Exhibit 10.61

 

SUBORDINATION AGREEMENT

 

This Subordination Agreement is made as of the 25th day of March, 2004 by and
among Jonnie R. Williams, residing at 1 Starwood Lane Manakin-Sabot, Virginia
23103 (the “Subordinated Creditor”), Star Scientific, Inc., a Delaware
corporation (the “Borrower”) and Manchester Securities Corp., a New York
corporation (“Senior Creditor”). Each undefined capitalized term contained
herein shall have the meaning set forth in the Securities Purchase Agreement
among the Borrower and the Senior Creditor dated the date hereof (“Securities
Purchase Agreement”).

 

WHEREAS, the Borrower intends to enter into the Securities Purchase Agreement,
Registration Rights Agreement and Security Agreement contemporaneously herewith
(as same may be amended from time to time, the “Transaction Agreements”) with
the Senior Creditor, pursuant to which, among other things, the Senior Creditor
shall purchase the Borrower’s 8% Convertible Debentures issued by the Borrower
(the “Debentures”);

 

WHEREAS, Subordinated Creditor is an officer and shareholder of Borrower;

 

WHEREAS, Borrower now owes Subordinated Creditor the sum of $4,500,000, and
Subordinated Creditor may, from time to time, make further loans, advancements
or extensions of credit to Borrower (collectively, the “Subordinated Debt”); and

 

WHEREAS, the Senior Creditor requires that the Subordinated Creditor enter into
this Subordination Agreement as a condition precedent to the Senior Creditor
entering into the Transaction Agreements and purchasing the Debentures;

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby act and agree as
follows:

 

1. The Subordinated Creditor agrees that the payment of the Subordinated Debt or
any part thereof is expressly subordinated to the prior payment and satisfaction
in full of the Senior Debt (as defined in this paragraph 1). As used herein,
“Senior Debt” means the principal, interest, premium, fees and other sums
payable from time to time to the Senior Creditor under the Debentures. Interest,
fees and charges constituting Senior Debt will be calculated as provided for in
the Debentures and without regard to whether or not same are allowable in any
bankruptcy or insolvency proceedings involving the Borrower.

 

2. Except for Permitted Payments (as defined in paragraph 3 hereof) so long as
any part of the Senior Debt shall be unpaid, no payment of, or with respect to,
any Subordinated Debt shall be made at any time by the Borrower or received by
the Subordinated Creditor (in any manner, including by set-off). If the
Subordinated Creditor receives any payment to which the Subordinated Creditor
shall not be entitled under this Section 2 or Section 3 hereof, the Subordinated
Creditor will hold any such payment in trust for the benefit of the Senior
Creditor, and will forthwith remit same to the Senior Creditor.

 

3. Notwithstanding anything in this Agreement to the contrary, so long as no
default by the Borrower or any Subsidiary of the Company exists under the Senior
Debt, or the Subordinated Debt, the Borrower shall have the right to pay any
principal and interest (not to

--------------------------------------------------------------------------------

exceed the legal rate) then due and payable on the Subordinated Debt; provided
further, however, that such payment will not (i) result in, or cause a default
under the Debentures or any of the Transaction Agreements, (ii) the Borrower is
not insolvent at the time such payment is made and such payment does not cause
Borrower to be insolvent, and (iii) immediately after such payment is made the
Borrower’s cash on hand (determined in accordance with generally accepted
accounting principles consistently applied) will be not less than $10,000,000
(“Permitted Payments”).

 

4. As long as any of the Senior Debt shall be outstanding:

 

(a) Except for Permitted Payments, any payment or distribution to which any
holder of Subordinated Debt would otherwise be entitled to receive with respect
to the Subordinated Debt, but for the subordination provisions of this
Agreement, shall be paid directly to the Senior Creditor.

 

(b) Except for Permitted Payments, in the event that any payment on account of
Subordinated Debt or any distribution of assets of the Borrower shall be
received by the Subordinated Creditor in violation of the subordination
provisions of this Agreement, such payment or distribution shall be held by such
Subordinated Creditor in trust for the benefit of the Senior Creditors and shall
be paid over forthwith to the Senior Creditor.

 

(c) Subordinated Creditor agrees that upon the occurrence of a Bankruptcy Event
(as defined in the Debenture), any payment or distribution of any kind or
character, whether in cash, securities, or other property, which is payable or
deliverable upon or with respect to any or all of Borrower’s indebtedness to
Subordinated Creditor, shall be paid or delivered directly to for application to
the Senior Debt, due or not due, until all of such indebtedness has been fully
paid and satisfied. In the event a Bankruptcy Event occurs and Senior Creditor
does not receive evidence that Subordinated Creditor has filed a proper claim
not later than fifteen days before the applicable bar date, in a form and manner
satisfactory to Senior Creditor than Senior Creditor shall have the right to
file such claim in Subordinated Creditor’s name, or its own name. Furthermore,
Subordinated Creditor hereby irrevocably authorizes and empowers the Senior
Creditor to demand, sue for, collect and receive every such payment or
distribution and give acquittance therefor in an amount not to exceed the Senior
Debt and to file claims and take such other proceedings in Senior Creditor’s own
name or in the name of Subordinated Creditor or otherwise, as Senior Creditor
deems necessary or advisable in its reasonable discretion for the enforcement of
this Agreement. Subordinated Creditor hereby agrees to execute and deliver to
Senior Creditor all powers of attorney, assignments or other instruments
requested by Senior Creditor in order to enable Senior Creditor to enforce all
claims upon or with respect to any or all of Borrower’s indebtedness to
Subordinated Creditor, and to collect and receive all payments or distributions
(other than Permitted Payments) which are payable or deliverable at any time
upon or with respect to any such indebtedness of Borrower to Subordinated
Creditor.

 

(d) No agreement (oral or written), note, or instrument evidencing any
Subordinated Debt shall be amended, terminated, exchanged, transferred or
otherwise affected without the prior written consent of the Senior Creditor

 

2

--------------------------------------------------------------------------------

(e) The Subordinated Creditor will not demand any payment in respect of the
Subordinated Debt, other than Permitted Payments.

 

(f) The Subordinated Creditor will neither request nor accept any security for
any of the Subordinated Debt. The Borrower and Subordinated Creditor hereby
represent and warrant that no security interest or collateral has been granted
to or on behalf of Subordinated Creditor in respect of the Subordinated Debt.

 

(g) Without the written consent of the Senior Creditor, Subordinated Creditor
will not bring any proceeding to enforce any of its rights or remedies with
respect to the Subordinated Debt or cause a Bankruptcy Event.

 

5. The terms of this Agreement, the subordination effected hereby and the rights
of the holder or holders of Senior Debt shall not be affected by: (i) any
amendment of or addition or supplement to the Debentures, the Transaction
Agreements or any other instrument or agreement relating to the Senior Debt or
securing or guaranteeing any of the Senior Debt, (ii) any exercise or
non-exercise of any right, power or remedy under or in respect of the Senior
Debt or any instrument or agreement relating thereto, or securing or
guaranteeing any of same, or (iii) any waiver, consent, release, indulgence,
extension, renewal, modification, delay or other action, inaction or omission in
respect of any Senior Debt or any instrument or agreement relating thereto, or
securing or guaranteeing any of same, all whether or not the holders of the
Subordinated Debt shall have had notice or knowledge of any of the foregoing.

 

6. The Subordinated Creditor shall not exercise any right of subrogation,
contribution or similar right, regardless of any payment made hereunder until
the Senior Debt has been paid in full.

 

7. This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns.

 

8. Any evidence of indebtedness now or hereafter evidencing any of the
Subordinated Debt shall be marked with the following legend:

 

“Payment of this indebtedness is subject to the terms and conditions of a
Subordination Agreement dated March 25, 2004 between Star Scientific, Inc.,
certain subsidiaries of Star Scientific, Inc., Jonnie Williams and certain
creditors of Star Scientific, Inc. A copy of said Subordination Agreement may be
obtained, upon written request of any holder of this note, from Star Scientific,
Inc., at 801 Liberty Way, Chester, Virginia 23836.”

 

9. Nothing contained in this Agreement or otherwise will in any event be deemed
to constitute any holder of Senior Debt the agent of the Subordinated Creditor
for any purpose nor to create any fiduciary or similar relationship between any
such holder of Senior Debt and the Subordinated Creditor. The Subordinated
Creditor acknowledges and agrees that no release, action or inaction with
respect to any Collateral for Senior Debt; nor any amendment to the Transaction
Agreements or any instrument or agreement relating to, securing or guaranteeing

 

3

--------------------------------------------------------------------------------

any of the Senior Debt; nor any exercise or non-exercise of any right, power or
remedy under or in respect of any of the Senior Debt or any instrument or
agreement relating to, securing or guaranteeing any of the Senior Debt; nor any
waiver, consent, release, indulgence, extension, renewal, modification, delay or
other action, inaction or omission (intentional or unintentional) in respect of
any of the Senior Debt or any Collateral therefor or any instrument or agreement
relating to, securing or guaranteeing any of the Senior Debt will in any event
give rise to any claim against any holder of Senior Debt or any officer,
director, employee or agent of such holder.

 

10. Upon the happening of an Event of Default under the Debentures or
Transaction Agreements, the Subordinated Creditor irrevocably authorizes and
directs Senior Creditor, and its successors and assigns and any trustee in
bankruptcy, receiver or assignee for the benefit of creditors of the Borrower,
whether in voluntary or involuntary liquidation, dissolution or reorganization,
to take such action in the name of the Subordinated Creditor as Senior Creditor
may deem to be necessary or appropriate to effectuate the subordination provided
for in this Agreement and to file all such claims and proofs of claim as the
Senior Creditor may deem necessary or appropriate to collect on the Senior Debt;
and the Subordinated Creditor hereby irrevocably appoints Senior Creditor and
its successor and assign, or any such trustee, receiver or assignee, as the
attorney- or attorneys-in-fact of the Subordinated Creditor for such purpose,
with full powers of substitution and resubstitution. Upon the happening of an
Event of Default under the Debentures or Transaction Agreements, the
Subordinated Creditor hereby further appoints the Senior Creditor, as such
Subordinated Creditor’s attorney-in-fact for the purpose of voting with respect
to any plan proposed in any reorganization, arrangement or composition
proceedings for the Borrower, it being understood that Senior Creditor may
exercise its rights hereunder as Senior Creditor in its reasonable discretion
may determine, and without regard, but in good faith, to the effect which same
would have on the interests of the Subordinated Creditor. The powers of attorney
granted herein are powers coupled with an interest and are, therefore,
irrevocable.

 

11. The Subordinated Creditor acknowledges receipt of copies of the Debentures
and Transaction Agreements and further agrees not to contest any of the
provisions of such documents or the exercise by the Senior Creditor and the
Collateral Agent of their respective rights and remedies thereunder.

 

12. The Subordinated Creditor and Borrower agree that if the Senior Debt is
refinanced (i) the Subordinated Debt will continue to be junior and subordinate
to the refinancing debt and (ii) in order to evidence such subordination,
Subordinated Creditor and Borrower shall, upon request of any lender or lenders
providing the refinancing debt (“Refinancing Lenders”), execute and deliver to
such Refinancing Lenders a subordination agreement containing substantially the
same terms as set forth in this Agreement (and prior to such execution and
delivery, all of the terms of this Agreement shall inure to the benefit of such
Refinancing Lenders as if such Person or Persons were the original Senior
Creditor hereunder.)

 

13. Subordinated Creditor represents and warrants that no subsidiary of Borrower
owes Subordinated Creditor any money. Subordinated Creditor further agrees that
he will not make any loans, advancements or extensions of Credit to any
subsidiary of Borrower.

 

4

--------------------------------------------------------------------------------

14. Notwithstanding anything to the contrary herein, provided that no Bankruptcy
Event has occurred, Subordinated Creditor and the Borrower may agree to convert
the outstanding Subordinated Debt into common stock of the Borrower.

 

15. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.

 

16. This Subordination Agreement shall terminate upon the satisfaction in full
of the Senior Debt.

 

17. This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered to the
other parties hereto by facsimile transmission, and facsimile signatures shall
be binding on the parties hereto.

 

Executed, as an instrument under seal, as of the day and year first above
written.

 

SUBORDINATED CREDITOR:           /s/    Jonnie R. Williams

--------------------------------------------------------------------------------

Name: Jonnie R. Williams

Address:

 

Agreed to:

 

BORROWER:

 

STAR SCIENTIFIC, INC.

 

 

By:             /s/    Paul L. Perito    

--------------------------------------------------------------------------------

   

Name: Paul L. Perito

Title: Chairman, President & C.O.O.

 

5

--------------------------------------------------------------------------------

Acknowledged:

 

SENIOR CREDITORS:

 

MANCHESTER SECURITIES CORP.

By:   /s/    Elliot Greenberg    

--------------------------------------------------------------------------------

   

Name: Elliot Greenberg

Title: Vice President

 

6

--------------------------------------------------------------------------------

SCHEDULE A

 

Name of

Subordinated Creditor

--------------------------------------------------------------------------------

 

Address

--------------------------------------------------------------------------------

 

Date of Loan

--------------------------------------------------------------------------------

   Amount Outstanding

--------------------------------------------------------------------------------

 

7