THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE LAW, AND MAY
NOT BE SOLD, OFFERED FOR SALE, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR
OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT AND APPLICABLE STATE, OR FOREIGN SECURITIES LAWS COVERING ANY
SUCH TRANSACTION OR (B) SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
 
SECURED PROMISSORY NOTE
 
Up to $1,000,000.00
December 18, 2008
 
Rochester, New York

 
FOR VALUE RECEIVED, DOCUMENT SECURITY SYSTEMS, INC. (“DSSI”) and SECUPRINT INC.
(“Secuprint,” and, with DSSI, collectively, the “Borrower”), promises to pay to
BAUM CAPITAL INVESTMENTS INC. (the “Lender”), or to its order, the principal sum
of up to ONE MILLION and 00/100 U.S. DOLLARS ($1,000,000.00) (the “Principal
Amount”), together with interest in arrears on the unpaid principal balance from
time to time outstanding from the date hereof until the entire principal amount
due hereunder is paid in full at the rate(s) provided below.
 
1.           Maturity. The aggregate Principal Amount, together with all accrued
interest thereon and expenses incurred by the Lender in connection herewith
(cumulatively, the “Outstanding Amount”), shall be due and payable in full on
the earliest to occur of (the earliest of such events, the “Maturity Date”): (i)
December 17, 2009 (the “Scheduled Maturity Date”) and (ii) the acceleration of
this Note upon the occurrence of an Event of Default. Unless payment is made
following a demand therefor by the Lender, the Borrower shall provide the Lender
with not less than five (5) business days’ prior written notice of its intent to
repay the amounts outstanding hereunder.
 
2.           Interest. This Secured Promissory Note (this “Note”) shall bear
interest at a rate of fifteen percent (15%). Interest shall be calculated on the
basis of a year of 360 days for the actual number of days elapsed. If, for the
period from the first day of the month following the date of this Note to the
date three months thereafter (“Test Period”), Secuprint is “Profitable” (as
defined herein), then the interest rate shall be reduced to twelve percent (12%)
beginning on that date.  Profitable shall mean Secuprint’s aggregate cash
receipts shall exceed its aggregate cash expenditures (Secuprint handling its
receipts and expenditures in the normal course of business).  From and after the
occurrence of an Event of Default, the unpaid principal balance of this Note
and, to the extent permitted by law, overdue interest shall bear interest at a
rate per annum equal to four (4%) percent over the then applicable interest rate
due under this Note (the “Default Rate”).

 
 

--------------------------------------------------------------------------------

 

3.           Payment. The Borrower shall pay eleven (11) consecutive monthly
installments of interest commencing on January 1, 2009 and continuing on the
same day of each month thereafter; and one (1) last payment consisting of the
entire outstanding principal amount together with interest, accrued thereon,
which payment is due and payable on the Maturity Date.  All payments by the
Borrower under this Note shall be made in United States Dollars without
deduction, set-off or counterclaim and shall be free and clear and without any
deduction or withholding for any taxes or fees of any nature whatever, unless
the obligation to make such deduction or withholding is required by law.  Unless
otherwise expressly provided in this Note, the Borrower, to the extent permitted
by applicable law, waives presentment for payment, protest, and demand, and
notice of protest, demand, and/or dishonor and nonpayment of this Note, notice
of any Event of Default under this Note, and all other notices or demands
otherwise required by law that the Borrower may lawfully waive.
 
           Immediately upon full repayment of the Outstanding Amount in
accordance with the terms hereof, the Borrower shall be released from the
repayment obligation set forth in this Note, the pledge and security interest
shall be terminated, and the Lender shall execute releases of financing
statements.

4.           Usury.  All agreements between the Borrower and the Lender are
hereby expressly limited so that in no contingency or event whatsoever, whether
by reason of acceleration of maturity of the indebtedness evidenced hereby or
otherwise, shall the amount paid or agreed to be paid to the Lender for the use,
forbearance, or detention of the indebtedness evidenced hereby exceed the
maximum permissible amount under applicable law. If, from any circumstance
whatsoever, fulfillment of any provision hereof at the time performance of such
provision shall be due shall involve transcending the limit of validity
prescribed by law, the obligation to be fulfilled shall automatically be reduced
to the limit of such validity, and if from any circumstances the Lender should
ever receive as interest an amount which would exceed the highest lawful rate,
such amount which would be excessive interest shall be applied to the reduction
of the principal balance evidenced hereby and not to the payment of interest,
and, if the principal amount of this Note has been paid in full, shall be
refunded to the Borrower.
 
5.           Late Charge.  If an interest payment is not received within ten
days of its due date, Borrower shall pay a late charge equal to twenty-five
percent (25%) of the delinquent amount; any excess collected by mistake shall be
refunded on request, and each such late charge shall be separately charged and
collected by the Lender.  Payments may be applied in any order in the sole
discretion of the Lender but prior to demand, shall be applied first to past due
interest, expenses and late charges, then to scheduled principal payments, if
any, which are past due, then to current interest, expenses and late charges,
and last to remaining principal.

6.           Security Interest and Collateral. This Note is secured by a first
priority security interest in all the assets of Secuprint as more fully
described in and pursuant to the terms of the Security Agreement, of even date
hereof, made by Secuprint in favor of the Lender (the “Security Agreement,”
together with this Note, the “Transaction Documents”).

 
2

--------------------------------------------------------------------------------

 

7.           Replacement of Note. If this Note is mutilated, lost, stolen or
destroyed, the Borrower shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Note, a new Note, but only upon receipt of evidence reasonably
satisfactory to the Borrower of such loss, theft or destruction and customary
and reasonable bond or indemnity, if requested.

8.           Events of Default.  The following constitute an event of default
(“Event of Default”):

a.           Borrower fails to pay any of its material liabilities, obligations,
and indebtedness to Lender of any and every kind and nature, whether heretofore,
now or hereafter owing, arising, due or payable and howsoever evidenced,
created, incurred, acquired, or owing, whether primary, secondary, direct,
contingent, fixed or otherwise whether arising under or in accordance with the
Transaction Documents or otherwise. when due and said failure continues for a
period of ten (10) days;

b.           Secuprint’s fails to be Profitable as of the end of the Test Period
and on a cumulative basis as of the end of each month thereafter.  Profitable
shall mean for the applicable period Secuprint’s aggregate cash receipts shall
exceed its aggregate cash expenditures (Secuprint handling its receipts and
expenditures in the normal course of business);

c.           Secuprint’s fails to be Profitable for any two consecutive months
after the Test Period.  Profitable shall mean for each of two consecutive months
Secuprint’s monthly cash receipts shall exceed its monthly cash expenditures
(Secuprint handling its receipts and expenditures in the normal course of
business);

d.           Borrower fails or neglects to perform, keep or observe any of the
covenants, conditions or agreements contained in this Note;

e.           Any warranty or representation now or hereafter made by the
Borrower in connection with this Note is untrue or incorrect in any material
respect, or any schedule, certificate, statement, report, financial data,
notice, or writing furnished at any time by the Borrower to the Lender is untrue
or incorrect in any material respect, on the date as of which the facts set
forth therein are stated or certified;

f.           A proceeding under any bankruptcy, reorganization, arrangement of
debt, insolvency, readjustment of debt or receivership law or statute is filed
against Borrower which is not dismissed within sixty (60) days of its filing, or
a proceeding under any bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law or statute is filed by
Borrower or the Borrower makes an assignment for the benefit of creditors or
Borrower takes any corporate action to authorize any of the foregoing;

g.           Borrower voluntarily or involuntarily dissolves or is dissolved,
terminates or is terminated;

 
3

--------------------------------------------------------------------------------

 

h.           Borrower becomes insolvent or fails generally to pay its debts as
they become due, and said failure continues for a period of thirty (30) days
after written notice of same from the Lender to the Borrower;

i.           A default under any of the other Transaction Documents;

j.           One or more judgments, decrees, or judicial orders for the payment
of money which in the aggregate, in any fiscal year of Borrower, exceeds
$250,000.00 shall be rendered against the Borrower or any of its subsidiaries,
and such judgments, decrees, or judicial orders shall continue unsatisfied and
in effect for a period of thirty (30) consecutive days without being vacated,
discharged, satisfied, or stayed or appealed;

9.           Financials. Secuprint agrees to provide to Lender within fifteen
(15) days after the end of each month the following:

a.           an unaudited internally prepared financial statement of Secuprint
as of the end of such month, which financial statement shall consist of income
and cash flows for the month, for the corresponding month in the previous fiscal
year and for the period from the end of the previous fiscal year, with a balance
sheet as of the month end;
b.           a statement signed by Secuprint’s chief financial officer
certifying that no event of default has occurred or is continuing to occur under
the Transaction Documents, together with calculations demonstrating compliance
with Profitable requirements contained in Paragraphs 2, 8.b. and 8.c above.

10.           Liability of Each Borrower: Each Borrower of this Note agrees to
be jointly and severally liable for all amounts and obligations which become due
under this Note and for compliance with all of the terms and conditions of this
Note.

11.           Purpose.  The Loan proceeds shall be used for the business purpose
of purchasing the assets of DPI of Rochester, LLC
 
12.           Miscellaneous.

a.           Authority and Enforceability; Etc. The Borrower hereby represents
and warrants to the Lender that:

i.           it has full power and authority and has taken or shall take all
required corporate and other action necessary to permit it to execute, deliver,
and perform all of its obligations contained in this Note, the Security
Agreement, and any other documents or instruments delivered in connection
herewith, and to borrow hereunder, and such actions to the best of its knowledge
will not violate any provision of law applicable to, or the organizational
documents of, the Borrower, or result in the breach of or constitute a default
under any material agreement or instrument to which the Borrower is a party or
by which it is bound, which default has not been waived in writing on or prior
to the date hereof;

 
4

--------------------------------------------------------------------------------

 

ii.           this Note has been duly authorized and validly executed by and is
the valid and binding obligation of the Borrower enforceable in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, or other laws affecting creditors’ rights and remedies
generally, and by general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law);

iii.           neither the execution and delivery by the Borrower of this Note,
nor the performance by the Borrower of its obligations hereunder, requires the
consent, approval or authorization of any person or governmental authority,
which consent, approval, or authorization has not been obtained; and
 
b.           Notices. All notices to any party required or permitted hereunder
shall be in writing and shall be sent to the address or facsimile number set
forth for such party as follows:

i.            If to the Lender:
 
Baum Capital Investments Inc.
c/o Stafford Higgins Industries
11 Willard Road
Norwalk, Connecticut 06851
Attn: Walter Baum
 
ii.           If to DSSI:

Document Security Systems, Inc.
28 East Main Street, Suite 1525
Rochester, NY 14614
Attention: Vice President of Finance 
 
iii.          If to Secuprint:

Secuprint Inc.
c/o Document Security Systems, Inc.
28 East Main Street, Suite 1525
Rochester, NY 14614
Attention: Vice President of Finance 

Any such notice shall be deemed effectively given (i) upon personal delivery to
the party to be notified; (ii) when sent by confirmed facsimile if sent during
normal business hours of the recipient, if not, then on the next business day;
(iii) three days after having been sent by registered or certified mail, return
receipt requested, postage prepaid; or (iv) one day after deposit with a
recognized national overnight courier, specifying next day delivery, or two days
after deposit with a recognized international overnight courier, specifying two
day delivery, in each case with written verification of receipt.

 
5

--------------------------------------------------------------------------------

 

c.           Waiver. No failure to exercise, and no delay in exercising, on the
part of the Lender, any right, power, or privilege hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power, or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege. The rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies provided by
law.
 
d.           Amendments. Any term, covenant, or condition of this Note may be
amended or waived only by written consent of the Borrower and the Lender.
 
e.           Expenses. Any reasonable expense incurred by the Lender (including,
without limitation, reasonable attorneys’ fees and disbursements) in connection
with the administration, or enforcement of this Note and any other document
executed by the Borrower in connection with the obligations of Borrower
hereunder or any amendment hereto or thereto, or the exercise of any right or
remedy upon the occurrence of an Event of Default, including, without
limitation, the recording and filing fees to perfect the liens granted under the
Security Agreement and the costs of collection and reasonable attorneys’ fees
and expenses, shall be paid by the Borrower within 15 days of receiving written
notice thereof from the Lender. Any such expense incurred by the Lender and not
timely paid by the Borrower shall be added to the other obligations hereunder
and shall earn interest at the same rate per annum as the principal hereunder.
 
f.           Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to any
conflict or choice of laws principles.
 
g.           Transfer; Successors and Assigns. The terms and conditions of this
Note shall inure to the benefit of and be binding upon the respective successors
and assigns of the parties. This Note shall not be assignable by any Lender
without the prior written consent of the Borrower, provided that the Lender may
assign or transfer any of its rights, privileges, or obligations set forth in,
arising under, or created by this Agreement to any entity controlled by,
controlling or under common control with the Lender. The Borrower may not assign
this Note without prior written consent of the Lender, provided that the
Borrower may assign this Note to any successor of all or substantially all of
its assets or business, or any entity surviving the merger, combination or
consolidation with the Borrower.
 
h.           Entire Agreement. This Note and any other agreement or instrument
entered into in connection herewith contains the entire agreement of the
Borrower and the Lender with respect to the subject matter hereof.

 
6

--------------------------------------------------------------------------------

 
 
i.           Confidentiality. In addition to separate confidentiality agreement,
if any, the Lender will at all times keep confidential and not divulge, use or
make accessible to anyone the terms and conditions of this Agreement and the
transactions described herein, and any non-public material information
concerning or relating to the business or financial affairs of the Borrower to
which such party has been or will become privy relating to this Agreement,
except to its employees and advisors in such capacity, as required to perform
its obligations hereunder, if required by law or rules of a stock exchange on
which its or its parent’s securities are listed, or with the prior written
consent of the Borrower.

[The remainder of this page intentionally left blank.]

 
7

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its duly
authorized representative as of the day and year first above written.
  
DOCUMENT SECURITY SYSTEMS, INC.
   
   
By:  
/s/ Philip Jones
 
Name: Philip Jones
Title: Vice President of Finance
   
By:  
 /s/ Patrick White
 
Name: Patrick White
Title: Chief Executive Officer
   
SECUPRINT INC.
   
   
By:  
/s/ Patrick White
 
Name: Patrick White
Title: Chief Executive Officer

 
8

--------------------------------------------------------------------------------