SECURITY AGREEMENT
Exhibit 10.4
THIS SECURITY AGREEMENT (the “Agreement”), is entered into and made effective as of
August 3, 2005, by and between VOIP, INC. (the “Company”) and WQN, INC. (the “Secured
Party”).
WHEREAS, the Company shall issue to the Secured Party a secured promissory note in the
principal amount of Three Million Seven Hundred Thousand ($3,700,000) (the “Purchase
Note”) and that certain promissory note, in the principal amount of $1,000,000 (the
“Bridge Note,” together with the Purchase Note, the “Notes”); and
WHEREAS, to induce the Secured Party to enter into the Notes, the Company hereby grants to the
Secured Party a security interest in and to all of the assets of the Company until the satisfaction
of the Obligations (as defined herein).
NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained,
and for other good and valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1.
DEFINITIONS AND INTERPRETATIONS
Section 1.1 Recitals.
The above recitals are true and correct and are incorporated herein, in their entirety, by
this reference.
Section 1.2 Interpretations.
Nothing herein expressed or implied is intended or shall be construed to confer upon any
person other than the Secured Party any right, remedy or claim under or by reason hereof.
Section 1.3 Obligations Secured.
The obligations secured hereby are any and all obligations of the Company now existing or
hereinafter incurred to the Secured Party, whether oral or written and whether arising before, on
or after the date hereof including, without limitation, those obligations of the Company to the
Secured Party under this Agreement, the Notes and that certain Asset Purchase Agreement, by and
between the Company and the Secured Party, dated the date hereof (the “Asset Purchase
Agreement”), and any other amounts now or hereafter owed to the Secured Party by the Company
thereunder or hereunder (collectively, the “Obligations”). This Agreement, the Notes and
the Asset Purchase Agreement are collectively referred to herein as the “Transaction
Documents.”
ARTICLE 2.
PLEDGED PROPERTY, ADMINISTRATION OF COLLATERAL
AND TERMINATION OF SECURITY INTEREST
AND TERMINATION OF SECURITY INTEREST
Section 2.1 Pledged Property.
(a) The Company hereby pledges to the Secured Party, and creates in the Secured Party for its
benefit, a security interest in and to all of the assets of the Company and the products thereof
and the proceeds of all such items (collectively, the “Pledged Property”) for such time
until the Obligations are paid in full.
(b) Simultaneously with the execution and delivery of this Agreement, the Company shall make,
execute, acknowledge, file, record and deliver to the Secured Party any documents reasonably
requested by the Secured Party to perfect its security interest in the Pledged Property.
Simultaneously with the execution and delivery of this Agreement, the Company shall make, execute,
acknowledge and deliver to the Secured Party such documents and instruments, including, without
limitation, financing statements, certificates, affidavits and forms as may, in the Secured Party’s
reasonable judgment, be necessary to effectuate, complete or perfect, or to continue and preserve,
the security interest of the Secured Party in the Pledged Property, and the Secured Party shall
hold such documents and instruments as secured party, subject to the terms and conditions contained
herein.
Section 2.2 Rights; Interests; Etc.
(a) So long as no Event of Default (as defined in each of the Notes) under either of the Notes
shall have occurred and be continuing:
(i) the Company shall be entitled to exercise any and all rights pertaining to the
Pledged Property or any part thereof for any purpose not inconsistent with the terms hereof; and
(ii) the Company shall be entitled to receive and retain any and all payments paid
or made in respect of the Pledged Property.
(b) Upon the occurrence and during the continuance of an Event of Default:
(i) All rights of the Company to exercise the rights which it would otherwise be
entitled to exercise pursuant to Section 2.2(a)(i) hereof and to receive payments which it would
otherwise be authorized to receive and retain pursuant to Section 2.2(a)(ii) hereof shall be
suspended, and all such rights shall thereupon become vested in the Secured Party, who shall
thereupon have the sole right to exercise such rights and to receive and hold as Pledged Property
such payments; provided, however, that if the Secured Party shall become entitled and shall elect
to exercise its right to realize on the Pledged Property pursuant to Article 5 hereof, then all
cash sums received by the Secured Party, or held by Company for the benefit of the Secured Party
and paid over pursuant to Section 2.2(b)(ii) hereof, shall be applied against any outstanding
Obligations; and
(ii) All interest, dividends, income and other payments and distributions which are
received by the Company contrary to the provisions of Section 2.2(b)(i) hereof shall be received in
trust for the benefit of the Secured Party, shall be segregated from other property of the Company
and shall be forthwith paid over to the Secured Party; or
(iii) The Secured Party in its sole discretion shall be authorized to sell any or
all of the Pledged Property at public or private sale in order to recoup all of the outstanding
principal plus accrued interest owed pursuant to the Notes as described herein.
Section 2.3 Subordination. Secured Party acknowledges and agrees that its security
interest in the Pledged Property shall be subordinate to securities interests in existence as of
the date hereof, including the security interests in the Pledged Property in favor of Cedar
Boulevard Lease Funding, LLC (“Cedar”), and agrees that Secured Party shall subordinate its
security interest in the Pledged Property, to the security interests of any future Senior Creditor
(as defined below) to the extent such security interests secure Senior Debt (as defined below. For
purposes of this Agreement (i) “Senior Creditors” shall mean a bank, insurance company,
pension fund, or accredited investor, or a syndicate of such institutional lenders that provides
Senior Debt financing to the Company and its subsidiaries, including any party refinancing the
obligations of the Company and its subsidiaries to Cedar; provided, that Senior Creditor shall not
include any officer, director, or insider of the Company or any of its subsidiaries, or any
affiliate of the foregoing, except upon the express written consent of Secured Party, (ii)
“Senior Debt” shall mean any and all indebtedness and obligations for borrowed money
(including principal, premium (if any), interest, fees, charges, expenses, costs, professional fees
and expenses, and reimbursement obligations) at any time owing by the Company to Senior Creditor
under the Senior Loan Documents (as defined below), including such amounts as may accrue or be
incurred before or after default or workout or the commencement of any liquidation, dissolution,
bankruptcy, receivership or reorganization by or against Borrower and any obligations of the
Company and its subsidiaries incurred in connection with refinancing the obligations to Cedar;
provided, that Senior Debt shall not include debt exceeding ten million and No/100 Dollars
($10,000,000.00) outstanding at any one time, and (iii) “Senior Loan Documents” means a
loan agreement between Borrower and Senior Creditor and any other agreement, security agreement,
document, promissory note, UCC financing statement, or instrument executed by Borrower in favor of
Senior Creditor pursuant to or in connection with the Senior Debt, as the same may from time to
time be amended, modified, supplemented, extended, renewed, restated or replaced.
ARTICLE 3.
ATTORNEY-IN-FACT; PERFORMANCE
Section 3.1 Secured Party Appointed Attorney-In-Fact.
Upon the occurrence of an Event of Default, the Company hereby appoints the Secured Party as
its attorney-in-fact, with full authority in the place and stead of the Company and in the name of
the Company or otherwise, from time to time in the Secured Party’s discretion to take any action
and to execute any instrument which the Secured Party may reasonably deem necessary to accomplish
the purposes of this Agreement, including, without limitation, to receive
and collect all instruments made payable to the Company representing any payments in respect
of the Pledged Property or any part thereof and to give full discharge for the same. The Secured
Party may demand, collect, receipt for, settle, compromise, adjust, xxx for, foreclose, or realize
on the Pledged Property as and when the Secured Party may determine. To facilitate collection, the
Secured Party may notify account debtors and obligors on any Pledged Property to make payments
directly to the Secured Party.
Section 3.2 Secured Party May Perform.
If the Company fails to perform any agreement contained herein, the Secured Party, at its
option, may itself perform, or cause performance of, such agreement, and the expenses of the
Secured Party incurred in connection therewith shall be included in the Obligations secured hereby
and payable by the Company under Section 7.3.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Secured Party that, in addition to the
representations and warranties in the Transaction Documents, the Company warrants and represents
that it is the legal and beneficial owner of the Pledged Property free and clear of any lien,
security interest, option or other charge or encumbrance except for the security interest created
by this Agreement.
ARTICLE 5.
DEFAULT; REMEDIES
Section 5.1 Default and Remedies.
(a) If an Event of Default described in Section 3.1 of the Purchase Note or Section 6(a) of
the Bridge Note occurs, then in each such case the Secured Party may declare the Obligations to be
due and payable immediately, by a notice in writing to the Company, and upon any such declaration,
the Obligations shall become immediately due and payable and the Secured Party can immediately
exercise any of its rights and remedies pursuant to the Transaction Documents or under any
applicable law. If an Event of Default described in Sections 3.2. 3.3 or 3.4 of the Purchase Note
or under Section 6(c) of the Bridge Note occurs and is continuing for the period set forth therein,
then the Obligations shall automatically become immediately due and payable without declaration or
other act on the part of the Secured Party and the Secured Party can immediately exercise any of
its rights and remedies pursuant to the Transaction Documents and under any applicable law.
(b) Upon the occurrence of an Event of Default, the Secured Party shall be entitled to (i)
receive all distributions with respect to the Pledged Property, (ii) cause the Pledged Property to
be transferred into the name of the Secured Party or its nominee, (iii) dispose of the Pledged
Property, (iv) realize upon any and all rights in the Pledged Property then held by the Secured
Party, and (v) exercise any of its rights and remedies pursuant to the Transaction Documents and
any applicable law.
Section 5.2 Method of Realizing Upon the Pledged Property; Other Remedies.
Upon the occurrence of an Event of Default, in addition to any rights and remedies available
at law or in equity, the following provisions shall govern the Secured Party’s right to realize
upon the Pledged Property:
(a) Any item of the Pledged Property may be sold for cash or other value in any number of lots
at brokers board, public auction or private sale and may be sold without demand, advertisement or
notice (except that the Secured Party shall give the Company ten (10) days’ prior written notice of
the time and place or of the time after which a private sale may be made), which notice period is
hereby agreed to be commercially reasonable. At any sale or sales of the Pledged Property, the
Company may bid for and purchase the whole or any part of the Pledged Property and, upon compliance
with the terms of such sale, may hold, exploit and dispose of the same without further
accountability to the Secured Party. The Company will execute and deliver, or cause to be executed
and delivered, such instruments, documents, assignments, waivers, certificates, and affidavits and
supply or cause to be supplied such further information and take such further action as the Secured
Party reasonably shall require in connection with any such sale.
(b) Any cash being held by the Secured Party as Pledged Property and all cash proceeds
received by the Secured Party in respect of, sale of, collection from, or other realization upon
all or any part of the Pledged Property shall be applied as determined by the Secured Party.
(c) In addition to all of the rights and remedies which the Secured Party may have pursuant to
this Agreement, the Secured Party shall have all of the rights and remedies provided by law,
including, without limitation, those under the Uniform Commercial Code.
(i) If the Company fails to pay such amounts due upon the occurrence of an Event of
Default which is continuing, then the Secured Party may institute a judicial proceeding for the
collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree
and may enforce the same against the Company and collect the monies adjudged or decreed to be
payable in the manner provided by law out of the property of Company, wherever situated.
(ii) The Company agrees that it shall be liable for any reasonable fees, expenses
and costs incurred by the Secured Party in connection with enforcement, collection and preservation
of the Transaction Documents, including, without limitation, reasonable legal fees and expenses,
and such amounts shall be deemed included as Obligations secured hereby and payable as set forth in
Section 8.3 hereof.
Section 5.3 Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial proceeding relating to the
Company or the property of the Company or of such other obligor or its creditors, the Secured Party
(irrespective of whether the Obligations shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Secured Party shall have made any
demand on the Company for the payment of the Obligations) shall be entitled and empowered, by
intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the Obligations and to file such other
papers or documents as may be necessary or advisable in order to have the claims of the Secured
Party (including any claim for the reasonable legal fees and expenses and other expenses paid or
incurred by the Secured Party permitted hereunder and of the Secured Party allowed in such judicial
proceeding); and
(b) to collect and receive any monies or other property payable or deliverable on any such
claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial proceeding is hereby authorized by the
Secured Party to make such payments to the Secured Party and, in the event that the Secured Party
shall consent to the making of such payments directed to the Secured Party, to pay to the Secured
Party any amounts for expenses due it hereunder.
Section 5.4 Duties Regarding Pledged Property.
The Secured Party shall have no duty as to the collection or protection of the Pledged
Property or any income thereon or as to the preservation of any rights pertaining thereto, beyond
the safe custody and reasonable care of any of the Pledged Property actually in the Secured Party’s
possession.
ARTICLE 6.
NEGATIVE COVENANTS
The Company covenants and agrees that, from the date hereof until the Obligations have been
fully paid and satisfied, the Company shall not, unless the Secured Party shall consent otherwise
in writing, directly or indirectly make, create, incur, assume or permit to exist any assignment,
transfer, pledge, mortgage, security interest or other lien or encumbrance of any nature in, to or
against any part of the Pledged Property or of the Company’s capital stock, or offer or agree to do
so, or own or acquire or agree to acquire any asset or property of any character subject to any of
the foregoing encumbrances (including any conditional sale contract or other title retention
agreement), or assign, pledge or in any way transfer or encumber its right to receive any income or
other distribution or proceeds from any part of the Pledged Property or the Company’s capital
stock; or enter into any sale-leaseback financing respecting any part of the Pledged Property as
lessee, or cause or assist the inception or continuation of any of the foregoing.
ARTICLE 7.
MISCELLANEOUS
Section 7.1 Notices.
All notices or other communications required or permitted to be given pursuant to this
Agreement shall be in writing and shall be considered as duly given on: (a) the date of delivery,
if delivered in person, by nationally recognized overnight delivery service or (b) five (5)
days after mailing if mailed from within the continental United States by certified mail, return
receipt requested to the party entitled to receive the same:
| If to the Secured Party: | WQN, Inc. | |||
| 00000 Xxxxxx Xxxxx, Xxxxx 000 | ||||
| Xxxxxx, XX 00000 | ||||
| Attention: | ||||
| Telecopy No.: | ||||
| Telephone No.: | ||||
| with a copy to: | ||||
| Xxxxxx Xxxxx LLP | ||||
| 0000 Xxxx Xxxxxx Xxxxx 0000 | ||||
| Xxxxxx, Xxxxx 00000 | ||||
| Attention: Xxxxxxx Xxxxxx, Esq. | ||||
| Telecopy No.: 000-000-0000 | ||||
| Telephone No.: 000-000-0000 | ||||
| and if to the Company: | VoIP, Inc. | |||
| 00000 XX 00xx Xxxxxx, Xxxxx 000 | ||||
| Xxxx Xxxxxxxxxx, XX 00000 | ||||
| Attention: Xxxxxx Xxxxxxx | ||||
| Telephone: (000) 000-0000 | ||||
| Facsimile: (000) 000-0000 | ||||
| with a copy to: | Xxxxxxx Xxxxx LLP | |||
| 0000 Xxxx Xxxxxx, Xxxxx 0000 | ||||
| Xxxxxx, XX 00000 | ||||
| Attention: Xxxxxx X. Xxxxx, Esq. | ||||
| Telephone: (000) 000-0000 | ||||
| Facsimile: (000) 000-0000 |
Any party may change its address by giving notice to the other party stating its new address.
Commencing on the tenth (10th) day after the giving of such notice, such newly
designated address shall be such party’s address for the purpose of all notices or other
communications required or permitted to be given pursuant to this Agreement.
Section 7.2 Severability.
If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or
unenforceability shall attach only to such provision and shall not in any manner affect or render
invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall
be carried out as if any such invalid or unenforceable provision were not contained herein.
Section 7.3 Expenses.
In the event of an Event of Default, the Company will pay to the Secured Party the amount of
any and all reasonable expenses, including the reasonable fees and expenses of its counsel, which
the Secured Party may incur in connection with: (i) the custody or preservation of, or the sale,
collection from, or other realization upon, any of the Pledged Property; (ii) the exercise or
enforcement of any of the rights of the Secured Party hereunder or (iii) the failure by the Company
to perform or observe any of the provisions hereof.
Section 7.4 Waivers, Amendments, Etc.
The Secured Party’s delay or failure at any time or times hereafter to require strict
performance by Company of any undertakings, agreements or covenants shall not waiver, affect, or
diminish any right of the Secured Party under this Agreement to demand strict compliance and
performance herewith. Any waiver by the Secured Party of any Event of Default shall not waive or
affect any other Event of Default, whether such Event of Default is prior or subsequent thereto and
whether of the same or a different type. None of the undertakings, agreements and covenants of the
Company contained in this Agreement, and no Event of Default, shall be deemed to have been waived
by the Secured Party, nor may this Agreement be amended, changed or modified, unless such waiver,
amendment, change or modification is evidenced by an instrument in writing specifying such waiver,
amendment, change or modification and signed by the Secured Party.
Section 7.5 Continuing Security Interest.
This Agreement shall create a continuing security interest in the Pledged Property and shall:
(i) remain in full force and effect until payment in full of the Obligations; and (ii) be binding
upon the Company and its successors and heirs and (iii) inure to the benefit of the Secured Party
and its successors and assigns. Upon the payment or satisfaction in full of the Obligations, the
Company shall be entitled to the return, at its expense, of such of the Pledged Property as shall
not have been sold in accordance with Section 5.2 hereof or otherwise applied pursuant to the terms
hereof.
Section 7.6 Independent Representation.
Each party hereto acknowledges and agrees that it has received or has had the opportunity to
receive independent legal counsel of its own choice and that it has been sufficiently apprised of
its rights and responsibilities with regard to the substance of this Agreement.
Section 7.7 Applicable Law: Jurisdiction.
This Agreement shall be governed by and interpreted in accordance with the laws of the State
of Texas without regard to the principles of conflict of laws. The parties further agree that any
action between them shall be heard in Dallas County, Texas.
Section 7.8 Waiver of Jury Trial.
AS A FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND TO MAKE THE
FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN
ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS
RELATED TO THIS TRANSACTION.
Section 7.9 Entire Agreement.
This Agreement constitutes the entire agreement among the parties and supersedes any prior
agreement or understanding among them with respect to the subject matter hereof.
Section 7.10 Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which taken together shall constitute one and
the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the date
first above written.
| VOIP, INC. | ||||
| By: | /s/ Xxxxxx Xxxxxxx | |||
| Name: Xxxxxx Xxxxxxx | ||||
| Title: Chief Executive Officer | ||||
| WQN, INC. | ||||
| By: | /s/ B. Xxxxxxx Xxxxx | |||
| Name: B. Xxxxxxx Xxxxx | ||||
| Title: CEO | ||||
