THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
AND ANY APPLICABLE STATES SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO CONVERSION SERVICES INTERNATIONAL, INC. THAT SUCH REGISTRATION
IS NOT REQUIRED.
SECURED CONVERTIBLE MINIMUM BORROWING NOTE
FOR VALUE RECEIVED, CONVERSION SERVICES INTERNATIONAL, INC. a
Delaware corporation (the "BORROWER") promises to pay to LAURUS MASTER FUND,
LTD., c/o Ogier Fiduciary Services (Cayman) Limited, P.O. Box 1234, Queensgate
House, South Church Street, Xxxxxx Town, Grand Cayman, Cayman Islands, British
West Indies, Fax: 000-000-0000 (the "HOLDER") or its registered assigns, on
order, the sum of Two Million Dollars ($2,000,000), of, if different, the
aggregate principal amount of all "Loans" (as such term is defined in the
Security Agreement referred to below), together with any accrued and unpaid
interest hereon, on August 15, 2007 (the "MATURITY Date").
Capitalized terms used herein without definition shall have the
meanings ascribed to such terms in the Security Agreement between Borrower,
certain Subsidiaries of the Borrower and the Holder dated as of August 16, 2004
(as amended, modified and supplemented from time to time, the "SECURITY
AGREEMENT").
The following terms shall apply to this Minimum Borrowing Note (the "Note"):
ARTICLE I INTEREST
1.1 Contract Rate. Subject to Sections 4.2, 5.1 and 6.7 hereof, interest
payable on this Note shall accrue at a rate per annum equal to the "prime rate"
published in The Wall Street Journal from time to time, plus one percent (1%)
(the "CONTRACT RATE"). The Prime Rate shall be increased or decreased as the
case may be for each increase or decrease in the Prime Rate in an amount equal
to such increase or decrease in the Prime Rate; each change to be effective as
of the day of the change in such rate in accordance with the terms of the
Security Agreement. Subject to Section 1.2, the Contract Rate shall not be less
than five percent (5 %).
1.2 Contract Rate Adjustments and Payments. The Contract Rate shall be
calculated on the last business day of each month hereafter until the Maturity
Date (each a "Determination Date") and shall be subject to adjustment as set
forth herein. If (i) the Borrower shall have registered the shares of the
Borrower's common stock underlying each of the conversion of each Minimum
Borrowing Note then outstanding and that certain warrant issued to Holder on a
registration statement declared effective by the Securities and Exchange
Commission (the "SEC"), and (ii) the market price (the "Market Price") of the
Common Stock as reported by Bloomberg, L.P. on the Principal Market (as defined
below) for the five (5) trading days immediately preceding a Determination Date
exceeds the then applicable Fixed Conversion Price by at least twenty five
percent (25%), the Contract Rate for the succeeding calendar month shall
automatically be reduced by 200 basis points (200 b.p.) (2.0.%) for each
incremental twenty five percent (25%) increase in the Market Price of the Common
Stock above the then applicable Fixed Conversion Price. If (i) the Borrower
shall not have registered the shares of the Borrower's common stock underlying
the conversion of each Minimum Borrowing Note then outstanding and that certain
warrant issued to Holder on a registration statement declared effective by the
SEC and which remains effective, and (ii) the Market Price of the Common Stock
as reported by Bloomberg, L.P. on the principal market for the five (5) trading
days immediately preceding a Determination Date exceeds the then applicable
Fixed Conversion Price by at least twenty five percent (25%), the Contract Rate
for the succeeding calendar month shall automatically be decreased by 100 basis
points (100 b.p.) (1.0.%) for each incremental twenty five percent (25%)
increase in the Market Price of the Common Stock above the then applicable Fixed
Conversion Price. Notwithstanding the foregoing (and anything to the contrary
contained in herein), in no event shall the Contract Rate be less than zero
percent (0%). Interest shall be (i) calculated on the basis of a 360 day year,
and (ii) payable monthly, in arrears, commencing on October 1, 2004 and on the
first business day of each consecutive calendar month thereafter until the
Maturity Date (and on the Maturity Date), whether by acceleration or otherwise
(each, a "CONTRACT RATE PAYMENT DATE").
ARTICLE II
ADVANCES, PAYMENTS UNDER NOTE
2.1. Mechanics of Advances. All Loans evidenced by this Note shall
be made in accordance with the terms and provisions of the Security Agreement.
2.2. Fixed Conversion Price. For purposes hereof, subject to Section
3.5 hereof, the initial "FIXED CONVERSION PRICE" means $ 0.14.
2.3. No Effective Registration. Notwithstanding anything to the
contrary herein, the Holder shall not be required accept shares of Common Stock
as payment following a conversion by the Holder if there fails to exist an
effective current Registration Statement (as defined in the Registration Rights
Agreement) covering the shares of Common Stock to be issued, or if an Event of
Default hereunder exists and is continuing, unless such requirement is otherwise
waived in writing by the Holder in whole or in part at the Holder's option.
2.4. Optional Redemption in Cash. The Borrower will have the option
of prepaying this Note ("OPTIONAL REDEMPTION") by paying to the Holder a sum of
money equal to one hundred fifteen percent (115%) of the principal amount of
this Note together with accrued but unpaid interest thereon and any and all
other sums due, accrued or payable to the Holder arising under this Note, the
Security Agreement, or any Ancillary Agreement (as defined in the Security
2
Agreement) (the "REDEMPTION AMOUNT") on the day written notice of redemption
(the "NOTICE OF REDEMPTION") is given to the Holder. The Notice of Redemption
shall specify the date for such Optional Redemption (the "REDEMPTION PAYMENT
DATE") which date shall be seven (7) days after the date of the Notice of
Redemption (the "REDEMPTION PERIOD"). A Notice of Redemption shall not be
effective with respect to any portion of this Note for which the Holder has
previously delivered a Notice of Conversion (defined below) pursuant to Section
3.1, or for conversions elected to be made by the Holder pursuant to Section 3.1
during the Redemption Period. The Redemption Amount shall be determined as if
such Xxxxxx's conversion elections had been completed immediately prior to the
date of the Notice of Redemption. On the Redemption Payment Date, the Redemption
Amount (plus any additional interest and fees accruing on the Notes during the
Redemption Period) must be irrevocably paid in full in immediately available
funds to the Holder. In the event the Borrower fails to pay the Redemption
Amount on the Redemption Payment Date, then such Redemption Notice will be null
and void.
ARTICLE III
HOLDER'S CONVERSION RIGHTS
3.1. Optional Conversion. Subject to the terms of this Article III,
the Holder shall have the right, but not the obligation, at any time until the
Maturity Date, or thereafter during an Event of Default (as defined in Article
V), and, subject to the limitations set forth in Section 3.2 hereof, to convert
all or any portion of the outstanding Principal Amount and/or accrued interest
and fees due and payable into fully paid and nonassessable shares of the Common
Stock at the Fixed Conversion Price. The shares of Common Stock to be issued
upon such conversion are herein referred to as the "CONVERSION SHARES."
3.2. Conversion Limitation. Notwithstanding anything contained
herein to the contrary, the Holder shall not be entitled to convert pursuant to
the terms of the Note an amount that would (a) be convertible into that number
of shares of Common Stock which, when added to the number of shares of Common
Stock otherwise beneficially owned by such Holder including those issuable upon
exercise of warrants held by such Holder would exceed 4.99% of the outstanding
shares of Common Stock of the Borrower at the time of conversion or (b) exceed
twenty five percent (25%) of the aggregate dollar trading volume of the Common
Stock for the twenty two (22) day trading period immediately preceding delivery
of a Notice of Conversion to the Borrower. For the purposes of the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The
conversion limitation described in this Section 3.2 shall automatically become
null and void without any notice to Borrower upon the occurrence and during the
continuance beyond any applicable grace period of an Event of Default, or upon
75 days prior notice to the Borrower, except that at no time shall the
beneficial ownership exceed 19.99% of the Common Stock. Notwithstanding anything
contained herein to the contrary, following the listing of the Borrower on the
NASDAQ SmallCap Market, the Nasdaq National Market or the American Stock
Exchange, the number of shares of Common Stock issuable by the Borrower and
acquirable by the Holder at a price below $[insert market price] per share
pursuant to the terms of this Note, the Security Agreement, any Ancillary
Agreement or any other agreement between the Company and the Holder, shall not
exceed an aggregate of 153,149,330 shares of the Borrower's Common Stock
(subject to appropriate adjustment for stock splits, stock dividends, or other
similar recapitalizations affecting the Common Stock) (the "MAXIMUM COMMON STOCK
3
ISSUANCE"), unless the issuance of shares hereunder in excess of the Maximum
Common Stock Issuance shall first be approved by the Borrower's shareholders. If
at any point in time , following the listing of the Borrower on the NASDAQ
SmallCap Market, the Nasdaq National Market or the American Stock Exchange, the
number of shares of Common Stock issued pursuant to the terms of this Note, the
Security Agreement, any Ancillary Agreement or any other agreement between the
Company and the Holder, together with the number of shares of Common Stock that
would then be issuable by the Borrower to the Holder in the event of a
conversion or exercise pursuant to the terms of this Note, the Security
Agreement, any Ancillary Agreement or any other agreement between the Company
and the Holder, would exceed the Maximum Common Stock Issuance but for this
Section 3.2, the Borrower shall promptly call a shareholders meeting to solicit
shareholder approval for the issuance of the shares of Common Stock hereunder in
excess of the Maximum Common Stock Issuance.
3.3. Mechanics of Xxxxxx's Conversion. In the event that the Holder
elects to convert this Note into Common Stock, the Holder shall give notice of
such election by delivering an executed and completed notice of conversion
("NOTICE OF CONVERSION") to the Borrower and such Notice of Conversion shall
provide a breakdown in reasonable detail of the Principal Amount, accrued
interest and fees that are being converted. On each Conversion Date (as
hereinafter defined) and in accordance with its Notice of Conversion, the Holder
shall make the appropriate reduction to the Principal Amount, accrued interest
and fees as entered in its records and shall provide written notice thereof to
the Borrower within two (2) business days after the Conversion Date. Each date
on which a Notice of Conversion is delivered or telecopied to the Borrower in
accordance with the provisions hereof shall be deemed a Conversion Date (the
"CONVERSION DATE"). A form of Notice of Conversion to be employed by the Holder
is annexed hereto as Exhibit A. Pursuant to the terms of the Notice of
Conversion, the Borrower will issue instructions to the transfer agent
accompanied by an opinion of counsel within two (2) business days of the date of
the delivery to Borrower of the Notice of Conversion and shall cause the
transfer agent to transmit the certificates representing the Conversion Shares
to the Holder by crediting the account of the Holder's designated broker with
the Depository Trust Corporation ("DTC") through its Deposit Withdrawal Agent
Commission ("DWAC") system within three (3) business days after receipt by the
Borrower of the Notice of Conversion (the "DELIVERY DATE"). In the case of the
exercise of the conversion rights set forth herein the conversion privilege
shall be deemed to have been exercised and the Conversion Shares issuable upon
such conversion shall be deemed to have been issued upon the date of receipt by
the Borrower of the Notice of Conversion. The Holder shall be treated for all
purposes as the record holder of such Common Stock, unless the Holder provides
the Borrower written instructions to the contrary.
3.4. Late Payments. The Borrower understands that a delay in the
delivery of the shares of Common Stock in the form required pursuant to this
Article beyond the Delivery Date could result in economic loss to the Holder. As
compensation to the Holder for such loss, the Borrower agrees to pay late
payments to the Holder for late issuance of such shares in the form required
4
pursuant to this Article III upon conversion of the Note, in the amount equal to
$250 per business day after the Delivery Date. The Borrower shall pay any
payments incurred under this Section in immediately available funds upon demand.
3.5. Adjustment Provisions. The Fixed Conversion Price and number
and kind of shares or other securities to be issued upon conversion determined
pursuant to Section 2.2 shall be subject to adjustment from time to time upon
the happening of certain events while this conversion right remains outstanding,
as follows:
A. Reclassification, etc. If the Borrower at any time shall,
by reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
to evidence the right to purchase an adjusted number of such securities and kind
of securities as would have been issuable as the result of such change with
respect to the Common Stock (i) immediately prior to or (ii) immediately after
such reclassification or other change at the sole election of the Holder.
B. Stock Splits, Combinations and Dividends. If the shares of
Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, or if a dividend is paid on the Common Stock or any
preferred stock issued by the Borrower in shares of Common Stock, the Fixed
Conversion Price shall be proportionately reduced in case of subdivision of
shares or stock dividend or proportionately increased in the case of combination
of shares, in each such case by the ratio which the total number of shares of
Common Stock outstanding immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such event.
C. Share Issuances. Subject to the provisions of this Section
3.5, if the Borrower shall at any time prior to the conversion or repayment in
full of the Principal Amount issue any shares of Common Stock or securities
convertible into Common Stock to a person other than the Holder (except (i)
pursuant to Subsections A or B above; or (ii) pursuant to options that may be
issued under any employee incentive stock option and/or any qualified stock
option plan adopted by the Borrower) for a consideration per share (the "OFFER
PRICE") less than the Fixed Conversion Price in effect at the time of such
issuance, then the Fixed Conversion Price shall be immediately reset to such
lower Offer Price pursuant to the formula below. For purposes hereof, the
issuance of any security of the Borrower convertible into or exercisable or
exchangeable for Common Stock shall result in an adjustment to the Fixed
Conversion Price upon the issuance of such securities.
If the Borrower issues any additional shares pursuant to this
Section 3.5 (C) then, and thereafter successively upon each such issue, the
Fixed Conversion Price shall be adjusted by multiplying the then applicable
Fixed Conversion Price by the following fraction:
----------------------------------------
A + B
----------------------------------------
(A + B) + [((C - D) x B) / C]
----------------------------------------
A = Actual shares outstanding prior to such offering
B = Actual shares sold in the offering
C = Fixed Conversion Price
D = Offering price
5
D. Computation of Consideration. For purposes of any
computation respecting consideration received pursuant to Subsection C above,
the following shall apply:
(a) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Borrower for any underwriting of the issue or otherwise
in connection therewith;
(b) in the case of the issuance of shares of Common Stock for
a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined in
good faith by the Board of Directors of the Borrower (irrespective of the
accounting treatment thereof); and
(c) upon any such exercise, the aggregate consideration
received for such securities shall be deemed to be the consideration received by
the Borrower for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Borrower upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (a) and (b) of this Subsection (D)).
3.6. Reservation of Shares. During the period the conversion right
exists, the Borrower will reserve from its authorized and unissued Common Stock
a sufficient number of shares to provide for the issuance of Common Stock upon
the full conversion of this Note. The Borrower represents that upon issuance,
such shares will be duly and validly issued, fully paid and non-assessable. The
Borrower agrees that its issuance of this Note shall constitute full authority
to its officers, agents, and transfer agents who are charged with the duty of
executing and issuing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the conversion of this Note.
3.7. Registration Rights. The Holder has been granted registration
rights with respect to the shares of Common Stock issuable upon conversion of
this Note as more fully set forth in a Registration Rights Agreement dated as of
the date hereof between the Borrower and the Holder.
ARTICLE IV
EVENTS OF DEFAULT
4.1. The occurrence of any of the events set forth in Section 19 of
the Security Agreement shall constitute an Event of Default ("EVENT OF DEFAULT")
hereunder.
6
DEFAULT RELATED PROVISIONS
4.2 Default Interest Rate. Following the occurrence and during the
continuance of an Event of Default, interest on this Note shall automatically be
increased by two percent (2%) per month, and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest from the date of
such Event of Default at such interest rate applicable to such Obligations until
such Event of Default is cured or waived.
4.3 Conversion Privileges. The conversion privileges set forth in
Article III shall remain in full force and effect immediately from the date
hereof and until this Note is paid in full.
4.4 Cumulative Remedies. The remedies under this Note shall be
cumulative.
ARTICLE V
DEFAULT PAYMENTS
5.1. Default Payment. If an Event of Default occurs and is
continuing beyond any applicable grace period, the Holder, at its option, may
elect, in addition to all rights and remedies of Holder under the Security
Agreement and the Ancillary Agreements and all obligations of Borrower under the
Security Agreement and the Ancillary Agreements, to accelerate all obligations
outstanding under the Security Agreement and the Ancillary Agreements and, in
connection therewith, require the Borrower to make a Default Payment ("DEFAULT
PAYMENT"). The Default Payment shall be 130% of the outstanding principal amount
of the Note, plus accrued but unpaid interest, all other fees then remaining
unpaid, and all other amounts payable hereunder. The Default Payment shall be
applied first to any fees due and payable to Holder pursuant to the Notes or the
Ancillary Agreements, then to accrued and unpaid interest due on the Notes and
then to outstanding principal balance of the Notes.
5.2. Default Payment Date. The Default Payment shall be due and
payable immediately on the date that the Holder has exercised its rights
pursuant to Section 5.1 ("DEFAULT PAYMENT DATE").
ARTICLE VI
MISCELLANEOUS
6.1. Failure or Indulgence Not Waiver. No failure or delay on the
part of the Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
6.2. Notices. Any notice herein required or permitted to be given
shall be in writing and provided in accordance with the terms of the Security
Agreement.
7
6.3. Amendment Provision. The term "Note" and all reference thereto,
as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as it may be amended or supplemented.
6.4. Assignability. This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements of the Security Agreement.
6.5. Cost of Collection. If default is made in the payment of this
Note, the Borrower shall pay the Holder hereof reasonable costs of collection,
including reasonable attorneys' fees.
6.6. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York. Both parties and the individual signing this Note on behalf of the
Borrower agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Note is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or unenforceability of any other provision of this
Note. Nothing contained herein shall be deemed or operate to preclude the Holder
from bringing suit or taking other legal action against the Borrower in any
other jurisdiction to collect on the Borrower's obligations to Holder, to
realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court order in favor of Xxxxxx.
6.7. Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
6.8. Security Interest and Guarantee. The Holder has been granted a
security interest (i) in certain assets of the Borrower and its Subsidiaries as
more fully described in (x) the Security Agreement and (y) the Master Security
Agreement dated as of the date hereof and (ii) pursuant to the Stock Pledge
Agreement dated as of the date hereof. The obligations of the Borrower under
this Note are guaranteed by certain Subsidiaries of the Borrower pursuant to the
Subsidiary Guaranty dated as of the date hereof.
6.9. Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
8
party shall not be applied in the interpretation of this Note to favor any party
against the other.
[Balance of page intentionally left blank; signature page follows.]
9
IN WITNESS WHEREOF, the Borrower has caused this Secured Convertible
Minimum Borrowing Note to be signed in its name effective as of this 16th day of
August, 2004.
CONVERSION SERVICES
INTERNATIONAL, INC.
By:/s/ Xxxxx Xxxxxx
------------------------
Name: Xxxxx Xxxxxx
Title: President and CEO
WITNESS:
/s/ Xxxxxxxx X. Xxxx
--------------------
10
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal
and $_________ of the interest due on the Secured Convertible Minimum Borrowing
Note issued by Conversion Services International, Inc. on August __, 2004 into
Shares of Common Stock of Conversion Services International, Inc. (the
"Borrower") according to the conditions set forth in such Note, as of the date
written below.
Date of Conversion:
---------------------------------------------------
Conversion Price:
---------------------------------------------------
Shares To Be Delivered:
---------------------------------------------------
Signature:
---------------------------------------------------
Print Name:
---------------------------------------------------
Address:
---------------------------------------------------
Holder DWAC instructions
---------------------------------------------------
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