10% CONVERTIBLE NOTE
$40,000
Date of Issue: May 7, 2001
Digital Descriptor Systems, Inc. (a Delaware corporation) (hereinafter referred
to as the "Company" or "Borrower") is indebted and, for value received, herewith
promises to pay to:
▇▇▇▇▇▇ ▇▇▇▇▇▇
or to his order, (together with any assignee, jointly or severally, the "Holder"
or "Lender") on the date which is six (6) months following the date of issue
(the "Original Due Date"), unless later extended by the Lender, in his sole
discretion, by ▇▇▇▇▇▇ delivering written notice to Borrower within five (5)
business days prior to the Original Due Date of his desire to extend such
maturity, which notice shall contain the new maturity date which shall not be
more than 180 days following the Original Due Date (the "Due Date"), the sum of
FORTY THOUSAND DOLLARS ($40,000), or, if less, so much thereof as may be
outstanding from time to time (the "Principal Amount") and to pay interest on
the Principal Amount at the rate of Ten percent (10%) per annum as provided
herein. In furtherance thereof, and in consideration of the premises, covenants,
promises, representations and warranties hereinafter set forth the Borrower
hereby agrees as follows:
1. Interest. Interest on the Principal Amount outstanding from time
to time shall accrue at the rate of 10% per annum, shall be based
on a year of 360 days and shall be payable on the Original Due
Date, or if Lender extends such date, the Due Date. Overdue
principal and interest on the Note shall, to the extent permitted
by applicable law, bear interest at the rate of 10% per annum. All
payments of both principal and interest, shall be made at the
address of the Holder hereof as it appears in the books and
records of the Borrower, or at such other place as may be
designated by the Holder hereof. Payments of both principal and
interest are to be made in lawful money of the United States.
2. Maturity. If not converted by the Holder as hereinafter set forth,
this Note shall mature on the Original Due Date or if Lender
extends such Date, the Due Date at which time all then remaining
unpaid principal, interest and any other charges then due
hereunder shall be due and payable in full.
3. Prepayment. The principal amount hereof, together with interest
thereon, may be prepaid, in whole or in part, prior to the
scheduled maturity of this Note without premium or penalty. The
Holder's conversion rights under paragraph 4 shall be extinguished
if and to the extent that the Note is paid before the Holder gives
its "Conversion Notice," as the term is defined in paragraph 4.
4. Conversion Right. The Holder of this Note shall have the right at
Holder's sole option, at any time after the date which is thirty
(30) days prior to the Original Due Date, or at any time during
any extension of maturity
provided by ▇▇▇▇▇▇ in accordance with the first paragraph of this
Note, to convert all or, in multiples of $5,000, any part of this
Note into such number of fully paid and nonassessable shares of
common stock, $.001 par value, of the Company (the "Common Stock")
as shall be provided herein. The Holder may exercise the
conversion right by giving written notice (the "Conversion
Notice") to Borrower of the exercise of such right and stating the
name or names in which the stock certificate or stock certificates
for the shares of Common Stock are to be issued and the address to
which such certificates shall be delivered. The Conversion Notice
shall be accompanied by a duly executed assignment of the portion
of the Note that Holder desires to convert. The number of shares
of Common Stock that shall be issuable upon conversion of the Note
or any portion thereof shall equal the face amount of the Note or
portion thereof divided by the Conversion Price as defined below
and in effect on the date the Conversion Notice is given.
Conversion shall be deemed to have been effected on the date the
Conversion Notice is given (the "Conversion Date"). Within ten
(10) business days after receipt of the Conversion Notice,
Borrower shall issue and deliver by hand against a signed receipt
therefor or by United States registered mail return receipt
requested, to the address designated in the Conversion Notice, a
stock certificate or stock certificates of Borrower representing
the number of shares of Common Stock to which Holder is entitled
and (if applicable) a check or cash in payment of all interest
accrued and unpaid on the Note up to and including the Conversion
Date unless Holder elects to apply such interest to the Conversion
Price in accordance with Section 4(c) below. The conversion rights
will be governed by the following provisions:
(a) Conversion Price: On the issue date hereof and until such
time as an adjustment shall occur, the Conversion Price per share shall
be an amount equal to 50% of the mean average price of the common stock
of the Borrower for the ten (10) trading days prior to notice of
conversion per share; provided, however, that the Conversion Price
shall be subject to adjustment at the times, and in accordance with the
provisions, as follows:
i) Adjustment of Issuance of Shares at less than the
Conversion Price: If and whenever any shares of Additional
Common Stock (as defined below) shall be issued by the
Company (the "Stock Issue Date") for a consideration per
share less than the Conversion Price, then in each such case
the Conversion Price shall be reduced to a new Conversion
Price in amount equal to the consideration per share received
by the Company for the shares of Additional Common Stock then
issued; and, in the case of shares issued without
consideration, the initial Conversion Price shall be reduced
in amount and the number of shares issued upon conversion
shall be increased in an amount so as to maintain for the
Holder the right to convert the Note into shares equal in
amount to the same percentage interest in the Common Stock of
the Company as existed for the Holder immediately preceding
the Stock Issue Date.
ii) Sale of Shares: In the event of the issuance of shares of
Additional Common Stock for a consideration part or all of
which shall be cash, the amount of the cash consideration
2
therefor shall be deemed to be the amount of the cash
received by the Company for such shares, after any
compensation or discount in the sale, underwriting or
purchase thereof by underwriters or dealers or others
performing similar services or for any expenses incurred in
connection therewith.
iii) Reclassification of Shares: In case of the
reclassification of securities into shares of Common Stock,
the shares of Common Stock issued in such reclassification
shall be deemed to have been issued for a consideration other
than cash. Shares of Additional Common Stock issued by way of
dividend or other distribution on any class of stock of the
Company shall be deemed to have been issued without
consideration.
iv) Split-up or Combination of Shares: In the event issued
and outstanding shares of Common Stock shall be subdivided or
split up into a greater number of shares of the Common Stock,
the Conversion Price shall be proportionately decreased, and
in the event issued and outstanding shares of Common Stock
shall be combined into a smaller number of shares of Common
Stock, the Conversion Price shall be proportionately
increased, such increase or decrease, as the case may be,
becoming effective at the time of record of the split-up or
combination, as the case may be.
v) Additional Common Stock: The term "Additional Common
Stock" herein shall mean all shares of Common Stock hereafter
issued by the Company (including Common Stock held in the
treasury of the Company), except Common Stock issued upon the
conversion of any portion of the Note.
(b) Adjustment for Mergers, Consolidations, Etc.:
i) In the event of distribution to all Common Stock holders
of any stock, indebtedness of the Company or assets
(excluding cash dividends or distributions from retained
earnings) or other rights to purchase securities or assets,
then, after such event, the Note will be convertible into the
kind and amount of securities, cash and other property which
the Holder of the Note would have been entitled to receive if
the Holder owned the Common Stock issuable upon conversion of
the Note immediately prior to the occurrence of such event.
ii) In the event of any capital reorganization,
reclassification of the stock of the Company (other than a
change in par value or as a result of a stock dividend,
subdivision, split up or combination of shares), or
consolidation or merger of the Company with or into another
person or entity (other than a consolidation or merger in
which the Company is the continuing corporation and which
does not result in any change in the Common Stock) or of the
sale, exchange, lease, transfer or other disposition of all
or substantially all of the properties and assets of the
Company as an entirety or the participation by the Company in
an exchange of shares as the corporation the stock of which
is to be acquired, this Note shall be convertible into the
3
kind and number of shares of stock or other securities or
property of the Company (or of the corporation resulting from
such consolidation or surviving such merger or to which such
properties and assets shall have been sold, exchanged,
leased, transferred or otherwise disposed, or which was the
corporation whose securities were exchanged for those of the
Company), to which the Holder of the Note would have been
entitled to receive if the Holder owned the Common Stock
issuable upon conversion of the Note immediately prior to the
occurrence of such event. The provisions of the foregoing
sentences of this Section 4(b)(ii) shall similarly apply to
successive reorganizations, reclassifications,
consolidations, mergers, sales, exchanges, leases, transfers
or other dispositions or other share exchanges.
iii) Notice of Adjustment: (A) In the event the Company shall
propose to take any action which shall result in an
adjustment in the Conversion Price, the Company shall give
notice to the Holder, which notice shall specify the record
date, if any, with respect to such action and the date on
which such action is to take place. Such notice shall be
given on or before the earlier of thirty (30) days before the
record date or the date which such action shall be taken.
Such notice shall also set forth all facts material to the
effect of such action on the Conversion Price and the number,
kind or class of shares or other securities or property which
shall be deliverable or purchasable upon the occurrence of
such action or deliverable upon conversion of this Note. (B)
Following completion of an event wherein the Conversion Price
shall be adjusted, the Company shall furnish to the Holder a
statement, signed by the Chief Executive Officer of the
Company, of the facts creating such adjustment and specifying
the resultant adjusted Conversion Price then in effect.
(c) The Holder may, at his sole option, apply any accrued interest
and/or principal outstanding on the Conversion Date towards the
Conversion Price.
5. Reservation of Shares. Borrower warrants and agrees that it shall
at all times reserve and keep available, free from preemptive
rights, sufficient authorized and unissued, or of treasury, shares
of Common Stock to effect conversion of this Note upon the terms
and conditions contained herein.
6. Registration Rights. The Borrower has filed a Registration
Statement on Form SB-2 under the United States Security Act of
1933 and has included this Convertible Note and the underlying
common stock thereunder from transfer by the Holder except if and
unless the shares are duly registered for sale pursuant to the
Securities Act of 1993, as amended, or the transfer is duly exempt
from registration.
7. Taxes. The Borrower shall pay any documentary or other
transactional taxes attributable to the issuance or delivery of
this Note or the shares of Common Stock issued upon conversion by
the Holder (excluding any federal, state or local income taxes and
4
any franchise taxes or taxes imposed upon the Holder by the
jurisdiction, or any political subdivision thereof, under which
such Holder is organized or is qualified to do business).
8. Default.
(a) Event of Default: An "Event of Default" shall exist if any
one or more of the following events (herein collectively called
"Events of Default") shall occur and be continuing:
i) Borrower shall fail to pay (or shall state in writing an
intention not to pay or its inability to pay), when due or no
later than 10 days thereof, any installment of interest on or
principal of, the Note or any fee, expense or other payment
required hereunder;
ii) Any representation or warranty made under this Note shall
prove to be untrue or inaccurate in any material respect as
of the date on which such representation or warranty is made;
iii) Default in the performance of any of the covenants or
agreements of Borrower contained under the Note, which
default is not remedied within thirty (30) days after written
notice thereof to Borrower from Lender, provided that such
thirty (30) day grace period shall not apply to default of
any payment requirement or notice covenant made by Borrower;
iv) Borrower and/or its subsidiaries and/or affiliates, if
any, shall (A) apply for or consent to the appointment of a
receiver, trustee, custodian, intervenor or liquidator of
itself, or of all or substantially all, of its assets, (B)
file a voluntary petition in bankruptcy, admit in writing
that it is unable to pay its debts as they become due or
generally not pay its debts as they become due, (C) make a
general assignment for the benefit of creditors, (D) file a
petition or answer seeking reorganization of an arrangement
with creditors or to take advantage of any bankruptcy or
insolvency laws, (E) file an answer admitting the material
allegations of, or consent to, or default in answering, a
petition filed against it in any bankruptcy, reorganization
or insolvency proceeding, or (F) take corporate action for
the purpose of effecting any of the foregoing;
v) An involuntary petition or complaint shall be filed
against Borrower or any of its subsidiaries, if any, seeking
its bankruptcy or reorganization or the appointment of a
receiver, custodian, trustee, intervenor or liquidator, or
all or substantially all of Borrower's assets, and such
petition or complaint shall not have been dismissed within
sixty (60) days of the filing thereof or an order, order for
relief judgement or decree shall be entered by any court of
competent jurisdiction or other competent authority approving
a petition or complaint seeking reorganization of Borrower or
its subsidiary, if any, or appointing a receiver, custodian,
trustee, intervenor or liquidator of such person, or of all
or substantially all of such person' assets; or
5
vi) The failure of Borrower to issue and deliver shares of
Common Stock as provided herein upon conversion of the Note.
(b) Remedies upon Event of Default: If an Event of Default shall
have occurred and be continuing, then Lender may exercise any one
or more of the following rights and remedies:
i) declare the unpaid Principal Amount of, and all interest
then accrued but unpaid on, the Note and any other
liabilities hereunder to be forthwith due and payable,
whereupon the same shall forthwith become due and payable
without presentment, demand, protest, notice of default,
notice of acceleration or of intention to accelerate or other
notice of any kind, all of which Borrower hereby expressly
waives, anything contained herein or in the Note to the
contrary notwithstanding in which event the Lender may, in
its sole discretion, immediately exercise its conversion
rights provided for in Section 4 hereof,
ii) reduce any claim to judgment, and/or;
(c) Remedies Nonexclusive: Each right, power or remedy of the
Holder upon the occurrence of any Event of Default as provided for
in this Note or now or hereafter existing at law or in equity or
by statute shall be cumulative and concurrent and shall be in
addition to every other right, power or remedy provided for in
this Note or now or hereafter existing at law or in equity or by
statute, and the exercise or beginning of the exercise by the
Holder of any one or more of such rights, powers or remedies shall
not preclude the simultaneous or later exercise by the Holder of
any or all such other rights, powers or remedies.
(d) Expenses: Upon the occurrence of a Default or an Event of
Default, which occurrence is not cured within the applicable grace
period, if any provided therefor, ▇▇▇▇▇▇▇▇ agrees to pay and shall
pay all costs and expenses (including ▇▇▇▇▇▇'s attorney's fees and
expenses) reasonably incurred by Lender in connection with the
preservation and enforcement of ▇▇▇▇▇▇'s rights under the Note.
9. Failure to Act and Waiver. No failure or delay by the Holder to
require the performance of any term or terms of this Note or nor
to exercise any right, or any remedy shall constitute a waiver of
any such term or of any right or of any default, nor shall such
delay or failure preclude the Holder from exercising any such
right, power or remedy at any later time or times. By accepting
payment after the due date of any amount payable under this Note,
the Holder shall not be deemed to waive the right either to
require payment when due of all other amounts payable, or to later
declare a default for failure to effect such payment of any such
other amount. The failure of the Holder of this Note to give
notice of any failure or breach of the Borrower under the Note
shall not constitute a waiver of any right or remedy in respect of
such continuing failure or breach or any subsequent failure or
breach.
6
10. Consent to Jurisdiction. The Borrower hereby agrees and consents
that any action, suit or proceeding arising out of this Note may
be brought in any appropriate court in the State of Illinois
including the United States District Court for the Northern
District of Illinois, or in any other court having jurisdiction
over the subject matter, all at the sole election of the Holder
hereof, and by the issuance and execution of this Note the
Borrower irrevocably consents to the jurisdiction of each such
court. Borrower irrevocably consents to the service of any
complaint, summons, notice or other process relating to any action
or proceeding by delivery thereof to it by hand or by any other
manner provided for in Section 11 hereof.
11. Notices. All notices and communications under this Note shall be
in writing and shall be either delivered in person and accompanied
by a signed receipt therefor, or mailed first-class United States
certified mail return receipt requested, postage prepaid, and
addressed as follows; (i) if to the Borrower at ▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇; and, (ii) if to the
Holder of this Note, to the address (a) of such Holder as it
appears on the books of the Borrower if, or (b) in the case of a
partial assignment to one or more Holder(s), to the Lender's agent
for notice, if applicable. Any notice of communication shall be
deemed given and received as of the date of such delivery of
delivered; or if mailed, then three days after the date of
mailing.
12. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF COMMONWEALTH OF
PENNSYLVANIA.
* * *
IN WITNESS WHEREOF, the undersigned Borrower have caused this Note to
be duly executed under its corporate seal on the date of issue above stated.
BORROWER
Address for Notice Digital Descriptor Systems, Inc.
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇
--------------------------------
Title: President
Attest by: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
-------------------------
Title: Secretary
7
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert the attached Debenture into shares of
common stock, $0.001 par value per share (the "Common Stock"), of Digital
Descriptor Systems, Inc. (the "Company") according to the conditions hereof, as
of the date written below. If shares are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and opinions
as reasonably requested by the Company in accordance therewith. No fee will be
charged to the bolder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Debentures to be Converted
Payment of Interest in Kind [ ] Yes [ ] No
If yes, $_______ of Interest Accrued on
Account of Conversion at Issue
Number of shares of Common Stock to be issued
Applicable Conversion Price
Signature
Name
Address
8