Document:

Exhibit -10.2 John Knapp's Employment Agreement

    Exhibit
      10.2

    
 

    EMPLOYMENT
      AGREEMENT

    

    This
      Employment Agreement (“Agreement”) is entered into by and between ICO, Inc. (the
“Company”) and A. John Knapp, Jr. (“Employee”), to be effective as of October 1,
      2005 (the “Effective Date”).

     

    

    WITNESSETH:

    

    WHEREAS,
      Employee
      will become employed by Company on the Effective Date; and

     

    WHEREAS,
      the
      Company desires to employ Employee from and after the Effective Date pursuant
      to
      the terms and conditions and for the consideration set forth in this Agreement,
      and Employee desires to be employed by Company pursuant to such terms and
      conditions and for such consideration.

     

    NOW,
      THEREFORE,
      for and
      in consideration of the mutual promises, covenants, and obligations contained
      herein, the Company and Employee agree as follows:

     

    

    ARTICLE
      1: EMPLOYMENT AND DUTIES:

    

    1.1 Employee’s
      employment and compensation received from Company are “at-will” and, therefore,
      can be terminated, with or without cause, at any time without prior notice,
      at
      Employee’s option or at the option of Company.  The “Employment Period,” as
      used herein, means the period commencing on the Effective Date, and ending
      on
      the last day of Employee’s employment with Company (the “Termination Date”).

     

    1.2 
      Beginning as of the Effective Date, Employee shall be employed as President
      and
      Chief Executive Officer of the Company, and shall continue to be a member of
      the
      Board of Directors of the Company. Employee may also serve as an officer and/or
      director of the Company’s domestic and foreign affiliated subsidiaries, and in
      such other key contributor capacities as may be requested by the Employer.
      Employee agrees to serve in such positions, and to perform diligently and to
      the
      best of Employee’s abilities the duties and services pertaining to such
      positions as reasonably determined by Company, as well as such additional or
      different duties and services appropriate to such positions which the Employee
      from time to time may be directed to perform by the Company. Employee shall
      report to the Board.

     

    1.3 Employee
      shall at all times comply with and be subject to such policies and procedures
      as
      the Company may establish from time to time, including, without limitation,
      the
      Company’s Employee Handbook, Code of Business Ethics, Group Accounting and
      Finance Policy Manual, Group Legal Department Policy Manual, and Expense
      Reimbursement Policy Manual.

     

     

    
      
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    1.4 Employee
      shall, during the Employment Period, devote at least 75% of Employee’s business
      time, energy, and best efforts to the business and affairs of the Company.
      Employee may not engage, directly or indirectly, in any other business,
      investment, or activity that interferes with Employee’s performance of
      Employee’s duties hereunder, is contrary to the interest of the Company or any
      of its affiliated subsidiaries and divisions (collectively, the “ICO Entities”
      or, individually, an “ICO Entity”). The ICO Entities as of the Effective Date
      are listed on Exhibit A attached hereto and incorporated herein. In the event
      that, during the Employment Period, any of the ICO Entities establish or
      purchase a 10% or more direct or indirect equity interest in any entity not
      listed on Exhibit A, such entity shall be deemed to be an ICO Entity for the
      purposes of this Agreement. The foregoing notwithstanding, the parties recognize
      and agree that Employee may engage in passive personal investments and other
      business activities which do not conflict with the business and affairs of
      the
      Company or the ICO Entities or interfere with Employee’s performance of his
      duties hereunder. Employee shall be eligible to serve on the board of directors
      or committees thereof of entities that are not ICO Entities during Employee’s
      employment by the Company, subject to the Board’s advance consideration and
      approval thereof. Employee shall be permitted to retain any compensation
      received for approved service on any unaffiliated corporation’s board of
      directors or committees thereof.

     

    1.5 Employee
      acknowledges and agrees that Employee owes a fiduciary duty of loyalty,
      fidelity, and allegiance to act at all times in the best interests of the
      Company and other ICO Entities and to do no act which would, directly or
      indirectly, injure any ICO Entity’s business, interests, or reputation. It is
      agreed that any direct or indirect interest in, connection with, or benefit
      from
      any outside activities, particularly commercial activities, which interest
      might
      in any way adversely affect the Company, or any ICO Entity, involves a possible
      conflict of interest. In keeping with Employee’s fiduciary duties to the
      Company, Employee agrees that during the Employment Period Employee shall not
      knowingly become involved in a conflict of interest with the Company or the
      ICO
      Entities, or upon discovery thereof, allow such a conflict to continue.
      Moreover, during the Employment Period Employee shall not engage in any activity
      which might involve a possible conflict of interest without first obtaining
      approval in accordance with this Agreement and the Company’s policies and
      procedures.

     

    

    ARTICLE
      2: COMPENSATION AND BENEFITS:

    

    2.1 During
      the Employment Period, the Employee shall receive a base salary ("Base Salary")
      of Ninety-Six Thousand Dollars ($96,000) per annum, less all required
      deductions, including but not limited federal withholding, social security
      and
      other taxes, and payable bi-weekly on the Company’s regular payroll schedule.
      During the Employment Period, the Base Salary may be reviewed periodically
      by
      the Compensation Committee of the Board (the “Compensation Committee”). The
      Compensation Committee may make recommendations to the Board to revise the
      Employee’s Base Salary, which may only be revised upon approval by the Board.
      Any increase in the Base Salary shall not serve to limit or reduce any other
      obligation to the Employee under this Agreement.

     

     

    
      
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    2.2 In
      addition to the Base Salary and other benefits afforded to Employee under this
      Agreement, on the first business day of Employee’s employment, Employee shall be
      granted options (“Options”) to purchase 120,000 shares of the Common Stock of
      the Company (“Shares”). The Options shall be granted from the Company’s 1998
      Employee Stock Option Plan, and pursuant to the terms of a Stock Option
      Agreement which shall include the terms described in this Section 2.2. The
      Options shall be granted at an exercise price equal to the fair market value
      of
      the Shares (as defined in the applicable stock option plan) on the date of
      grant. All of the referenced Options shall be Non Qualified Stock Options
      (NQSOs). 

     

    The
      Options shall vest as follows: Options to purchase 10,000 of the Shares shall
      vest upon the conclusion of each of the Employee’s first twelve months of
      employment as President and Chief Executive Officer. In the event that
      Employee’s employment as President and Chief Executive Officer terminates, for
      any reason, within twelve months after the Effective Date, vesting shall be
      pro-rated for the last month of service. All of the Options shall expire and
      shall not be exercisable on the seventh anniversary of the date of grant. The
      total number of Options to purchase Shares that have vested as of the first
      anniversary of the Effective Date shall be referred to herein as the “FY 2006
      Vested Options.”

     

    Example
      #1:
      Employee’s employment as President and Chief Executive Officer terminates
      five-and-a-half months after the Effective Date. In this scenario, Options
      to
      purchase 50,000 Shares shall have vested as of the end of the fifth month of
      employment, and with regard to the final half-month of employment, Options
      to
      purchase an additional 5,000 Shares shall vest. In this scenario an aggregate
      of
      Options to purchase 55,000 Shares shall have vested as of the Termination Date;
      therefore, the “FY 2006 Vested Options” is 55,000.

    

    Example
      #2:
      Employee continues to be employed as of December 31, 2006. In this scenario,
      Options to purchase 120,000 Shares shall have vested as of the anniversary
      of
      the Effective Date; therefore, the “FY 2006 Vested Options” is
      120,000.

    

    2.3 During
      the Employment Period, the Employee shall be entitled to participate in
      incentive, savings, and retirement plans, and other standard benefit plans
      afforded to other employees of the Company, including, without limitation,
      all
      medical, dental, disability, group life, accidental death, D&O indemnity,
      and travel accident insurance plans and programs of the Company, to the extent
      Employee is otherwise eligible under the terms and conditions of the applicable
      plan or policy, and as such plans or policies may be from time to time be
      amended, modified or terminated by the Company without prior notice. Dependants
      of Employee may participate in such plans to the extent allowed for other
      dependants of employees of the Company as allowed by the applicable plan. This
      Agreement shall not be construed to limit in any respect the Company’s right to
      establish, amend, modify, or terminate any benefit plan or policy. Furthermore,
      the Company shall not by reason of this Article 2 be obligated to institute,
      maintain, or refrain from changing, amending, or discontinuing, any incentive
      compensation, employee benefit, or stock or stock option program or plan, so
      long as such actions are similarly applicable to covered employees
      generally.

     

     

    
      
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    2.4 During
      the Employment Period, the Company shall pay or reimburse Employee for all
      actual, reasonable, and customary expenses incurred by Employee in the course
      of
      his employment in accordance with the Company’s policies and procedures in
      effect at the time.

     

    2.5 During
      the Employment Period, the Employee shall be entitled to four weeks of vacation,
      fully paid, per calendar year.

     

    2.6 The
      Company may withhold from any compensation, benefits, or amounts payable under
      this Agreement all federal, state, city, or other taxes as may be required
      pursuant to any law or governmental regulation or ruling.

     

    

    

    ARTICLE
      3: TERMINATION OF EMPLOYMENT AND 

    EFFECTS
      OF SUCH TERMINATION

    

    3.1 As
      Employee’s employment is “at will,” either Party (Company or Employee) may
      terminate this Agreement, with or without cause, upon providing written notice
      to the other party pursuant to Section 5.1 below. On the Termination Date,
      all
      future compensation to which Employee would otherwise be entitled and all future
      benefits for which Employee is eligible shall cease and terminate as of the
      Termination Date. Employee shall not be entitled to receive payment, if any,
      for
      accrued and unused vacation days. 

     

    3.2 Termination
      of the employment relationship does not terminate those obligations imposed
      by
      this Agreement which are continuing obligations, including Employee’s
      obligations under Article 4.

     

    

     

    

    ARTICLE
      4: 

    OWNERSHIP
      AND PROTECTION OF INTELLECTUAL PROPERTY

    AND
      CONFIDENTIAL INFORMATION;

    NON-COMPETITION
      AGREEMENT:

    

    4.1 All
      information, ideas, concepts, improvements, discoveries, and inventions, whether
      patentable or not, which are conceived, made, developed or acquired by Employee,
      individually or in conjunction with others, during Employee’s employment by the
      Company (whether during business hours or otherwise and whether on the Company’s
      premises or otherwise) which relate to the business, products or services of
      the
      Company or any of the ICO Entities (including, without limitation, all such
      information relating to corporate opportunities, confidential financial
      information, research and development activities, sales data, pricing and
      trading terms, evaluations, opinions, interpretations, acquisition prospects,
      the identity of customers or potential customers and their requirements, the
      identity of key contacts within the customers’ organizations or within the
      organizations of acquisition prospects, marketing and merchandising techniques,
      prospective names, and marks), and all writings or material of any type
      embodying any of such items, shall be the sole and exclusive property of ICO
      or
      the ICO Entities, as the case may be.

     

     

    
      
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    4.2 Employee
      acknowledges that the businesses of the Company and the ICO Entities are highly
      competitive and that their strategies, methods, books, records, and documents,
      their technical information concerning their products, equipment, services,
      and
      processes, procurement procedures and pricing techniques, the names of and
      other
      information (such as credit and financial data) concerning their customers
      and
      business affiliates (including but not limited to the products and/or services
      marketed, advertised, and/or sold to customers and prospective customers, and
      the prices charged or quoted to them for such products and/or services, and
      the
      business activities, needs, and requirements for products and/or services of
      such customers or prospective customers) all comprise confidential business
      information and trade secrets which are valuable, special, and unique assets
      which the Company or the ICO Entities use in their business to obtain a
      competitive advantage over their competitors. Employee further acknowledges
      that
      protection of such confidential business information and trade secrets against
      unauthorized disclosure and use is of critical importance to the Company and
      the
      ICO Entities in maintaining their competitive position. Employee hereby agrees
      that Employee will not, at any time during or after the Employment Period,
      make
      any unauthorized disclosure of any confidential business information or trade
      secrets of the Company or any other ICO Entity, or make any use thereof, except
      in the carrying out of his employment responsibilities hereunder. Confidential
      business information shall not include information in the public domain (but
      only if the same becomes part of the public domain through a means other than
      a
      disclosure prohibited hereunder). The above notwithstanding a disclosure shall
      not be unauthorized if (i) it is required by law or by a court of competent
      jurisdiction or (ii) it is in connection with any judicial arbitration, dispute
      resolution or other legal proceeding in which Employee’s legal rights and
      obligations as an Employee or under this Agreement are at issue; provided,
      however, that Employee shall, to the extent practicable and lawful in any such
      events, give prior notice to the Company of his intent to disclose any such
      confidential business information in such context so as to allow the Company
      or
      the applicable ICO Entity an opportunity (which Employee will cooperate with
      and
      will not oppose) to obtain such protective orders or similar relief with respect
      thereto as may be deemed appropriate.

     

    4.3 All
      written materials, records, and other documents made by, or coming into the
      possession of, Employee during the Employment Period which contain or disclose
      confidential business information or trade secrets of the Company or the ICO
      Entities shall be and remain the property of the Company or the ICO Entities,
      as
      the case may be. Upon the later of the termination of Employee’s employment with
      the Company, for any reason, and the last day of Employee’s service on the
      Board, Employee promptly shall deliver the same and all copies thereof to the
      Company.

     

     

    
      
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    4.4 To
      enable
      Employee to perform the duties contemplated by this Agreement, the Company
      promises that it will disclose confidential information, including confidential
      business information and trade secrets of the nature described or referenced
      in
      Sections 4.1 - 4.3 above, during the Employment Period and before termination
      of
      the employment relationship established by this Agreement. In return for and
      ancillary to the promise made by the Company to make such disclosure, Employee
      hereby makes a reciprocal promise designed to enforce the Company’s interest in
      protecting its confidential information and its goodwill. Accordingly, Employee
      promises to comply with the obligations set forth in Sections 4.1 through 4.3
      above, and furthermore, Employee agrees that, during Employee’s employment with
      the Company and/or any other ICO Entity, and for fifteen (15) months following
      the later of the Termination Date and the last day when Employee serves on
      the
      Board, Employee will not, directly or through any other person, firm, or
      corporation, in any country in which the Company or any ICO Entity does
      business:

     

    (a) perform
      services as an employee, officer, director or independent contractor for any
      Competing Enterprise (as defined below); 

    

    (b) be
      an
      owner, shareholder (except for the ownership by Employee of less than Five
      Percent (5%) of the equity securities of any publicly-traded company), agent,
      or
      partner of, or serve in an executive position with, any Competing
      Enterprise;

    

    (c) call
      on
      or otherwise communicate with any customer or prior customer of the Company
      and/or any ICO Entity, including any respective successors and assigns, for
      the
      purpose of soliciting business for a Competing Enterprise or for someone other
      than the Company and/or other ICO Entities; or

    

    (d) do
      anything to interfere with the normal operation of the businesses of the Company
      or any other ICO Entity, including, without limitation, make any effort
      personally or through others to recruit, hire, or solicit any employee or
      independent contractor of the Company or another ICO Entity to leave the Company
      or such ICO Entity, or to interfere in any way with any ICO Entity’s
      relationships with its customers or suppliers.

    

    For
      purposes of this Section, the term “Competing Enterprise” shall mean: any person
      or any business organization of whatever form, excluding the Company and/or
      any
      other ICO Entity, engaged directly or indirectly in any business or enterprise
      whose business activities specifically relate to or involve: (i) grinding,
      processing, blending, and/or compounding of polymer products for (a) the
      rotational molding industry, or (b) any other industry that ICO Polymers North
      America, Inc. or any other ICO Entity specifically services or sells to; or
      (ii)
      the production of concentrates or compounds or other processing services related
      to polymer products as conducted by Bayshore Industrial, Inc. or any other
      ICO
      Entities. 

     

    
 

    
      
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    ARTICLE
      5: MISCELLANEOUS:

    

    5.1 For
      purposes of this Agreement, notices and all other communications provided for
      herein shall be in writing and shall be deemed to have been duly given when
      received by or tendered to Employee or the Company, as applicable, by pre-paid
      courier or by United States registered or certified mail, return receipt
      requested, postage prepaid, addressed as follows:

     

    

     

    If
      to the
      Company, to 

     

    ICO,
      Inc., To the attention of the Chairman of the Board of Directors

    5333
      Westheimer Road, Suite 600

    Houston,
      Texas 77056

    

    or
      to
      such other address as either party shall have furnished to the other in writing
      in accordance herewith. Notice and communications shall be effective when
      actually received by the addressee.

     

    If
      to
      Employee, to his last known personal residence.

     

    Notwithstanding
      the foregoing, any Notice of Termination pursuant to Article 3 may be delivered
      to the Employee in accordance with the above sentences in this Section 5.1,
      or
      by email to the Employee’s Company email address, and in the event of such
      delivery by email, the Delivery Date shall be conclusively determined to be
      the
      date when such email was received on the Company’s server regardless of the date
      when such email was opened by the Employee.

     

    5.2 This
      Agreement shall be governed by and construed and enforced, in all respects
      in
      accordance with the law of the State of Texas, without regard to principles
      of
      conflicts of law, unless preempted by federal law, in which case federal law
      shall govern; provided, however, that the dispute resolution process in Section
      5.5 shall govern in all respects with regard to the resolution of disputes
      hereunder.

     

    5.3 No
      failure by either party hereto at any time to give notice of any breach by
      the
      other party of, or to require compliance with, any condition or provision of
      this Agreement shall be deemed a waiver of similar or dissimilar provisions
      or
      conditions at the same or at any prior or subsequent time.

     

    5.4 It
      is a
      desire and intent of the parties that the terms, provisions, covenants, and
      remedies contained in this Agreement shall be enforceable to the fullest extent
      permitted by law. If any such term, provision, covenant, or remedy of this
      Agreement or the application thereof to any person, association, or entity
      or
      circumstances shall, to any extent, be construed to be invalid or unenforceable
      in whole or in part, then such term, provision, covenant, or remedy shall be
      construed in a manner so as to permit its enforceability under the applicable
      law to the fullest extent permitted by law. In any case, the remaining
      provisions of this Agreement or the application thereof to any person,
      association, or entity or circumstances other than those to which they have
      been
      held invalid or unenforceable, shall remain in full force and
      effect.

     

     

    
      
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    5.5 It
      is the
      mutual intention of the parties to have any dispute concerning this Agreement
      resolved out of court. Accordingly, the parties agree that any claim or
      controversy of whatever nature arising from or relating in any way to this
      Agreement or the employment of the Employee by the Company, and any continuing
      obligations under this Agreement, including disputes arising under the common
      law or federal or state statutes, laws or regulations and disputes with respect
      to the arbitrability of any claim or controversy, shall be resolved exclusively
      by final and binding arbitration before a single experienced employment
      arbitrator selected by the parties and conducted in accordance with the
      agreement of the parties or as determined by the arbitrator. If the parties
      are
      unable to agree to an arbitrator, an arbitrator will be selected in accordance
      with the Employment Dispute Resolution (“EDR”) Rules of the American Arbitration
      Association (“AAA”). The arbitration will be conducted in Houston, Texas,
      pursuant to the EDR Rules of the AAA, and the arbitrator shall have full
      authority to award or grant all remedies provided by law. The judgment upon
      the
      award may be enforced by any court having jurisdiction thereof. Each party
      shall
      pay the fees of their respective attorneys, the expenses of their witnesses,
      and
      any other expenses incurred by such party in connection with the arbitration;
      provided, however, that the Company shall pay for the fees of the arbitrator
      or
      the administrative and filing fees charged by the AAA. However, either party,
      on
      its own behalf and on behalf of any other ICO Entities, shall be entitled to
      seek a restraining order or injunction in any court of competent jurisdiction
      to
      prevent any breach or the continuation of any breach of the provisions of
      herein. 

     

    5.6 This
      Agreement shall be binding upon and inure to the benefit of the Company, to
      the
      extent herein provided, the Company and any other person, association, or entity
      which may hereafter acquire or succeed to all or substantially all of the
      business or assets of the Company by any means whether direct or indirect,
      by
      purchase, merger, consolidation, or otherwise. Employee’s rights and obligations
      under this Agreement are personal and such rights, benefits, and obligations
      of
      Employee shall not be voluntarily or involuntarily assigned, alienated, or
      transferred, whether by operation of law or otherwise, without the prior written
      consent of the Company.

     

    
      5.7 This
        Agreement replaces and extinguishes any previous agreements and discussions
        pertaining to the subject matter covered herein. This Agreement constitutes
        the
        entire agreement of the parties with regard to the terms of Employee’s
        employment, termination of employment and severance benefits, and contains
        all
        of the covenants, promises, representations, warranties, and agreements between
        the parties with respect to such matters. 

      
 

    

    
      
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    Each
      party to this Agreement acknowledges that no representation, inducement,
      promise, or agreement, oral or written, has been made by either party with
      respect to the foregoing matters which is not embodied herein, and that no
      agreement, statement, or promise relating to the employment of Employee by
      the
      Company that is not contained in this Agreement shall be valid or binding,
      except as set forth in any applicable Employee benefit plan. It is understood
      that, by signing below, Employee acknowledges that this Agreement supercedes
      any
      agreements or understandings regarding the subject matter covered herein made
      prior to the Employee signing this document. Any modification of this Agreement
      will be effective only if it is in writing and signed by each party whose rights
      hereunder are affected thereby, provided that any such modification must be
      authorized or approved by the Board of Directors or its delegate, as
      appropriate.

     

     

     

     

     

     

     

     

     

     

     

     

    
      
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    IN
      WITNESS WHEREOF,
      the
      Company and Employee have duly executed this Agreement in multiple originals
      to
      be effective on the Effective Date. 

     

    
      
        	
                 ICO,
                  INC.

              
	
                 

                /s/
                  Grefory T.
                  Barmore                       
                  

              
	
                Gregory
                  T. Barmore

              
	
                Chairman
                  of the Board of Directors

              
	
                Date:        
                  10/07/05                               

              

      

       

       

      
        
          	
                    Employee

                
	
                   

                   
                    /s/ A. John Knapp,
                    Jr.                      
                    

                
	
                   
                    A. John Knapp, Jr.

                
	
                   
                    Date:         
                    10/06/05                           

                

        

         

      

    

    
      
        
           

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    EXHIBIT
      A

    

    

    The
      ICO
      Entities (as defined in Section 1.4) are listed below, with country of
      incorporation and state (if U.S.) indicated. 

    

    

    Bayshore
      Industrial GP, L.L.C - USA, DE

    Bayshore
      Industrial LP, L.L.C. - USA, DE

    Bayshore
      Industrial, L.P. - USA, TX

    Bayshore
      RE Holdings, Inc. - USA, DE

    China
      RE
      Holdings, Inc. - USA, DE

    Courtenay
      Polymers Pty Ltd. - Australia

    Fabri-Moulds
      Ltd. - UK

    ICO
      Europe BV - The Netherlands

    ICO
      Global Services, Inc. - USA, DE

    ICO
      Holdings Australia Pty Ltd. - Australia

    ICO
      Holdings New Zealand Ltd. - New Zealand

    ICO
      Holland BV - The Netherlands

    ICO
      Minerals, Inc. - USA, DE

    ICO
      P&O, Inc. - USA, DE

    ICO
      Petrochemical Cayman Islands - Cayman Islands

    ICO
      Polymers Cayman Islands - Cayman Islands

    ICO
      Polymers do Brasil Ltda. - Brazil

    ICO
      Polymers France SAS - France

    ICO
      Polymers Hellas Ltd. - Greece

    ICO
      Polymers Italy S.r.l. - Italy

    ICO
      Polymers North America, Inc. - USA, NJ

    ICO
      Polymers UK Ltd. - UK

    ICO
      Polymers, Inc. - USA, DE

    ICO
      Scandinavia AB - Sweden

    ICO
      Technology, Inc. - USA, DE

    ICO
      UK
      Ltd. - UK

    ICO
      Worldwide, LP - USA, TX

    ICO
      Worldwide (UK), Ltd. - UK

    J.R.
      Courtenay (N.Z.) Ltd. - New Zealand

    J.R.
      Courtenay Sdn Bhd - Malaysia

    Rotec
      Chemicals, Ltd. - UK

    Lomic
      SCI
      - France

    Soreco
      SAS - France

    Swavasey
      Colours Ltd. - UK

    Tecron
      Industries Ltd. - UK

    The
      Innovation Company, S.A. de C.V. - Mexico

    Wedco
      Petrochemical, Inc. - USA, DE

    Wedco
      Technology U.K. Ltd. - UK

    Wedco
      Technology, Inc. - USA, NJ

    Worldwide
      GP, LLC - USA, DE

    Worldwide
      LP, LLC - USA, DE

    

    
Page
      11 of 11SECOND AMENDMENT TO

EXHIBIT 10.1

TERMINATION AGREEMENT

    This Termination Agreement, dated as of October 3, 2005 (this "Agreement"), is among Seven Hills Funding Corporation (formerly known as Deerfield Funding Corporation) (the "CP Issuer"); Federated Department Stores, Inc. ("Federated"); FDS Bank (the "Servicer"), successor in interest to Federated in its capacity as servicer under the Liquidity Agreement (defined below); Prime Receivables Corporation, a Delaware corporation, in its capacity as transferor (the "Transferor") under the Supplement (defined below); Credit Suisse, New York Branch, as liquidity agent (the "Liquidity Agent") under the Liquidity Agreement (as defined below); JPMorgan Chase Bank, National Association ("JPMorgan"), as successor in interest to Chemical Bank in its capacities as (i) Depositary under the Depositary Agreement (as defined in the Liquidity Agreement), (ii) Collateral Agent under the Security Agreement (as defined in the Liquidity Agreement) and (iii) Trustee under the Pooling Agreement (as defined below); and the Banks and CP Dealers listed on the signature pages hereto.  Capitalized terms used in this Agreement and not otherwise defined have the meanings assigned to them in the Liquidity Agreement.

Preliminary Statements

    1.    The Transferor and the Servicer are among the parties to the Series 1992-3 Variable Funding Supplement, dated as of December 31, 1992 (as heretofore amended, waived or otherwise modified, the "Supplement") to the Amended and Restated Pooling and Servicing Agreement, dated as of December 15, 1992 among, inter alia, the Transferor and the Servicer (as heretofore amended, waived or otherwise modified, the "Pooling Agreement").

    2.    Under the Supplement, the Transferor created the Series 1992-3 Variable Funding Certificates and conveyed to the CP Issuer a Class A Variable Funding Certificate.  The CP Issuer entered into arrangements for the sale of commercial paper and the provision for certain liquidity arrangements from other parties, including the entry into (i) the Liquidity Agreement, dated as of December 31, 1992 among the CP Issuer, the Servicer, the Banks and the Liquidity Agent (as amended, restated or otherwise modified, the "Liquidity Agreement"), (ii) the Depositary Agreement and (iii) the Security Agreement (collectively with the Depositary Agreement and the Liquidity Agreement, the "Operative Documents").

    3.    The parties hereto desire to terminate the Operative Documents, subject to the payment of the Commercial Paper outstanding under the Liquidity Agreement, and the termination of the Liquidity Commitments under the Liquidity Agreement.

Agreement

    The parties hereto agree to the following terms and conditions:

    SECTION 1.    Payment of Commercial Paper.  The CP Issuer desires to pay the obligations of the Commercial Paper outstanding under the Depositary Agreement on October 3, 2005, and attaches as Exhibit A hereto the information necessary to evidence the proposed payment of Commercial Paper on such date.  Each of the other parties hereto accepts and agrees with the terms set forth therein.
    SECTION 2.    Termination of Liquidity Commitments and Liquidity Agreement.  Pursuant to Section 4.01(a) of the Liquidity Agreement, the CP Issuer hereby gives written notice to the Trustee, the Transferor, the Liquidity Agent, the CP Dealers, and the Depositary as of the date hereof, that the Liquidity Commitments shall terminate on October 3, 2005, upon the repayment in full of all outstanding Commercial Paper.  Each of the Trustee, the Transferor, the Liquidity Agent, the CP Dealers and the Depositary accepts and acknowledges such notice hereunder, and agrees that the Liquidity Commitments shall terminate as provided above and that the Liquidity Agreement shall terminate in connection therewith without further action on the part of any of the parties hereto.

    SECTION 3    Termination of Depositary Agreement.  Notwithstanding anything in the Depositary Agreement to the contrary, each party hereto agrees that the Depositary Agreement shall terminate on October 3, 2005 upon the repayment in full of all outstanding Commercial Paper and the termination of the Liquidity Commitments in accordance with the terms of this Agreement.

    SECTION 4    Termination of Security Agreement.  In accordance with Section 22 of the Security Agreement, on October 3, 2005, upon the occurrence of the actions described in Section 3, the Loan Obligations under the Security Agreement shall have been paid and satisfied in full, the Commitments of the Liquidity Banks shall have been terminated in accordance with the terms of this Agreement, and the Security Agreement shall terminate at such time in accordance with its terms.

    SECTION 5    Termination of Series 1992-3 Investor Certificates.  Notwithstanding anything in the Supplement or the Pooling Agreement to the contrary, the Trustee, the CP Issuer, the Transferor and the Liquidity Agent agree that the Supplement and the rights of the Certificateholders of the 1992-3 Series Investor Certificates to receive payment on the Certificates shall terminate upon the repayment in full of the outstanding Commercial Paper.

    SECTION 6    Evidence of Termination; Further Assurances.  Each party hereto agrees that, upon the occurrence of the actions described above in this Agreement, it will execute any other documents and provide such other information concerning the termination of the Operative Documents as is reasonably requested by the CP Issuer.

    SECTION 7    Conditions to Effectiveness.  This Agreement shall become effective as of the date hereof upon (a) receipt by the Liquidity Agent of counterparts of this Agreement (whether by facsimile or otherwise) executed by each of the other parties hereto and (b) execution and delivery to the other parties hereto of a counterpart of this Agreement (whether by facsimile or otherwise) by the Liquidity Agent.

    SECTION 8    Counterparts.  This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed shall be deemed to an original and all of which when taken together shall constitute but one and the same instrument.

    SECTION 9    Governing Law.  This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

    SECTION 10    Section Headings.  The various headings of this Agreement are included for convenience only and shall not affect the meaning or interpretation of this Agreement, the Operative Documents or any provision hereof or thereof.

    Delivered as of the day and the year first above written.

	 	
SEVEN HILLS FUNDING CORPORATION, 

as CP Issuer

By: /s/ Susan P. Storer

Name: Susan P. Storer

Title: President

	 	
PRIME RECEIVABLES CORPORATION, 

as Transferor

By:  /s/ Susan P. Storer

Name: Susan P. Storer

Title: President

	 	
FDS BANK, as Servicer

By: /s/ Susan R. Robinson

Name: Susan R. Robinson

Title: Treasurer

	 	
FEDERATED DEPARTMENT STORES, INC.

By: /s/ Ron Tysoe

Name: Ronald W. Tysoe

Title: Vice Chair

 

	 	
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as Depositary, Collateral Agent, Trustee and a Bank

By: /s/ Luiza Sinanian

Name: Luiza Sinanian

Title: Trust Officer

	 	
CREDIT SUISSE, NEW YORK BRANCH,

as Liquidity Agent and a Bank  

By: /s/ Alberto Zonca

Name: Alberto Zonca

Title: Director

By: /s/ Michael W. Koenitzer

Name: Michael W. Koenitzer

Title: 

	 	
BANK OF AMERICA, NA, as a Bank

By: /s/ William Van Beek

Name: William Van Beek

Title: Principal

	 	
MELLON BANK, N.A., as a Bank

By: /s/ Mark F. Johnson

Name: Mark F. Johnston

Title: First Vice President

	 	
PNC BANK, NATIONAL ASSOCIATION, as a Bank

By: /s/ Bruce A. Kintner

Name: Bruce A. Kintner

Title: Vice President

 

Acknowledged by:

	 	
CREDIT SUISSE FIRST BOSTON LLC, 

as a CP Dealer 

By: /s/ Helena M. Willner

Name: Helena M. Willner

Title: Director

	 	
GOLDMAN SACHS & CO. (successor to GOLDMAN SACHS MONEY MARKETS, L.P.), 

as a CP Dealer

By: /s/ Patrick Welch

Name: Patrick Welch

Title: Vice President

	 	
J.P. MORGAN SECURITIES INC., 

as a CP Dealer

By: /s/ Johanna C. Foley

Name: Johanna C. Foley

Title: Vice President

 

	 	
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as Depositary, Collateral Agent and Trustee

By: /s/ William Hendricks

Name: William Hendricks

Title: Vice President

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