Item 1.01 Entry Into a Material Definitive Agreement
On
March 2, 2018, Stanley Furniture Company, Inc., now HG Holdings, Inc. (the “Company”) held a special meeting of stockholders at which the stockholders approved the sale of substantially all of the Company’s assets (the “Asset Sale”) to Churchill Downs LLC (“Buyer”), pursuant to the terms of the Asset Purchase Agreement, dated as of November 20, 2017, as amended by the First Amendment thereto dated January 22, 2017 (the “Asset Purchase Agreement”). The Company completed the Asset Sale to Buyer on March 2, 2018. See Item 2.01 for additional information about the Asset Sale.
In connection with the Asset Sale, on
March 2, 2018, Buyer delivered its
subordinated promissory note in the principal amount of approximately $7.4 million (the “Note”) to the Company and the Company entered into an Intercreditor and Debt Subordination Agreement (the “Subordination Agreement”) with North Mill Capital LLC (the “Lender”), the lender that provided financing under a senior secured loan facility to Buyer in connection with the Asset Sale.
Under the Note,
Buyer has agreed to pay the Company the principal amount of the Note no later than March 2, 2023. The Note accrues interest at a rate of 6.00% per annum, which interest is due on the last business day of each calendar month. The Note provides for the prepayment of the principal amount of the Note following the end of each fiscal year in an amount equal to Buyer’s Excess Cash Flow. Excess Cash Flow under the Note means for any fiscal year, on a consolidated basis for Buyer, EBITDA (as defined in the Note) minus each of the following, to the extent actually paid in cash during such fiscal year, capital expenditures, taxes, dividends and distributions, interest, fees and principal payments and prepayments on the Note and other debt for borrowed money (including capitalized leases). Under the terms of the Note, Buyer has agreed to not incur any liabilities in addition to those incurred in connection with the senior secured loan facility with the Lender or to grant any liens on its assets to any party other than the Company and the Lender under the senior secured loan facility. Buyer has also agreed to certain restrictions on its ability to make certain payments, including dividends, or engage in certain material transactions without the Company’s prior written consent. The Note is secured by substantially all of the assets of Buyer as set forth in the Note.
The Note is guaranteed by
Churchill Downs Intermediate Holdings, Ltd. (“Parent”)
,
a Delaware limited liability company which holds all the membership interests in Buyer, and Stanley Furniture Company 2.0, LLC, a Virginia limited liability company (“Subsidiary”) which was acquired by Buyer as part of the Asset Sale. The Note is secured by pledges of substantially all of the assets of Parent and Subsidiary as well as all of Parent’s membership interests in Buyer and all of Buyer’s membership interest in Subsidiary. To evidence these guarantees and pledges by Buyer to the Company, the Company, Parent and Subsidiary entered into the following agreements in connection with the closing of the Asset Sale: (1) Guaranty from Parent and Subsidiary in which Parent and Subsidiary, respectively, guaranteed payment and performance of all present and future obligations of Buyer to the Company, (2) Security Agreements with Parent and Subsidiary in which Parent and Subsidiary, respectively, granted the Company a subordinated security interest in all of their respective assets; and (3) Pledge Agreements with Parent and Buyer, in which Parent and Buyer pledged all of the membership interests in Buyer and Subsidiary, respectively, to the Company as security for the payment and performance of Buyers’ obligations to the Company, including but not limited to its obligations under the Note.
Under the
Subordination Agreement, the Company agreed that Buyer’s obligations under the Note, including its payment obligations, and the Company’s rights and remedies with respect to the collateral pledged by Buyer under the Note, are subordinate to Buyer’s obligations under, and the Lender’s rights with respect, to the senior secured loan facility, including the Lender’s rights with respect to the collateral to be pledged by Buyer in connection with the senior secured loan facility. Under the Subordination Agreement, the Company also agreed that until Buyer has satisfied its indebtedness to Lender and the Subordination Agreement has been terminated in accordance with its terms, the Company will not ask for or receive from Buyer any payment or distribution on account of the indebtedness that Buyer owes to the Company unless immediately before and after giving pro forma effect to any payment on the indebtedness from Buyer to the Company: (1)
Buyer has not defaulted under its senior secured loan facility with Lender; (2) the availability under its senior secured loan facility with Lender will be at least $1 million, (3) all of Buyer’s taxes are current, and (4) the combined amount of all payables and other obligations of Buyer that are then delinquent or are outside their payment terms are no more than $25,000. Availability under Buyer’s senior secured loan facility for purposes of the Subordination Agreement generally refers to the difference between (a) the lesser of an advance limit of $16 million and the value of Buyer’s borrowing base (primarily eligible accounts receivables and inventory subject to certain caps and blocks), less reserves and (b) outstanding advances under the senior secured loan facility.
The foregoing description of the Note and Subordination Agreement does not purport to be complete and is qualified in its entirety by reference to the Note and Subordination Agreement, which are filed as Exhibits 10.1 and 10.2 hereto, respectively, and incorporated herein by reference.