Exhibit 10.4
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of the 22nd day of September, 2004
(the "AGREEMENT"), is entered into by and between Sands Brothers Venture Capital
LLC, Sands Brothers Venture Capital III LLC and Sands Brothers Venture Capital
IV LLC (collectively, the "SECURED PARTIES") and Conversion Services
International, Inc., a Delaware corporation company (the "COMPANY").
WHEREAS, as of the date hereof, the Secured Parties have loaned to the
Company an aggregate of $1,000,000.00 (the "LOAN") pursuant to three separate
Senior Subordinated Secured Convertible Promissory Notes (as the same may be
amended, extended, restated, renewed or modified, the "NOTES") issued by the
Company to the Secured Parties; and
WHEREAS, it is a condition to the willingness of the Secured Parties to
make the Loan evidenced by the Note that the Company enter into this Agreement
and grant to the Secured Parties the security interest provided for herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereto agree as follows:
1. Certain Defined Terms. As used herein, the following capitalized terms have
the following meanings. All other capitalized terms are defined elsewhere
herein:
"ACCOUNT DEBTOR" means any Person who is or may be obligated with
respect to, or on account of, an Account.
"ACCOUNTS" means all "accounts", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including: (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper or Instruments) (including
any such obligations that may be characterized as an account or contract right
under the UCC); (b) all of such Person's rights in, to and under all purchase
orders or receipts for goods or services; (c) all of such Person's rights to any
goods represented by any of the foregoing (including unpaid sellers' rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods); (d) all rights to payment due to such
Person for Goods or other property sold, leased, licensed, assigned or otherwise
disposed of, for a policy of insurance issued or to be issued, for a secondary
obligation incurred or to be incurred, for energy provided or to be provided,
for the use or hire of a vessel under a charter or other contract, arising out
of the use of a credit card or charge card, or for services rendered or to be
rendered by such Person or in connection with any other transaction (whether or
not yet earned by performance on the part of such Person); and (e) all
collateral security of any kind given by any Account Debtor or any other Person
with respect to any of the foregoing.
"BOOKS AND RECORDS" means all books, records, board minutes, contracts,
licenses, insurance policies, environmental audits, business plans, files,
computer files, computer discs and other data and software storage and media
devices, accounting books and records, financial statements (actual and pro
forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
"CHATTEL PAPER" means all "chattel paper," as such term is defined in
the UCC, including electronic chattel paper, now owned or hereafter acquired by
any Person.
"COLLATERAL" means all of Company's property and assets, whether real
or personal, tangible or intangible, and whether now owned or hereafter
acquired, or in which it now has or at any time in the future may acquire any
right, title or interests including all of the following property in which it
now has or at any time in the future may acquire any right, title or interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all General Intangibles;
(e) all Accounts;
(f) all Deposit Accounts, other bank accounts and all
funds on deposit therein;
(g) all Investment Property;
(h) all Stock;
(i) all Chattel Paper;
(j) all Letter-of-Credit Rights;
(k) all Instruments;
(l) all commercial tort claims;
(m) all Books and Records;
(n) all Intellectual Property;
(o) all Supporting Obligations including letters of credit and
guarantees issued in support of Accounts, Chattel Paper, General
Intangibles and Investment Property;
(p) (i) all money, cash and cash equivalents and (ii) all cash
held as cash collateral to the extent not otherwise constituting
Collateral, all other cash or property at any time on deposit with or
held by Laurus for the account of Company (whether for safekeeping,
custody, pledge, transmission or otherwise); and
(q) all products and Proceeds of all or any of the foregoing,
tort claims and all claims and other rights to payment including
insurance claims against third parties for loss of, damage to, or
destruction of, and (ii) payments due or to become due under leases,
rentals and hires of any or all of the foregoing and Proceeds payable
under, or unearned premiums with respect to policies of insurance in
whatever form.
"DEPOSIT ACCOUNTS" means all "deposit accounts" as such term is defined
in the UCC, now or hereafter held in the name of any Person.
"EQUIPMENT" means all "equipment" as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including any
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and all machinery, apparatus, equipment, fittings, furniture, fixtures, motor
vehicles and other tangible personal property (other than Inventory) of every
kind and description that may be now or hereafter used in such Person's
operations or that are owned by such Person or in which such Person may have an
interest, and all parts, accessories and accessions thereto and substitutions
and replacements therefor.
"FIXTURES" means all "fixtures" as such term is defined in the UCC, now
owned or hereafter acquired by any Person.
"GENERAL INTANGIBLES" means all "general intangibles" as such term is
defined in the UCC, now owned or hereafter acquired by any Person including all
right, title and interest that such Person may now or hereafter have in or under
any contract, all Payment Intangibles, customer lists, Licenses, Intellectual
Property, interests in partnerships, joint ventures and other business
associations, permits, proprietary or confidential information, inventions
(whether or not patented or patentable), technical information, procedures,
designs, knowledge, know-how, Software, data bases, data, skill, expertise,
experience, processes, models, drawings, materials, Books and Records, Goodwill
(including the Goodwill associated with any Intellectual Property), all rights
and claims in or under insurance policies (including insurance for fire, damage,
loss, and casualty, whether covering personal property, real property, tangible
rights or intangible rights, all liability, life, key-person, and business
interruption insurance, and all unearned premiums), uncertificated securities,
choses in action, deposit accounts, rights to receive tax refunds and other
payments, rights to received dividends, distributions, cash, Instruments and
other property in respect of or in exchange for pledged Stock and Investment
Property, and rights of indemnification.
"GOODS" means all "goods", as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including embedded
software to the extent included in "goods" as defined in the UCC, manufactured
homes, standing timber that is cut and removed for sale and unborn young of
animals.
"GOODWILL" means all goodwill, trade secrets, proprietary or
confidential information, technical information, procedures, formulae, quality
control standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
"INSTRUMENTS" means all "instruments", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located, including
all certificated securities and all promissory notes and other evidences of
indebtedness, other than instruments that constitute, or are a part of a group
of writings that constitute, Chattel Paper.
"INTELLECTUAL PROPERTY" means any and all patents, trademarks, service
marks, trade names, copyrights, trade secrets, Licenses, information and other
proprietary rights and processes.
"INVENTORY" means all "inventory", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including all
inventory, merchandise, goods and other personal property that are held by or on
behalf of such Person for sale or lease or are furnished or are to be furnished
under a contract of service or that constitute raw materials, work in process,
finished goods, returned goods, or materials or supplies of any kind, nature or
description used or consumed or to be used or consumed in such Person's business
or in the processing, production, packaging, promotion, delivery or shipping of
the same, including all supplies and embedded software.
"INVESTMENT PROPERTY" means all "investment property", as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located.
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"LETTER-OF-CREDIT RIGHTS" means "letter-of-credit rights" as such term
is defined in the UCC, now owned or hereafter acquired by any Person, including
rights to payment or performance under a letter of credit, whether or not such
Person, as beneficiary, has demanded or is entitled to demand payment or
performance.
"LICENSE" means any rights under any written agreement now or hereafter
acquired by any Person to use any trademark, trademark registration, copyright,
copyright registration or invention for which a patent is in existence or other
license of rights or interests now held or hereafter acquired by any Person.
"OBLIGATIONS" means all debts, liabilities and obligations owing by the
Company to the Secured Parties, in each case solely and exclusively as the same
arise under the Loan and the Note.
"PAYMENT INTANGIBLES" means all "payment intangibles" as such term is
defined in the UCC, now owned or hereafter acquired by any Person, including, a
General Intangible under which the Account Debtor's principal obligation is a
monetary obligation.
"PERSON" means any individual, sole proprietorship, partnership,
limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
public benefit corporation, entity or government (whether federal, state,
county, city, municipal or otherwise, including any instrumentality, division,
agency, body or department thereof), and shall include such Person's successors
and assigns.
"SENIOR DEBT HOLDER" means Laurus Master Fund, Ltd., a Cayman Islands
corporation.
"SENIOR INDEBTEDNESS" means all amounts owed by the Company to the
Senior Debt Holder under, and all obligations of the Company pursuant to: (i)
that certain $2 million Secured Convertible Minimum Borrowing Note of the
Company, dated August 16, 2004, in favor of the Senior Debt Holder, (ii) that
certain $4 million Secured Revolving Note of the Company, dated August 16, 2004,
in favor of the Senior Debt Holder, (iii) that certain Master Security
Agreement, dated August 16, 2004, among the Company, CSI Sub Corp. (DE), XxXxxxx
Associates, LLC, Evoke Software Corporation and the Senior Debt Holder, (iv)
that certain $5 million Secured Convertible Term Note, dated August 16, 2004, in
favor of the Senior Debt Holder; (v) that certain Securities Purchase Agreement,
dated August 16, 2004, between the Company and the Senior Debt Holder, (vi) that
certain Stock Pledge Agreement, dated August 16, 2004, between the Company and
the Senior Debt Holder, (vii) that certain Registration Rights Agreement, dated
August 16, 2004, between the Company and the Senior Debt Holder, and (viii) that
certain Common Stock Purchase Warrant, dated August 16, 2004, in favor of the
Senior Debt Holder.
"SOFTWARE" means all "software" as such term is defined in the UCC, now
owned or hereafter acquired by any Person, including all computer programs and
all supporting information provided in connection with a transaction related to
any program.
"STOCK" means all certificated and uncertificated shares, options,
warrants, membership interests, general or limited partnership interests,
participation or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934). For purposes hereof, Stock includes, without
limitation, the Stock of any Subsidiary owned by the Company.
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"SUBSIDIARY" means any entity through which the Company shall conduct
operations, of which the Company shall own, directly or indirectly through
another Subsidiary, more than fifty percent (50%) of the outstanding voting
capital stock (or other shares of beneficial interest with voting rights), or
which the Company shall otherwise control, either directly or indirectly, and
whether through the ownership of securities or other ownership interests, by
contract or otherwise.
"SUPPORTING OBLIGATIONS" means all "supporting obligations" as such
term is defined in the UCC.
"UCC" means the Uniform Commercial Code as the same may, from time be
in effect in the State of New York; provided, that in the event that, by reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State of
New York, the term "UCC" shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions of this Agreement
relating to such attachment, perfection, priority or remedies and for purposes
of definitions related to such provisions; provided further, that to the extent
that UCC is used to define any term herein and such term is defined differently
in different Articles or Divisions of the UCC, the definition of such term
contained in Article or Division 9 shall govern.
2. Grant of Security Interest. To secure the payment of all
Obligations, the Company hereby grants to the Secured Parties a continuing
security interest in all of the Collateral. With respect to each of the Secured
Parties, the security interest granted hereunder shall be limited to the amount
of the Loan funded by each such Secured Parties plus all related Obligations
relating to such amount of the Loan. Upon the Senior Debt Holder's release of
its security interest in the Stock of any Subsidiaries, the Company shall
promptly deliver stock certificates evidencing such Stock to the Secured
Parties.
3. Subordination. Notwithstanding anything in this Agreement to the
contrary, by its execution hereof, the Secured Parties, for themselves and its
successors and assigns, acknowledges and agrees for the benefit of the Company
and the Senior Debt Holder, and their respective successors and assigns, that,
notwithstanding any provision of this Agreement to the contrary, the payment or
satisfaction by the Company of any interest, principal, any other amounts or any
Obligations under the Note or this Agreement or any agreement, certificate or
document contemplated or required hereunder, and the performance by the Company
its obligations hereunder and thereunder, is and shall be expressly subordinated
and junior in right of payment to the prior indefeasible payment in full of all
Senior Indebtedness, whether now existing or hereafter arising, and is hereby
subordinated as a claim against the Company or any of the assets of the Company,
whether such claim be in the event of any distribution of the assets of the
Company, upon any reorganization or composition or bankruptcy, insolvency,
receivership or other statutory or common law proceedings or arrangements
involving the Company or the readjustment of its liabilities or any assignment
for the benefit of creditors or any marshaling of its assets or liabilities or
any general failure of the Company to pay its debts as they become due. All
rights of the Secured Parties are expressly subject to the rights of the Senior
Debt Holder. The subordination provisions set forth in this Section 3 are in
addition to the terms and provisions of that certain Intercreditor Agreement,
dated as of the date hereof, between the Holder and the Senior Debt Holder (the
"INTERCREDITOR AGREEMENT"), and each of the terms of this Agreement, the Note
and of each agreement, certificate or document contemplated or required
hereunder or thereunder are subject in all instances to the terms of the
Intercreditor Agreement.
4. Representations and Warranties. The Company hereby represents and
warrants to the Secured Parties those same representations and warranties that
appear in Section 7 of the Note, which representations and warranties are
incorporated by reference herein.
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5. Inspection Rights. The Company will allow the Secured Parties and/or
their representatives access to (during reasonable business hours and for
reasonable durations) and the right of inspection of the Company's premises
where the books and records relating to the Collateral are located.
6. Event of Default. The Company shall be in default under this
Agreement upon the happening of any Event of Default under the Note and as
defined in the Note.
7. Effect of Event of Default. Subject to the provisions of Section 3
hereof and the terms of the Intercreditor Agreement, upon the occurrence of any
Event of Default and at any time thereafter, the Secured Parties may declare all
Obligations immediately due and payable and the Secured Parties shall have the
remedies of a secured party provided in the UCC, this Agreement and other
applicable law. Subject to the provisions of Section 3 hereof and the terms of
the Intercreditor Agreement, upon the occurrence of any Event of Default and at
any time thereafter, the Secured Parties will have the right to take possession
of the Collateral and to maintain such possession on our premises or to remove
the Collateral or any part thereof to such other premises as you may desire,
including, without limitation, the right to contact account debtors liable in
respect of the Accounts for the purpose of engaging in collection activities
with respect thereto. Subject to the provisions of Section 3 hereof and the
terms of the Intercreditor Agreement, upon the Secured Parties' request, the
Company shall assemble the Collateral and make it available to the Secured
Parties at a place designated by the Secured Parties. If any notification of
intended disposition of any Collateral is required by law, such notification, if
mailed, shall be deemed properly and reasonably given if mailed at least five
(5) business days before such disposition, postage prepaid, addressed to us
either at our address shown herein or at any address appearing on the Secured
Parties' records for the Company. Subject to the provisions of Section 3 hereof
and the terms of the Intercreditor Agreement, any proceeds of any disposition of
any of the Collateral shall be applied by the Secured Parties to the payment of
all expenses in connection with the sale of the Collateral, including reasonable
attorneys' fees and other legal expenses and disbursements and the reasonable
expense of retaking, holding, preparing for sale, selling, and the like, and any
balance of such proceeds may be applied by the Secured Parties toward the
payment of the Obligations in such order of application as the Secured Parties
may elect, and the Company shall be liable for any deficiency.
8. Actions by the Secured Parties. If the Company defaults in the
performance or fulfillment of any of the terms, conditions, promises, covenants,
provisions or warranties on our part to be performed or fulfilled under or
pursuant to this Agreement, the Secured Parties may, at its sole option without
waiving its right to enforce this Agreement according to its terms, immediately
or at any time thereafter and without notice to the Company, perform or fulfill
the same or cause the performance or fulfillment of the same for the Company's
account and at its sole cost and expense, and the cost and expense thereof
(including reasonable attorneys' fees) shall be added to the Obligations and
shall be payable on demand with interest thereon at the highest rate permitted
by law.
9. Indemnification. The Company hereby indemnify and save the Secured
Parties harmless from all loss, costs, damage, liability and/or expense,
including reasonable attorneys' fees, that the Secured Parties may sustain or
incur to enforce payment, performance or fulfillment of any of the Obligations
or in the enforcement of this Agreement or in the prosecution or defense of any
action or proceeding either against the Secured Parties or the Company
concerning any matter growing out of or in connection with this Agreement and/or
any of the Obligations and/or any of the Collateral.
10. Termination of Security Interest. The Secured Parties agree to
terminate the security interest in the Collateral upon the Company tendering the
full and final payment in satisfaction of the Obligations. The Secured Parties
agree to join with the Company in executing termination statements and other
instruments pursuant to the UCC in form satisfactory to the Company and in
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executing such other documents or instruments as may be required or deemed
necessary by the Company for purposes of terminating the security interest in
the Collateral.
11. No Shorting. As a material inducement for the Company to enter into
this Agreement and the Note, the Secured Parties represents that they have not
as of the date hereof, and covenant on behalf of themselves and their affiliates
that neither the Secured Parties nor any affiliate of the Secured Parties will
at any time in which the Secured Parties or any affiliate of the Secured Parties
beneficially hold the Notes or the Warrant (as defined in the Note) or the
shares of Common Stock (as defined in the Notes) thereunder, engage in any short
sales of, or hedging or arbitrage transactions with respect to, the Common
Stock, or buy "put" options or similar instruments with respect to the Common
Stock. Notwithstanding the foregoing, it is specifically agreed that in the
event that affiliates of the Secured Parties act as an underwriter in connection
with any registered public offering of the Company's securities, that the
foregoing prohibitions shall not preclude such underwriters from engaging in
"stabilization transactions" which are permitted under applicable securities
laws, rules and regulations.
12. Waiver. No delay or failure on part of the Secured Parties in
exercising any right, privilege or option hereunder shall operate as a waiver of
such or of any other right, privilege, remedy or option, and no waiver whatever
shall be valid unless in writing, signed by the Secured Parties and then only to
the extent therein set forth, and no waiver by the Secured Parties of any
default shall operate as a waiver of any other default or of the same default on
a future occasion. The Secured Parties' books and records containing entries
with respect to the Obligations shall be admissible in evidence in any action or
proceeding, shall be binding upon the Company for the purpose of establishing
the items therein set forth and shall constitute prima facie proof thereof. The
Secured Parties shall have the right to enforce any one or more of the remedies
available to the Secured Parties, successively, alternately or concurrently. The
Company agrees to join with the Secured Parties in executing financing
statements or other instruments pursuant to the UCC in form satisfactory to the
Secured Parties and in executing such other documents or instruments as may be
required or deemed necessary by the Secured Parties for purposes of affecting or
continuing the Secured Parties' security interest in the Collateral.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the
conflicts of laws principles thereof.
14. Successors and Assigns. All of the rights, remedies, options,
privileges and elections given to the Secured Parties hereunder shall inure to
the benefit of its successors and permitted assigns. The Secured Parties may not
assign, pledge or otherwise transfer this Agreement or any or obligation
hereunder without the prior written consent of the Company; provided that the
Holder may, without such consent, assign this Agreement to an affiliate of the
Holder, but only on the express condition that any such affiliate agrees in
writing to be bound by the terms of this Agreement and the Intercreditor
Agreement as if it were an original party thereto.
15. Waiver of Jury Trial, etc. The Secured Parties and the Company
hereby: (a) waive any and all right to trial by jury in litigation relating to
this Agreement and the Note, (b) submit to the nonexclusive jurisdiction of the
state and federal courts located in the State of New York, County of New York
and (c) waive any objection the Secured Parties or the Company may have as to
the bringing or maintaining of such action with any such court.
16. Notices. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by overnight courier (prepaid) or if delivered by facsimile
transmission, to the Company at the address or facsimile number set forth in the
Company's SEC filings or to the Secured Parties at the addresses or facsimiles
number set forth in the records of the Company. Any party hereto may by notice
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so given change its address for future notice hereunder. Notice shall be deemed
to have been given (a) upon personal delivery, if delivered by hand, (b) three
days after the date of deposit in the mails, postage prepaid, or (c) the next
business day if sent by facsimile transmission (if receipt is electronically
confirmed) or by a prepaid overnight courier service.
17. Amendments. No amendment, modification, termination, or waiver of
any provision of this Agreement shall be effective unless the same shall be in
writing and signed by the Secured Parties, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
18. No Waiver. No course of dealing between the Secured Parties and the
Company, nor any failure or delay on the Secured Parties' part in exercising any
right, power, or remedy under this Agreement shall operate as a waiver thereof;
nor shall any single or partial exercise of any such right, power, or remedy
preclude any other or further exercise thereof or the exercise of any other
right, power, or remedy under this Agreement. The rights and remedies provided
in this Agreement and the Note are cumulative, and are not exclusive of any
other rights, powers, privileges, or remedies, now or hereafter existing, at law
or in equity or otherwise.
19. Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction. In no
event shall any payments hereunder (if deemed interest under applicable law or
regulation) exceed the maximum rate permitted under applicable law or
regulation. If any provision of this Agreement is in contravention of any such
law or regulation, then such provision shall be deemed amended to provide for
interest at said maximum rate and any excess amount shall be applied to the
Obligations in such order as the Secured Parties shall elect.
20. Captions. The captions of the Sections of this Agreement have been
inserted for convenience only and shall have no substantive effect.
21. Counterparts. This Agreement may be executed in any number of
counterparts (including by facsimile), each of which when so executed shall be
deemed to be an original and all of which counterparts together shall constitute
one and the same instrument.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered on their behalf as of the date first above written.
COMPANY:
CONVERSION SERVICES INTERNATIONAL, INC.
/s/ Xxxxx Xxxxxx
By: _______________________________
Name: Xxxxx Xxxxxx
Title: President and Chief Executive Officer
SECURED PARTIES:
SANDS BROTHERS VENTURE CAPITAL LLC
By: SB Venture Capital Management LLC, Manager
/s/ Xxxxxx Xxxxx
By: _______________________________
Name: Xxxxxx Xxxxx
Title: Manager
SANDS BROTHERS VENTURE CAPITAL III LLC
By: SB Venture Capital Management III LLC, Manager
/s/ Xxxxxx Xxxxx
By: _______________________________
Name: Xxxxxx Xxxxx
Title: Manager
SANDS BROTHERS VENTURE CAPITAL IV LLC
By: SB Venture Capital Management IV LLC, Manager
/s/ Xxxxxx Xxxxx
By: _______________________________
Name: Xxxxxx Xxxxx
Title: Manager
[Signature Page to Security Agreement]
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