Exhibit 10.5
SUBORDINATION AGREEMENT
This Subordination Agreement (this "Agreement") is entered into as of
the 22nd day of September, 2004, by and between Sands Brothers Venture Capital
LLC, Sands Brothers Venture Capital III LLC and Sands Brothers Venture Capital
IV LLC (collectively, with their affiliates, successors and permitted assigns,
the "Subordinated Lender"), and Laurus Master Fund, Ltd. (the "Senior Lender").
Unless otherwise defined herein, capitalized terms used herein shall have the
meaning provided such terms in the Securities Purchase Agreement and/or the
Security Agreement referred to below, as applicable.
BACKGROUND
WHEREAS, the Senior Lender has made a loan to Conversion Services
International, Inc., a Delaware corporation (the "Company") pursuant to, and in
accordance with, (i) that certain Securities Purchase Agreement dated as of
August 16, 2004 by and between the Company and Laurus (as amended, modified or
supplemented from time to time, the "Securities Purchase Agreement") and (ii)
the Related Agreements referred to in the Securities Purchase Agreement, (iii)
that certain Security Agreement dated as of August 16, 2004 by and between the
Company and Laurus (as amended, modified or supplemented from time to time, the
"Security Agreement") and (iv) the Ancillary Agreements referred to in the
Security Agreement (collectively, the "Senior Loan Documents");
WHEREAS, as of the date hereof, the Subordinated Lender is making an
aggregate $1,000,000 secured subordinated loan to the Company pursuant to: (i)
three separate Senior Subordinated Convertible Promissory Notes (the
"Subordinated Notes") and (ii) that certain Security Agreement between the
Company and the Subordinated Lender; and
WHEREAS, in connection with the loan being made to the Company by the
Subordinated Lender, the Senior Lender and the Subordinated Lender desire to
enter into this Agreement in order to set forth their rights as among one
another with respect to the Company.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Subordinated Lender and the
Senior Lender agree as follows:
TERMS
1. All obligations of each the Company and/or any of its Subsidiaries
to the Senior Lender, howsoever created, arising or evidenced, whether direct or
indirect, absolute or contingent or now or hereafter existing, or due or to
become due are referred to as "Senior Liabilities". Any and all loans made by
the Subordinated Lender to the Company and/or any of its Subsidiaries, together
with all other obligations of the Company and/or any of its Subsidiaries to the
Subordinated Lender (in each case, including any interest, fees or penalties
related thereto), howsoever created, arising or evidenced, whether direct or
indirect, absolute or contingent or now or hereafter existing, or due or to
become due are referred to as "Junior Liabilities". It is expressly understood
and agreed that the term "Senior Liabilities", as used in this Agreement, shall
include, without limitation, any and all interest, fees and penalties accruing
on any of the Senior Liabilities after the commencement of any proceedings
referred to in paragraph 4 of this Agreement, notwithstanding any provision or
rule of law which might restrict the rights of the Senior Lender, as against the
Company, its Subsidiaries or anyone else, to collect such interest, fees or
penalties, as the case may be.
2. Except as expressly otherwise provided in this Agreement or as the
Senior Lender may otherwise expressly consent in writing, the payment of the
Junior Liabilities shall be postponed and subordinated to the payment in full of
all Senior Liabilities. Furthermore, no payments or other distributions
whatsoever in respect of any Junior Liabilities shall be made, nor shall any
property or assets of the Company or any of its Subsidiaries be applied to the
purchase or other acquisition or retirement of any Junior Liability.
Notwithstanding anything to the contrary contained in this paragraph 2 or
elsewhere in this Agreement, the Company and its Subsidiaries may make regularly
scheduled principal and interest payments, as the case may be, to the
Subordinated Lender with respect to the Junior Liabilities, so long as: (i) no
Event of Default has occurred and is continuing at the time of any such payment
and (ii) the amount of such regularly scheduled principal payments and the rate
of interest, in each case, with respect to the Junior Liabilities is not
increased from that in effect on the date hereof. Furthermore, without the
consent of the Senior Lender, the Subordinated Lender may convert any principal
or interest under the Subordinated Notes into shares of Company common stock,
but solely in accordance with the terms of the Subordinated Notes. The Senior
Lender shall provide prompt written notice to the Subordinated Lender following
such time as the Senior Lender declares any Event of Default (as defined in the
Senior Loan Documents).
3. The Subordinated Lender hereby subordinates all security interests
that have been, or may be, granted by the Company and/or any of its Subsidiaries
to such Subordinated Lender in respect of the Junior Liabilities, to the
security interests granted by the Company and/or any of its Subsidiaries to the
Senior Lender in respect of the Senior Liabilities.
4. In the event of any dissolution, winding up, liquidation,
readjustment, reorganization or other similar proceedings relating to the
Company and/or any of its Subsidiaries or to its creditors, as such, or to its
property (whether voluntary or involuntary, partial or complete, and whether in
bankruptcy, insolvency or receivership, or upon an assignment for the benefit of
creditors, or any other marshalling of the assets and liabilities of the Company
and/or any of its Subsidiaries, or any sale of all or substantially all of the
assets of the Company and/or any of its Subsidiaries, or otherwise), the Senior
Liabilities shall first be paid in full before any Subordinated Lender shall be
entitled to receive and to retain any payment or distribution in respect of any
Junior Liability (other than permitted payments previously and lawfully made to
Subordinated Lender pursuant to Section 2 hereof).
5. The Subordinated Lender will mark its books and records so as to
clearly indicate that their respective Junior Liabilities are subordinated in
accordance with the terms of this Agreement. The Subordinated Lender will
execute such further documents or instruments and take such further action as
the Senior Lender may reasonably request from time to time request to carry out
the intent of this Agreement.
6. The Subordinated Lender hereby waives all diligence in collection or
protection of or realization upon the Senior Liabilities or any security for the
Senior Liabilities.
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7. Until such time as the Senior Liabilities have been paid in full,
the Subordinated Lender will not, without the prior written consent of the
Senior Lender: (a) attempt to enforce or collect any Junior Liability or any
rights in respect of any Junior Liability; or (b) commence, or join with any
other creditor in commencing, any bankruptcy, reorganization or insolvency
proceedings with respect to the Company and/or any of its Subsidiaries. The
Senior Lender agrees to provide prompt written notice to Subordinated Lender at
such time the Senior Liabilities have been paid in full.
8. The Senior Lender may, from time to time, at its sole discretion and
without notice to the Subordinated Lender, take any or all of the following
actions (it being understood and agreed that none of the following shall act to
modify the rights of the Senior Lender as provided for in the Senior Loan
Documents): (a) retain or obtain a security interest in any property to secure
any of the Senior Liabilities; (b) retain or obtain the primary or secondary
obligation of any other obligor or obligors with respect to any of the Senior
Liabilities; (c) extend or renew for one or more periods (whether or not longer
than the original period), alter or exchange any of the Senior Liabilities, or
release or compromise any obligation of any nature of any obligor with respect
to any of the Senior Liabilities; and (d) release their security interest in, or
surrender, release or permit any substitution or exchange for, all or any part
of any property securing any of the Senior Liabilities, or extend or renew for
one or more periods (whether or not longer than the original period) or release,
compromise, alter or exchange any obligations of any nature of any obligor with
respect to any such property. Notwithstanding that prior notice to the
Subordinated Lender of any such action is not required, the Senior Lender agrees
to provide prompt written notice to Subordinated Lender following such time the
Senior Lender undertakes any of the foregoing actions.
9. In accordance with the terms of the Senior Loan Documents, the
Senior Lender may, from time to time, whether before or after any discontinuance
of this Agreement, without notice to the Subordinated Lender, assign or transfer
any or all of the Senior Liabilities or any interest in the Senior Liabilities;
and, notwithstanding any such assignment or transfer or any subsequent
assignment or transfer of the Senior Liabilities, such Senior Liabilities shall
be and remain Senior Liabilities for the purposes of this Agreement, and every
immediate and successive assignee or transferee of any of the Senior Liabilities
or of any interest in the Senior Liabilities shall, to the extent of the
interest of such assignee or transferee in the Senior Liabilities, be entitled
to the benefits of this Agreement to the same extent as if such assignee or
transferee were the Senior Lender, as applicable; provided, however, that,
unless the Senior Lender shall otherwise consent in writing, the Senior Lender
shall have an unimpaired right, prior and superior to that of any such assignee
or transferee, to enforce this Agreement, for the benefit of the Senior Lender,
as to those of the Senior Liabilities which the Senior Lender has not assigned
or transferred. Notwithstanding that prior notice to the Subordinated Lender of
any such assignment or transfer is not required, the Senior Lender agrees to
provide prompt written notice to Subordinated Lender following any such
assignment or transfer.
10. The Senior Lender shall not be prejudiced in its rights under this
Agreement by any act or failure to act of the Subordinated Lender, or any
noncompliance of the Subordinated Lender with any agreement or obligation,
regardless of any knowledge thereof which the Senior Lender may have or with
which the Senior Lender may be charged; and no action of the Senior Lender
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permitted under this Agreement shall in any way affect or impair the rights of
the Senior Lender and the obligations of the Subordinated Lender under this
Agreement.
11. Notices. All notices, requests, demands, consents and other
communications required or permitted to be given or made hereunder shall be in
writing and shall be deemed to have been duly given and received to or by the
party to whom the same is so given or made: (a) if delivered by hand, on the day
it is so delivered against receipt, (b) if mailed via the United States mail,
certified first class mail, postage prepaid, return receipt requested, on the
fifth (5th) business days after it is mailed, (c) if sent by a nationally
recognized overnight courier, on the business day after it is sent or (d) if
sent by facsimile transmission, on the day it is so delivered (with confirmation
of receipt), at the address or fax number of such party as set forth below,
which address and fax number may be changed by notice to the other party hereto
duly given as set forth herein):
if to the Senior Lender, to:
Laurus Capital Management, LLC
825 Third Avenue, 14th Floor
New York, NY 10022
tel: 212-541-5800 ext.211
fax: 212-541-4434
Attn: John E. Tucker, Esq.
if to the Subordinated Lender, to:
Sands Brothers Venture Capital
90 Park Avenue, 39th floor
New York, NY 10016
tel: 212-953-4954
fax: 212-697-8035
Attn: Howard Sterling
12. No delay on the part of the Senior Lender in the exercise of any
right or remedy shall operate as a waiver of such right or remedy, and no single
or partial exercise by the Senior Lender of any right or remedy shall preclude
other or further exercise of such right or remedy or the exercise of any other
right or remedy; nor shall any modification or waiver of any of the provisions
of this Agreement be binding upon the Senior Lender except as expressly set
forth in a writing duly signed and delivered on behalf of the Senior Lender. For
the purposes of this Agreement, Senior Liabilities shall have the meaning set
forth in Section 1 above, notwithstanding any right or power of any Subordinated
Lender or anyone else to assert any claim or defense as to the invalidity or
unenforceability of any such obligation, and no such claim or defense shall
affect or impair the agreements and obligations of any Subordinated Lender under
this Agreement.
13. This Agreement shall be binding upon the Subordinated Lender and
upon the heirs, legal representatives, successors and assigns of the
Subordinated Lender and the permitted successors and assigns of the Subordinated
Lender.
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14. This Agreement shall be construed in accordance with and governed
by the laws of New York without regard to conflict of laws provisions. Wherever
possible each provision of this Agreement shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Agreement shall be prohibited by or invalid under such law, such provision shall
be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
[signature page follows]
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IN WITNESS WHEREOF, this Agreement has been made and delivered this
22nd day of September, 2004.
SUBORDINATED LENDER:
SANDS BROTHERS VENTURE CAPITAL LLC
By: SB Venture Capital Management LLC, Manager
/s/ Steven Sands
By: _______________________________
Name: Steven Sands
Title: Manager
SANDS BROTHERS VENTURE CAPITAL III LLC
By: SB Venture Capital Management III LLC, Manager
/s/ Steven Sands
By: _______________________________
Name: Steven Sands
Title: Manager
SANDS BROTHERS VENTURE CAPITAL IV LLC
By: SB Venture Capital Management IV LLC, Manager
/s/ Steven Sands
By: _______________________________
Name: Steven Sands
Title: Manager
SENIOR LENDER:
LAURUS MASTER FUND, LTD.
/s/ Eugene Grin
By: _______________________________
Name: Eugene Grin
Title: Fund Manager
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Acknowledged and Agreed to by:
CONVERSION SERVICES INTERNATIONAL, INC.
/s/ Scott Newman
By:____________________________________
Name: Scott Newman
Title: President and Chief Executive Officer
[Signature Page to Subordination Agreement]
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