevocably waives any objection on the grounds of venue, forum non-conveniens
or any similar grounds and irrevocably consents to service of process by mail or
in any other manner permitted by applicable law and consents to the jurisdiction
of the courts located in the State of New York.  The Parties further hereby
waive any right to a trial by jury with respect to any lawsuit or judicial
proceeding arising or relating to this Escrow Agreement.  No party to this
Escrow Agreement is liable to any other party for losses due to, or if it is
unable to perform its obligations under the terms of this Escrow Agreement
because of, acts of God, fire, war, terrorism, floods, strikes, electrical
outages, equipment or transmission failure, or other causes reasonably beyond
its control.  This Escrow Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.  All signatures of the parties to this
Escrow Agreement may be transmitted by facsimile, and such facsimile will, for
all purposes, be deemed to be the original signature of such party whose
signature it reproduces, and will be binding upon such party.  If any provision
of this Escrow Agreement is determined to be prohibited or unenforceable by
reason of any applicable law of a jurisdiction, then such provision shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions thereof, and any
such prohibition or unenforceability in such jurisdiction shall not invalidate
or render unenforceable such provisions in any other jurisdiction.  A person who
is not a party to this Escrow Agreement shall have no right to enforce any term
of this Escrow Agreement.  The parties represent, warrant and covenant that each
document, notice, instruction or request provided by such Party to Escrow Agent
shall comply with applicable laws and regulations.  Where, however, the
conflicting provisions of any such applicable law may be waived, they are hereby
irrevocably waived by the parties hereto to the fullest extent permitted by law,
to the end that this Escrow Agreement shall be enforced as written.  Except as
expressly provided in Section 8 above, nothing in this Escrow Agreement, whether
express or implied, shall be construed to give to any person or entity other
than the Escrow Agent and the Parties any legal or equitable right, remedy,
interest or claim under or in respect of this Escrow Agreement or any funds
escrowed hereunder.
 
Signatures appear on the following page.
 
 
 
 
 

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IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement as of
the date set forth above.
 
 

MERIT                    
By:
/s/ Jay Baker         Name:  Jay Baker          Title: President               
        NPDC               By: /s/ Harvey P. Eisen         Name:  Harvey P.
Eisen         Title: Chairman, President and Chief Executive Officer            
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION   as Escrow Agent                    
By: /s/ Michael J. Kuzmicz              Name: Michael J. Kuzmicz         Title:
Vice President      

 
 
 
 
 
 
 
 
 
 
 

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SCHEDULE 1
 
Telephone Number(s) and authorized signature(s) for
Person(s) Designated to give Funds Transfer Instructions
 
If to Merit:

Name
Telephone Number
Signature
1.           Jay Baker
(864) 699-3525
/s/ Jay Baker             
2.           Caleb C. Fort
(864) 699-3502
/s/ Caleb C. Fort       
3.           ________________
________________
________________

If to NPDC:
 
Name
Telephone Number
Signature
1.           John Belknap
 
/s/ John Bleknap      
2.           Ira Sobotko
 
/s/ Ira Sobotko         
3.           Harvey Eisen
(914) 242-5701
/s/ Harvey P. Eisen  

 
 
Telephone Number(s) for Call-Backs and
Person(s) Designated to Confirm Funds Transfer Instructions
 
If to Merit:

Name
Telephone Number
 
1.           Jay Baker
(864) 699-3525
 
2.           Caleb C. Fort
(864) 699-3502
 
3.           ________________
________________
 

If to NPDC:
 
Name
Telephone Number
 
1.           John Belknap
(973) 428-4600
 
2.           Ira Sobotko
(973) 428-4600
 
3.           Harvey Eisen
(914) 242-5701
 

Telephone call backs shall be made to both Parties if joint instructions are
required pursuant to the agreement.  All funds transfer instructions must
include the signature of the person(s) authorizing said funds transfer and must
not be the same person confirming said transfer.
 
 
 
 

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SCHEDULE 2
 
Escrow Agent’s Compensation:
 

Account Acceptance Fee
Waived

Encompassing review, negotiation and execution of governing documentation,
opening of the account, and completion of all due diligence
documentation.  Payable upon closing.

Annual Administration Fee
$2,500

The Administration Fee covers our usual and customary ministerial duties,
including record keeping, distributions, document compliance and such other
duties and responsibilities expressly set forth in the governing documents for
each transaction.  Payable upon closing and annually in advance thereafter,
without pro-ration for partial years.

Extraordinary Services and Out-of Pocket Expenses
Any additional services beyond our standard services as specified above, and all
reasonable out-of-pocket expenses including attorney’s or accountant’s fees and
expenses will be considered extraordinary services for which related costs,
transaction charges, and additional fees will be billed at the Bank's then
standard rate.  Disbursements, receipts, investments or tax reporting exceeding
25 items per year may be treated as extraordinary services thereby incurring
additional charges.

Disclosure & Assumptions
·
Please note that the fees quoted are based on a review of the transaction
documents provided and an internal due diligence review. JPMorgan reserves the
right to revise, modify, change and supplement the fees quoted herein if the
assumptions underlying the activity in the account, level of balances, market
volatility or conditions or other factors change from those used to set our
fees.

·
The escrow deposit shall be continuously invested in a JPMorgan Chase Bank money
market deposit account (“MMDA”) or a JPMorgan Chase Bank Cash Compensation
account. MMDA and Cash Compensation Accounts have rates of compensation that may
vary from time to time based upon market conditions.

·
The Parties acknowledge and agree that they are permitted by U.S. law to make up
to six (6) pre-authorized withdrawals or telephonic transfers from an MMDA per
calendar month or statement cycle or similar period.  If the MMDA can be
accessed by checks, drafts, bills of exchange, notes and other financial
instruments (“Items”), then no more than three (3) of these six (6) transfers
may be made by an Item.  The Escrow Agent is required by U.S. law to reserve the
right to require at least seven (7) days notice prior to a withdrawal from a
money market deposit account.

·
Payment of the invoice is due upon receipt.

Compliance
To help the government fight the funding of terrorism and money laundering
activities, Federal law requires all financial institutions to obtain, verify,
and record information that identifies each person or entity that opens an
account.  We may ask for information that will enable us to meet the
requirements of the Act.
 
 
 

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EXHIBIT A
 
Standing Disbursement Instructions - Merit
 
On or before the date on which Escrow Agent receives the Specified Notice,
Escrow Agent shall disburse all such funds directly to Regions in accordance
with the following wire instructions:
 
 
Name of Bank:
Regions Bank
Account No.:
 
Routing No.:
 
Account Name:
The Merit Group, Inc.
Reference:
[_______________]

 
 
After the date on which Escrow Agent receives the Specified Notice, Escrow Agent
shall disburse all such funds directly to Stonehenge in accordance with the
instructions set forth in the Specified Notice.
 
.
 

 

 
 

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EXHIBIT B

NOTICE

[_____________  __], [___]

JPMorgan Chase Bank, National Association
[_______________]
[_______________]
Attn:  [_______________]

 
Re:
Escrow Agreement dated as of January 15, 2010 (as the same may be amended,
restated, supplemented, or otherwise modified from time to time, the “Escrow
Agreement”), by and among JPMorgan Chase Bank, National Association, in its
capacity as Escrow Agent (the “Escrow Agent”), The Merit Group, Inc., a South
Carolina corporation (“Merit”), and National Patent Development Corporation, a
Delaware corporation (“NPDC”)

Ladies and Gentlemen:

This notice is the notice referred to in the Escrow Agreement.

In accordance with the Escrow Agreement, (a) Escrow Agent is hereby notified
that the Senior Debt Satisfaction Date has occurred, disbursements and other
payments of any funds of any kind or nature and (b) Escrow Agent is hereby
directed to disburse and pay all disbursements and other payments of any funds
of any kind or nature which are payable to Merit under the terms of the Escrow
Agreement only in accordance with the following wire instructions:
 
Name of Bank:
[_______________]
Account No.:
[_______________]
Routing No.:
[_______________]
Account Name:
[_______________]
Reference:
[_______________]
      Very truly yours,       STONEHENGE OPPORTUNITY FUND III, L.P.

 
 
 
 
 
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