EXHIBIT 4.1
THIS NOTE
HAS NOT BEEN
REGISTERED UNDER THE
SECURITIES
ACT OF 1933, AS
AMENDED (THE "1933 ACT"), OR UNDER THE PROVISIONS OF ANY APPLICABLE STATE
SECURITIES LAWS, BUT HAS BEEN ACQUIRED BY THE REGISTERED HOLDER HEREOF FOR
PURPOSES OF INVESTMENT AND IN RELIANCE ON STATUTORY
EXEMPTIONS
UNDER THE 1933
ACT, AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THIS NOTE
MAY NOT BE SOLD,
PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT IN
A TRANSACTION WHICH IS
EXEMPT UNDER
PROVISIONS OF THE 1933 ACT AND ANY
APPLICABLE STATE
SECURITIES LAWS OR PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT; AND
IN THE CASE OF AN EXEMPTION, ONLY IF
THE COMPANIES HAVE RECEIVED AN OPINION OF
COUNSEL SATISFACTORY
TO THE COMPANIES
THAT SUCH TRANSACTION DOES NOT REQUIRE
REGISTRATION OF THIS NOTE.
DIGITAL DESCRIPTOR SERVICES, INC.
February 25, 2005
Sea Girt, New Jersey
$3,500,000.00, Subject to Increase
Adjustment
2.86% SECURED CONVERTIBLE PROMISSORY NOTE
1.
Digital
Descriptor Systems, Inc., a Delaware corporation (the
"Parent") and CGM Applied Security
Technologies,
Inc., a Delaware
corporation
("Acquisition Sub", and together with the
Parent, the
"Companies"), for
value
received, hereby promise to pay, jointly and severally, to CGM Security
Solutions, Inc., or registered assigns (the "Holder") on the payment date
set
forth below, at the principal offices of
the Parent, the
principal sum of Three
Million Five Hundred Thousand Dollars ($3,500,000) (the "Principal Amount"),
subject to increase pursuant to the terms contained herein, in such coin or
currency of the United States of America as at the time of payment
shall be
legal tender for the payment of public and
private debts, and to pay interest on
the outstanding principal sum hereof at the rate of 2.86% per annum (the
"Note"); provided, however, that the Principal Amount shall be subject to an
automatic increase to the "New Principal
Amount", defined below, in an amount
equal to the average of the two amounts
determined in
accordance with Valuation
Procedure One and Valuation Procedure Two (each defined below,
and together the
"Procedures") if any, and applied in accordance
with the conditions
below. Any
increase in the Principal Amount and the
commencement of accrual of any interest
thereon shall be effective as of the date on which the
results of the last of
the Procedures are received by the parties
(the "Effective Date").
2.
Pursuant
to "Valuation
Procedure One": (a)
within 60 days of
December 31, 2007, the Parent's then independent auditor shall determine the
gross revenues generated by Acquisition Sub for
the fiscal year ending December
31, 2007 in accordance with generally accepted accounting principles,
consistently applied (the "Gross Revenue"), and shall certify same to the
parties; (b) the Gross Revenue shall be multiplied by a factor of 1.0 to
determine the new value of Acquisition Sub (the "New CGM Value One");
and (c)
the amount of any increase in the Principal
Amount pursuant to this Valuation
Procedure One shall be equal to the New CGM
Value One,
less $5,000,000, and
shall be referred to as the "Procedure One
Principal Amount
<PAGE>
Increase". In the event that the
application of Valuation Procedure One does not
result in a Procedure One Principal Amount
Increase, then under this Valuation
Procedure One the Principal Amount shall be deemed the
Procedure One Principal
Amount Increase for all purposes under this
Valuation Procedure One.
3.
Pursuant
to "Valuation Procedure Two", an independent investment
bank, qualified to undertake
valuations of public
companies (the "Valuation
Expert"), mutually agreed upon by the Parent
and the former shareholders of the
Holder, as of the date hereof, shall
establish the value of Acquisition Sub (the
"New CGM Value Two"), in accordance with the following procedures: (a) the
parties shall agree upon the Valuation
Expert in writing, no
later than October
30, 2007, and if not so agreed by such date,
the Valuation Expert shall be
selected by the American Arbitration Association, whose selection shall be
binding upon the parties; (b) the Valuation Expert shall be authorized to
deliver its valuation of Acquisition
Sub no later than
March 31, 2008,
subject
to reasonable extensions in the discretion
of the Valuation Expert, and; (c) the
amount of any automatic increase in the Principal Amount pursuant to this
Valuation Procedure Two shall be equal to
the New CGM Value Two, less $5,000,000
and shall be referred to as the "Procedure
Two Principal Amount
Increase".
In
the event that the application of Valuation
Procedure Two does not
result in a
Procedure Two Principal Amount Increase,
then under this Valuation Procedure Two
the Principal Amount shall be deemed the
Procedure Two Principal Amount Increase
for all purposes under this Valuation
Procedure Two.
4. The Holder and the
Companies agree that
when determining
the New
CGM Value Two in Valuation Procedure Two, the Valuation
Expert, when
preparing
its valuation, shall: (i) when required to
utilize financial
statements in its
valuation, rely solely upon the
consolidated audited financial statements of the
Parent and Acquisition Sub for the fiscal years ended December 31, 2007 and
2006, excluding from its valuation any and
all financial information that may be
included therein and attributable to any other
subsidiary or
affiliate of the
Parent (the "Financial Statements");
(ii) exclude
extraordinary expenses as may
have been allocated or charged by the Parent, or any other subsidiary or
affiliate of Parent, to Acquisition Sub,
retaining, however, for purposes of the
valuation any reasonable fees charged solely by Parent to Acquisition
Sub and
which represent any payments to the Parent's management and which directly
correspond to any improvements in the Acquisition Sub's operational
effectiveness as determined by the Valuation Expert, in accordance with
generally accepted accounting principles, consistently applied; and (iii)
exclude any debt on the Financial Statements owed to the Parent, other
subsidiaries and affiliates or to the persons
or entities set forth on Schedule
A.
5.
Notwithstanding the
foregoing,
if the gross
sales of CGM
Security Solutions, Inc. for the one year period ended
December 31, 2004,
as
included in the final certified audited financial statements for such period
("Actual Gross Sales") do not equal at
least $4,030,000
(the "Target
Sales"),
the principal amount of this Note shall be
reduced by an amount
equal to the
difference between the Target Sales and the
Actual Gross Sales
(the "Adjusted
Note Principal Amount Reduction").
6.
Upon
the Effective Date, the Principal Amount of this Note
of $3,500,000 shall automatically be: (i) increased by the amount
equal to the
average of the Procedure One Principal Amount Increase and the Procedure Two
Principal Amount Increase, and; (ii) decreased by the
Adjusted Note Principal
Amount Reduction, if any, and if any
increase in the $3,500,000 principal
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amount of this Note results therefrom, such increase, added together with the
original principal of $3,500,000 shall be deemed for all
purposes the "New
Principal Amount" of this Note. The parties agree that notwithstanding any
result of the foregoing calculations, the New Principal Amount of this Note
shall not be less than the Principal
Amount.
7.
Accrued
interest shall be payable upon the outstanding Principal
Amount of this Note on the 30th day following each of the first three
anniversaries of this Note. The balance of any accrued interest on the New
Principal Amount, if any, shall be due and payable
30 days after the Effective
Date. The New Principal Amount of this Note, as determined
in accordance with
the terms hereof and subject to the cash
payment limitation of
Section 9 below,
together with unpaid accrued interest shall
be payable on the 30th day following
the Effective Date (the "Payment Date") in like coin or currency to
the Holder
hereof at the office of the Parent as
hereinafter set forth,
provided that any
payment otherwise due on a Saturday, Sunday
or legal Bank holiday may be paid on
the following business day.
8.
In the
event that the Parent or Acquisition Sub determine that for
any reason whatsoever any interest or other consideration payable under the
terms of this Note are in violation of any
applicable usury statute of the State
of New Jersey, Parent and/or Acquisition
Sub shall, prior to the due date of the
New Principal Amount: (i) provide Holder with written
notice of such violation,
setting forth the facts and circumstances supporting such claims, and; (ii)
include with such written notice, a legal
opinion, addressed to the Holder, from
an attorney admitted to practice in the State of New Jersey, containing an
unqualified legal opinion that under the facts
and documents
delivered by the
Parent and/or the Acquisition Sub that the payments due under
this Note are in
violation of one or more usury statutes of the State of New
Jersey (the "Usury
Notice"). Within 30 days' of the sending of
the Usury Notice, the Parent and/or
Acquisition Sub shall institute an action
seeking a declaratory
judgment in the
Superior Court, County of Somerset, State
of New Jersey (the "Court"), to obtain
a judgment (1) on the application of the New Jersey usury statutes to the
payments due under this Note, and to obtain a ruling as to (2)
the aggregate
maximum rate of interest payments that could be legally charged to Parent and
Acquisition Sub on the Principal Amount under applicable statutes, for the
period commencing from the date hereof
through the due date of the New Principal
Amount (the "Maximum Legal Amount"). Parent
and Acquisition Sub acknowledge that
they have set forth below their respective
representations,
which include that
they have performed their legal due
diligence in connection with their execution
and delivery of this Note and that to their
best knowledge, the terms and
payments due under this Note are not in
violation of any usury statute of the
State of New Jersey, and that the Holder is
relying upon such representations to
accept delivery of this Note, execute and deliver the Asset
Purchase Agreement
and other documents, all dated the date hereof and
pursuant to which the Holder
is selling his entire business to the
Parent and Acquisition
Sub, and that any
subsequent sending of the Usury Notice and
subsequent court action by the Parent
and/or the Acquisition Sub that results in the Court
concluding
that all the
payments due and payable under this Note
are not in violation of any applicable
New Jersey usury statute, would represent breaches of their respective
representations set forth herein and would result in serious injury to the
Holder, entitling the Holder to liquidated
damages.
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<PAGE>
Accordingly, in the event the Usury
Notice is sent by the
Parent and/or the
Acquisition Sub prior to the payment of all sums due under this
Note, and the
Court in the declaratory judgment action,
determines that the aggregate payments
due under this Note are not in violation of
any New Jersey usury
statute, the
Parent and Acquisition Sub, jointly and
severally, shall pay
to the Holder, on
demand, in addition to the payments due
under this Note, (A)
an additional sum
equal to the difference between the aggregate and lawful
amounts due under this
Note as determined by the Court and the Maximum Legal Amount and (B) all of
Holder's legal fees, administrative costs and expenses incurred by
Holder as a
result of Holder's participation in the declaratory judgment action. In the
event the Court finds that any amounts due
under this Note to be usurious under
the laws of the State of New Jersey, then
so much of such interest payable under
the terms of this Note as shall be deemed
to be usurious
shall be deducted by
the Court from the payments due under this Note and the Parent
and Acquisition
Sub shall forthwith and immediately pay the
reduced legally
permissible amount
of principal and interest due under this
Note to the Holder, no
later than five
(5) days following such Court decision.
9.
Notwithstanding the
foregoing,
on the Payment Date,
subject to
the limitations set forth below, the Companies shall either (i) pay to the
Holder the New Principal Amount together with any remaining
accrued interest
thereon, in cash, not to exceed $6,000,000 (the "Cash Payment"), and the
balance, if any, shall be paid in Parent
stock as more
specifically
described
below (the "Stock Payment"), or (ii) provided that there is no outstanding
default under the "Debt Instruments"
identified in Exhibit
G to a certain Asset
Purchase Agreement between the parties to this Note and dated
the date hereof
(an "NIR Default", in which case such the "Asset
Transfer" option shall
not be
available to the Companies), transfer all
of Acquisition Sub's assets, including
the "Assets" as identified in the Asset Purchase Agreement, dated the date
hereof, among the Companies and the Holder
(the "Asset
Transfer"), as well
as
the corporate name and trademarks, back to the Holder, its shareholders or
assigns (as designated by the Holder), free and clear of any and all
liens,
security interests or claims of any nature
whatsoever,
and unencumbered by
any
debts associated with the Asset Transfer. Costs associated with the Asset
Transfer shall be borne by the Companies.
The indebtedness under this Note is
secured by a certain Security Agreement and Intellectual Property Security
Agreement, also dated the date hereof,
by and between the
Acquisition Sub
and
the Holder. The Companies shall complete the
Asset Transfer no later than April
10, 2008, or as soon as practicable
thereafter.
In the
event the Companies
pay the New
Principal Amount to the Holder,
either at their option or because they are required to do so because of the
existence on the Payment Date of an NIR
Default, the Holder
acknowledges
that
the Companies shall not be required to pay more than $6,000,000 of the New
Principal Amount in cash. Accordingly, the
Companies shall pay the New Principal
Amount to the Holder as follows: (i) in
cash, up to $6,000,000, representing the
Cash Payment, and (ii) the balance of the New Principal Amount in excess of
$6,000,000 shall be converted automatically and payable to the
Holder in common
stock of Parent ("Common Stock"),
representing the Stock
Payment. In
addition,
and subject to the sole and exclusive
option of the Holder,
the Holder may also
elect to convert any portion of the Cash
Payment over $3,500,000 to common stock
of the Parent (the "Qualified Portion").
The Stock Payment and, in the event the
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Holder elects a Qualified Portion, shall be converted into Common Stock based
upon the average bid and asked sales prices of the Common Stock during the
90-day period immediately preceding the Effective Date as reported by the
applicable exchange. The Parent shall calculate the amount of Common
Stock to
which the Holder is entitled and shall issue certificates representing such
shares to the Holder no later than 30 days
following the Effective Date. The
Holder shall exercise his option to designate a
Qualified Portion to
be issued
as Common Stock by sending a complete
Notice of Conversion, substantially in the
form attached hereto, to the Parent within thirty (30)
days of Holder's receipt
of the Cash Payment and Holder's check,
representing the Qualified Portion.
The
amount of Common Stock representing the Stock Payment and the
Qualified Portion shall not exceed 25% of the Common
Stock of the Parent
then
outstanding, assuming the issuance of shares of Common Stock hereunder
("Issuance Limit"). In the event the
Issuance Limit would otherwise be exceeded,
the Company shall issue such shares of Common Stock as equals the Issuance
Limit, and shall also issue shares of
convertible preferred
stock to the Holder
(the "Preferred Stock"), representing the balance of either the Stock
Payment
and/or Qualified Portion. The Preferred Stock shall have a liquidation
preference equal to the balance remaining of the New Principal
Amount not paid
in cash or immediately converted and paid to the Holder
in Common Stock. Twenty
percent (20%) of the Preferred Stock shall be automatically converted into
shares of Common Stock on each of the first five anniversary dates of the
issuance of the Preferred Stock at a conversion rate equal to the average bid
and asked price of the Common Stock for the
90 days prior to the Effective Date
as reported by the applicable exch
