ex10_2.htm


  
    
      Exhibit
        10.2

       

    

    FIVE
      STAR
      PRODUCTS, INC.

    STOCK
      OPTION AGREEMENT

     

    AGREEMENT,
      dated July 17, 2007 (the “Grant Date”), between Five Star Products, Inc., a
      Delaware corporation (the “Company”), with an address at 10 East 40th Street,
      Suite 3110, New York, NY 10016, and Ira Sobotko (the “Grantee”), with an address
      c/o 10 East 40th Street, Suite 3110, New York, NY 10016.

     

    WHEREAS,
      the Board of Directors of the Company has, on the Grant Date, pursuant to the
      Five Star Products, Inc. 2007 Incentive Stock Plan, a copy of which is annexed
      hereto as Exhibit A (the “Plan”; capitalized terms used but not defined herein
      having the meanings ascribed thereto in the Plan), granted to the Grantee
      options to purchase shares of the common stock, par value $.01 per share, of
      the
      Company (the “Common Stock”), as hereinafter set forth, and authorized the
      execution and delivery of this Agreement;

     

    NOW,
      THEREFORE, the parties hereto agree as follows:

     

    1.           The
      Grantee is hereby granted options (the “Options”) to purchase from the Company,
      subject to the terms and conditions set forth in this Agreement, all or any
      part
      of 125,000 shares of Common Stock (the “Option Shares”) at an initial purchase
      price of $ 0.78 per share; provided, however that notwithstanding any other
      provision of this Agreement, the Options granted are contingent upon approval
      of
      the Plan by the shareholders of the Company as provided in Section 16
      hereof.

     

    2.           The
      Options shall be exercisable as follows and subject to the continuous employment
      of the Grantee with the Company until the applicable vesting date:

     

    (a)           Unless
      sooner terminated as hereinafter provided, this Option shall become vested
      and
      exercisable up to 33.3% of the Option Shares on the date of filing (such filing
      date, the “1 Vesting Date”) of the Company’s Annual Report on Form 10-K (“Form
      10-K”) with the Securities and Exchange Commission (the “SEC”) for the fiscal
      year ending December 31, 2007 (“Fiscal 2007”), subject to the Company’s
      achieving Adjusted EBITDA (as defined below) of at least $5,000,000 for Fiscal
      2007.  For purposes of this Agreement “Adjusted EBITDA” means earnings
      before interest, taxes, depreciation, amortization and extraordinary items
      and
      Nonrecurring Items (as defined in the Plan), all determined in accordance with
      generally accepted accounting principles consistently applied.

     

    (b)           Unless
      sooner terminated as hereinafter provided, this Option shall become vested
      and
      exercisable up to 33.3% of the Option Shares on the date of filing (such filing
      date, the “2nd Vesting Date”) of the Company’s Form 10-K with the SEC for the
      fiscal year ending December 31, 2008 (“Fiscal 2008”), subject to the Company’s
      achieving Adjusted EBITDA of at least $7,500,000 for Fiscal 2008.

     

    (c)           Unless
      sooner terminated as hereinafter provided, this Option shall become vested
      and
      exercisable up to 33.4% of the Option Shares on the date of filing (such filing
      date, the “3rd Vesting Date”) of the Company’s Form 10-K with the SEC for the
      fiscal year ending
      December 31, 2009 (“‘Fiscal 2009”), subject to the Company’s achieving Adjusted
      EBITDA of at least $11,250,000 for Fiscal 2009.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (d)           If,
      on the 3rd Vesting Date, the Company’s aggregate Adjusted EBITDA for Fiscal
      2007, Fiscal 2008 and Fiscal 2009 equals or exceeds $23,750,000, then any Option
      Shares that did not vest on the 1st Vesting Day, 2nd Vesting Date or 3rd Vesting
      Day shall become vested and exercisable on the 3rd Vesting Date.

     

    (e)           Notwithstanding
      any other provision of this Agreement to the contrary, in the event that Grantee
      is employed by the Company as of the end of Fiscal 2007, 2008 or 2009, Grantee
      shall be entitled to the vesting of this Option for that fiscal year, as set
      forth above, regardless of whether Grantee’s employment terminates prior to the
      formal determination of vesting (i.e., based on Adjusted EBITDA
      calculations) for such fiscal year, as set forth above.

     

    3.           The
      Options shall automatically become vested and shall be immediately exercisable
      in full upon the occurrence of a Change in Control of the Company or its parent,
      National Patent Development Corporation (“NPDC”).  For purposes of
      this Agreement, a “Change in Control” of the Company shall be deemed to have
      occurred if (i) National Patent Development Corporation (“NPDC”) and its
      affiliates cease to own a majority of the voting stock of the Company and (ii)
      within any 12-month period beginning on or after the date that is three months
      after the date hereof, the persons who were directors of the Company immediately
      before the beginning of such period (the “Company Incumbent Directors”) shall
      cease (for any reason other than death) to constitute at least a majority of
      the
      Board of Directors of the Company or the board of directors of any successor
      to
      the Company, provided that any director who was not a director of the Company
      immediately before the beginning of such period shall be deemed to be a Company
      Incumbent Director if such director was elected to the Board of Directors of
      the
      Company by, or on the recommendation of or with the approval of, at least
      two-thirds of the directors who then qualified as Company Incumbent Directors
      either actually or by prior operation of this Section 3, unless such election,
      recommendation or approval was the result of an actual or threatened election
      contest of the type contemplated by Regulation 14a-11 promulgated under the
      Exchange Act.  For purposes of this Agreement, a “Change in Control”
of NPDC shall be deemed to have occurred if (i) a change in control of NPDC
      of a
      nature that would be required to be reported in response to Item 5.01 of Current
      Report on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act, other
      than a change of control resulting in control by Grantee or a group including
      Grantee occurs, (ii) any “person” (as such term is used in Sections 13(d) and
      14(d) of the Exchange Act), other than Grantee or a group including Grantee,
      is
      or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange
      Act), directly or indirectly, of securities of NPDC representing 20% or more
      of
      the combined voting power of NPDC’s then outstanding securities, or (iii) within
      any 12-month period beginning on or after the date that is three months after
      the date hereof, the persons who were directors of NPDC immediately before
      the
      beginning of such period (the “NPDC Incumbent Directors”) shall cease (for any
      reason other than death) to constitute at least a majority of the Board of
      Directors of NPDC or the board of directors of any successor to NPDC, provided
      that any director who was not a director of NPDC immediately before the
      beginning of such period shall be deemed to be a NPDC Incumbent Director if
      such
      director was elected to the Board of Directors of NPDC by, or on the
      recommendation of or with the approval of, at least two-thirds of the directors
      who then qualified as NPDC Incumbent Directors either actually or by prior
      operation of this Section 8(d), unless
      such election, recommendation or approval was the result of an actual or
      threatened election contest of the type contemplated by Regulation 14a-11
      promulgated under the Exchange Act of or any successor
      provision.


    
      
        
        

      

      
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    4.           All
      Options shall terminate and thereafter no longer be exercisable (subject to
      Section 8) on the tenth anniversary of the Grant Date (the “Expiration
      Date”).

     

    5.           Option
      Shares purchased pursuant to this Agreement shall be paid for in full at the
      time of purchase.  Payment may be made in cash, shares of Common
      Stock, Options, or such other consideration as may be approved by the Committee,
      or a combination thereof, provided that such consideration shall be such that
      the Option Shares shall be fully paid and nonassessable.  If payment
      is made in whole or part by tender of (a) shares of Common Stock, such shares
      shall be valued at the Fair Market Value thereof, (b) Options, the Options
      tendered as payment must be exercisable at the date of such tender, shall be
      deemed to have been exercised for purposes of this Agreement, and shall be
      valued at an amount equal to the excess of the Fair Market Value of the Option
      Shares issuable on exercise of such Options over the aggregate exercise price
      of
      such Options, or (c) consideration other than cash, shares of Common Stock,
      or
      Options, such consideration shall have such value as determined by the Committee
      (whose determination shall be final).  Upon receipt of written notice
      of exercise of Options in the form attached hereto as Exhibit B together with
      payment and delivery of any other required documentation, the Company shall,
      without stock transfer tax to the Grantee or any other person entitled to
      exercise such Options, deliver to the person exercising such Options a
      certificate or certificates for the Option Shares so purchased.  It
      shall be a condition to the performance of the Company’s obligation to issue or
      transfer Common Stock upon exercise of Options that the Grantee or other person
      exercising such Options pay, or make provision satisfactory to the Company
      for
      the payment of, any taxes (other than stock transfer taxes) which the Company
      is
      obligated to collect with respect to the issue or transfer of Common Stock
      upon
      exercise, including any Federal, state, or local withholding taxes.

     

    6.           No
      person shall have any rights as a stockholder with respect to any Option Shares
      until the date a stock certificate is issued to such person for such Option
      Shares.  Except as otherwise expressly provided herein, no adjustment
      shall be made for dividends or other rights for which the record date is prior
      to the date such stock certificate is issued.

     

    7.           Options
      are not transferable otherwise than by will or the laws of descent and
      distribution and are exercisable, during the lifetime of the Grantee, only
      by
      the Grantee or, in the event of Grantee’s legal disability, by the Grantee’s
      legal representative.  The Grantee or his representative shall give
      the Company notice of any transfer, specifying the name and address of the
      transferee and the number and class of Options transferred.

     

    8.           a)           If,
      for any reason other than death or disability, Grantee’s Termination of Service
      occurs prior to the Expiration Date, such Options may be exercised, to the
      extent of the number of shares and with the exercise price with respect to
      which
      the Grantee could have exercised it on the date of such Termination of Service,
      by the Grantee at any time prior to the earlier of (i) the Expiration Date
      and
      (ii) two months after the date of such Termination of Service.

     

    
      
        
        

      

      
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    (b)           If
      Grantee becomes disabled (within the meaning of section 22(e)(3) of the Code)
      prior to the Expiration Date, and the Grantee’s Termination of Service occurs as
      a consequence of such disability, the Options may be exercised, to the extent
      of
      the number of shares and with the exercise price with respect to which the
      Grantee could have exercised it on the date of such Termination of Service,
      by
      the Grantee at any time prior to the earlier of (i) the Expiration Date and
      (ii)
      six months after the date of such Termination of Service.  In the
      event of the Grantee’s legal disability, the Options may be exercised by the
      Grantee’s legal representative.

     

    (c)           If
      Grantee’s Termination of Service occurs as a result of death prior to the
      Expiration Date, or if the Grantee dies following his or her Termination of
      Service but prior to the expiration of the period determined under Sections
      8(a)
      and (b) above, the Options may be exercised, to the extent of the number of
      shares and with the exercise price with respect to which the Grantee could
      have
      exercised them on the date of his or her death, by the Grantee’s estate,
      personal representative, or beneficiary who acquired the right to exercise
      the
      Options by bequest or inheritance or by reason of the death of the
      Grantee.  Such post-death exercise may occur at any time prior to the
      earlier of (i) the Expiration Date and (ii) one year after the date of the
      Grantee’s death.

     

    (d)           If
      the issuance of any shares of Common Stock on the exercise of any Options
      pursuant to this Section 8 has not, at the time of such exercise, been
      registered under the Securities Act, the Grantee or other person exercising
      such
      Options shall execute and deliver such documents as the Company may reasonably
      require to ensure compliance with the Securities Act and other applicable
      securities laws, including acknowledgement that such shares are “restricted
      securities” as defined in the regulations under the Act and are acquired for
      investment purposes only and not with a view to resale or
      distribution.

     

    9.           The
      number and kind of shares issuable on exercise of, and the exercise price of,
      the Options represented hereby shall be subject to adjustment as provided in
      the
      Plan.

     

    10.           The
      Company shall at all times reserve and keep available out of its authorized
      Common Stock the full number of shares of Common Stock issuable upon exercise
      of
      Options.

     

    11.           b)           If
      at any time the Committee or the Board shall determine, in its discretion,
      that
      the listing, registration, or qualification of any of the Option Shares upon
      any
      securities exchange or under any state or federal law, or the consent or
      approval of any governmental regulatory body, is necessary or desirable as
      a
      condition of, or in connection with, the issue or purchase of Option Shares,
      the
      Options may not be exercised in whole or in part unless such listing,
      registration, qualification, consent, or approval shall have been effected
      or
      obtained free of any conditions not acceptable to the Committee or the Board,
      as
      applicable.  Any notice of exercise of Options which would be
      effective except for this Section 11 shall be deemed effective immediately
      upon
      satisfaction of all such conditions (even if such notice could not otherwise
      then have been given).

     

    (b)           The
      Company shall not be obligated to sell or issue any Option Shares in any manner
      in contravention of the Securities Act, the Exchange Act, or any state
      securities law.  The Board may, at any time, require as a condition to
      the exercise of Options that the Option Shares be acquired for investment
      purposes only and that the certificate therefor contain a legend restricting
      transfer.


    
      
        
        

      

      
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    12.           All
      notices hereunder shall be in writing, and (a) if to the Company, shall be
      delivered personally to the Secretary of the Company or mailed to its principal
      office, addressed to the attention of the Secretary, (b) if to the Grantee,
      shall be delivered personally or via courier or mailed via certified mail,
      postage prepaid, return receipt requested to the Grantee at the address first
      set forth above, or (c) if to any subsequent holder of Options or Option Shares,
      to the address specified for such holder in the notice provided for in Section
      7
      or on the stock records of the Company.  Such addresses may be changed
      at any time by notice from one party to the other.

     

    13.           All
      decisions or interpretations made by the Committee with regard to any question
      arising hereunder shall be binding and conclusive on the Company and the
      Grantee.

     

    14.           This
      Agreement shall bind and inure to the benefit of the parties hereto and the
      successors and assigns of the Company and, to the extent provided in Section
      7,
      the executors, administrators, legatees, heirs, guardians, legal
      representatives, successors, and assigns of the Grantee.

     

    15.           This
      Agreement shall be governed by and construed in accordance with the laws of
      the
      State of Delaware, without giving effect to rules governing the conflict of
      laws.

     

    16.           Notwithstanding
      any other provision of this Agreement, the Options granted by this Agreement
      shall be void and of no force and effect unless the shareholders of the Company
      shall within twelve months after the Grant Date approve the Plan.  No
      Options may be exercised until the foregoing shareholder approval is
      received.

     

     

     

    
      
        
        

      

      
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    IN
      WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
      day
      and year first above written.

     

    
      	 	FIVE
              STAR PRODUCTS,
              INC.	 
	 	 	 	 
	
               

            	
              By:
                

            	/s/ JOHN
              C. BELKNAP	 
	 	 	Title :
              Chief Executive
              Officer	 
	 	 	 	 
	 	 	 	 
	 	GRANTEE	 
	 	 	 	 
	 	 /s/
              IRA  J. SOBOTKO	 
	 	Ira
              Sobotko	 


    

     


    
      
        
        

      

      
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    EXHIBIT
      A

     

    FIVE
      STAR
      PRODUCTS, INC.

     

    2007
      INCENTIVE STOCK PLAN

     

     

     

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    


    EXHIBIT
      B

     

    EXERCISE
      NOTICE

     

    The
      undersigned, pursuant to the foregoing Option Agreement (terms used herein
      have
      the meanings as defined in the Option Agreement), hereby elects to exercise
      Options for ________shares of Common Stock (the “Shares”) at an exercise price
      of $0.38 per share, and herewith (or as otherwise provided in the Option
      Agreement) makes payment in full therefor pursuant to such Option
      Agreement.

     

    1.           If
      the sale of the Shares and the resale thereof has not, prior to the date hereof,
      been registered pursuant to a registration statement filed and declared
      effective under the Securities Act of 1933 (the “Act”), the undersigned hereby
      agrees, represents, and warrants that:

     

    (a)           I
      am acquiring the Shares for my own account (and not for the account of others)
      for investment and not with a view to the distribution or resale
      thereof;

     

    (b)           By
      virtue of my position, I have access to the same kind of information which
      would
      be available in a registration statement filed under the Act;

     

    (c)           I
      am a sophisticated investor;

     

    (d)           I
      understand that I may not sell or otherwise dispose of such shares in the
      absence of either a registration statement under the Act or an exemption from
      the registration provisions of the Act; and

     

    (e)           The
      certificates representing such shares may contain a legend to the effect of
      (d)
      above.

     

    2.           If
      the sale of the Shares and the resale thereof has been registered under the
      Act,
      the undersigned hereby represents and warrants that I have received the
      applicable prospectus and all subsequent reports incorporated therein by
      reference.

     

    
      	 	Very
              truly yours,	 
	 	 	 
	
               

            	 	 
	 	(type
              name under signature
              line)	 


    

    


    Dated: _________________________