Exhibit 10.1
FORM OF SUBORDINATED SECURED CONVERTIBLE NOTE
NEITHER THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO
WHICH SUCH SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF
(A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT.
Irvine Sensors Corporation
Subordinated Secured Convertible Note

      Issuance Date: July 1, 2011   Principal: U.S. $[_________]

FOR VALUE RECEIVED, IRVINE SENSORS CORPORATION, a Delaware corporation (the
“Company”), hereby promises to pay to [_____] or its registered assigns
(“Holder”) the amount set out above opposite the caption “the Principal” (as
such amount may be increased or reduced from time to time pursuant to the terms
hereof, whether through the payment of PIK Interest (as defined below) or
through redemption, conversion or otherwise, the “Principal”) when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise
(in each case, in accordance with the terms hereof) and to pay Interest (as
defined below) on the outstanding Principal at the rates, in the manner and at
the times set forth herein. This Subordinated Secured Convertible Note
(including all Subordinated Secured Convertible Notes issued in exchange,
transfer or replacement hereof, this “Note”) is one of an issue of Subordinated
Secured Convertible Notes, each issued on or after July 1, 2011 on substantially
the same terms as this Note, in an aggregate principal amount not to exceed
$7,000,000 (collectively, the “Notes” and such other Subordinated Secured
Convertible Notes issued on or after July 1, 2011, the “Other Notes”). Certain
capitalized terms used herein are defined in Section 31.
(1) PAYMENTS OF PRINCIPAL. On the Maturity Date, the Holder shall surrender this
Note to the Company and the Company shall pay to the Holder in cash an amount
equal to the outstanding Principal (if any) and accrued and unpaid Interest
thereon. The “Maturity Date” shall be December 23, 2015.

 

 

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(2) INTEREST. Simple interest (“Interest”) shall accrue on the outstanding
Principal at the Interest Rate from and including the date set forth above
opposite the caption “Issuance Date” (the “Issuance Date”) until the Principal
is paid in full, shall be computed on the basis of a 365-day year and actual
days elapsed and, subject to the right of the Holder to include accrued and
unpaid Interest in the Conversion Amount (as defined below) in accordance with
Section 3(b)(i) below, shall be payable in arrears for each Interest Period no
later than the date that is ten (10) Business Days after the last day of the
applicable Interest Period (each such date, an “Interest Payment Date”).
(a) Payment of Interest. Interest shall be payable on each Interest Payment Date
to the record holder of this Note as of the last day of the applicable Interest
Period, subject to Section 2(b), (i) in cash (“Cash Interest”) or (ii) prior to
the Mandatory Conversion Eligibility Date, at the option of the Company, either
(x) entirely as Cash Interest, (y) in the form of shares of Company Common Stock
(“Interest Shares”) or (z) in a combination of Cash Interest and Interest
Shares, provided that the Interest may be payable in Interest Shares pursuant to
this clause (ii) if, and only if, the Company delivers written notice (each an
“Interest Election Notice”) of such election to each holder of the Notes on or
prior to the tenth (10th) Company Trading Day prior to the Interest Payment Date
(each, an “Interest Election Date”). Each Interest Election Notice must specify
the amount of Interest that shall be paid as Cash Interest or PIK Interest, if
any, and the amount of Interest that shall be paid in Interest Shares. Interest
to be paid on an Interest Payment Date in Interest Shares shall be paid in a
number of fully paid and nonassessable shares (rounded to the nearest whole
share in accordance with Section 3(a)) of Company Common Stock equal to the
quotient of (a) the amount of Interest payable to the Holder on such Interest
Payment Date less any Cash Interest or PIK Interest paid and (b) the Interest
Conversion Price. If any Interest Shares are to be paid on an Interest Payment
Date, then the Company shall issue and deliver within two (2) business days
after the applicable Interest Payment Date, to the address set forth in the
register maintained by the Company for such purpose or to such address as
specified by the Holder in writing to the Company at least two (2) Business Days
prior to the applicable Interest Payment Date, a certificate, registered in the
name of the Holder or its designee, for the number of Interest Shares to which
the Holder shall be entitled. The Company shall pay any and all taxes that may
be payable by the Holder with respect to the issuance and delivery of Interest
Shares; provided that the Company shall not be required to pay any tax that may
be payable in respect of any issuance of Interest Shares to any Person other
than the Holder or with respect to any income tax due by the Holder with respect
to such Interest Shares. Notwithstanding the foregoing, unless the Required
Holders otherwise agree in writing, the Company shall not be entitled to pay
Interest in Interest Shares and shall instead, subject to Section 2(b), be
required to pay all accrued and unpaid Interest in the form of Cash Interest on
the applicable Interest Payment Date if, during the period commencing on the
applicable Interest Election Date through the applicable Interest Payment Date
the Equity Conditions have not been satisfied.
(b) Restrictions on Cash Interest Payments. Notwithstanding the foregoing, in
the event that the Company would otherwise be required under this Section 2 to
pay Interest in the form of Cash Interest but is not permitted to do so pursuant
to Section 33 hereof, the Company shall instead pay such Interest through the
addition of the amount of such Interest to the then outstanding Principal (any
Interest paid in such manner, “PIK Interest”). Interest that is paid in the form
of PIK Interest shall be considered paid or duly provided for, for all purposes
under this Note, and shall not be considered overdue.

 

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(3) CONVERSION OF NOTES. This Note shall be convertible into shares of the
Company’s common stock, par value $.01 per share (the “Company Common Stock”),
on the terms and conditions set forth in this Section 3.
(a) Conversion Right. At any time or times on or after the Issuance Date, the
Holder shall be entitled to convert any portion of the outstanding Principal and
accrued and unpaid Interest thereon, in multiples of $10,000 (or, if less, any
remaining Principal and accrued and unpaid Interest thereon), into fully paid
and nonassessable shares of Company Common Stock in accordance with
Section 3(c), at the Conversion Rate (as defined below). The Company shall not
issue any fraction of a share of Company Common Stock upon any conversion. If
the issuance would otherwise result in the issuance of a fraction of a share of
Company Common Stock, the Company shall round such fraction of a share of
Company Common Stock down to the nearest whole share and pay to the Holder such
fractional share in cash. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Company Common Stock upon
conversion of any Conversion Amount; provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issue and delivery of Company Common Stock to any Person other than the
Holder or with respect to any income tax due by the Holder with respect to such
Company Common Stock issued upon conversion.
(b) Conversion Rate. The number of shares of Company Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (as defined
below) (the “Conversion Rate”).

  (i)  
“Conversion Amount” means the sum of (A) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, and (B) accrued and unpaid Interest with respect to such portion of
the Principal.
    (ii)  
“Conversion Price” means as of any Conversion Date (as defined below) or other
date of determination during the period beginning on the Issuance Date and
ending on and including the Maturity Date, the Fixed Conversion Price.

  (iii)  
“Fixed Conversion Price” means $0.07, subject to adjustment as provided herein.

 

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(c) Mechanics of Conversion.

  (i)  
Optional Conversion. To convert any Conversion Amount into shares of Company
Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., Pacific
Time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if
required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking with respect to this Note in the case of its loss,
theft or destruction). On or before the second (2nd) Business Day following the
date of receipt of a Conversion Notice, the Company shall transmit by facsimile
a confirmation of receipt of such Conversion Notice to the Holder and the
Transfer Agent. On or before the third (3nd) Business Day following the date of
receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall
issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Company Common Stock to which the Holder shall be entitled.
If this Note is physically surrendered for conversion as required by
Section 3(c)(iii) and the outstanding Principal of this Note is greater than the
portion of the Conversion Amount constituting principal, then the Company shall
as soon as practicable and in no event later than three Business Days after
receipt of this Note (the “Note Delivery Date”) and at its own expense, issue
and deliver to the holder a new Note (in accordance with Section 21(d))
representing the outstanding Principal not converted. The Person or Persons
entitled to receive the shares of Company Common Stock issuable upon a
conversion of this Note shall be treated for all purposes as the record holder
or holders of such shares of Company Common Stock on the Conversion Date to the
extent permitted by applicable law.

  (ii)  
Company’s Failure to Timely Convert. If the Company shall fail to issue a
certificate to the Holder for the number of shares of Company Common Stock to
which the Holder is entitled upon conversion of any Conversion Amount on or
prior to the date which is five (5) Business Days after the Conversion Date (a
“Conversion Failure”), then (A) the Company shall pay damages in cash to the
Holder for each date of such Conversion Failure in an amount equal to 1.5% of
the product of (I) the sum of the number of shares of Company Common Stock not
issued to the Holder on or prior to the Share Delivery Date and to which the
Holder is entitled, and (II) the Closing Sale Price of the Company Common Stock
on the Share Delivery Date and (B) the Holder, upon written notice to the
Company, may void its Conversion Notice with respect to, and retain or have
returned, as the case may be, any portion of this Note that has not been
converted pursuant to such Conversion Notice; provided that the voiding of a
Conversion Notice shall not affect the Company’s obligations to make any
payments which have accrued prior to the date of such notice pursuant to this
Section 3(c)(ii) or otherwise. At the Holder’s option in lieu of the foregoing,
if within three (3) Company Trading Days after the Company’s receipt of the
facsimile copy of a Conversion Notice the Company shall fail to issue and
deliver a certificate to the Holder for the number of shares of Company Common
Stock to which the Holder is entitled upon such holder’s conversion of any
Conversion Amount, and if on or after such Company Trading Day the Holder
purchases (in an open market transaction or otherwise) Company Common Stock to
deliver in satisfaction of a sale by the Holder of Company Common Stock issuable
upon such conversion that the Holder anticipated receiving from the Company (a
“Company Common Stock Buy-In”), then the Company shall, within three

 

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(3) Business Days after the Holder’s request (which shall include written
evidence of a Company Common Stock Buy-In) and in the Holder’s discretion,
either (i) pay cash to the Holder in an amount equal to the Holder’s total
purchase price (including brokerage commissions, if any) for the shares of
Company Common Stock so purchased (the “Company Common Stock Buy-In Price”), at
which point the Company’s obligation to deliver such certificate (and to issue
such Company Common Stock) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing
such Company Common Stock and pay cash to the Holder in an amount equal to the
excess (if any) of the Company Common Stock Buy-In Price over the product of
(A) such number of shares of Company Common Stock, times (B) the Closing Bid
Price on the Conversion Date.

  (iii)  
Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of any portion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to the Company
unless (A) the full Principal represented by this Note is being converted,
together with all accrued and unpaid Interest thereon, or (B) the Holder has
provided the Company with prior written notice (which notice may be included in
a Conversion Notice) requesting reissuance of this Note upon physical surrender
of this Note. The Holder and the Company shall maintain records showing the
portion of Principal and Interest converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Note upon conversion.

  (iv)  
Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company shall convert from each holder of
Notes electing to have a portion of its Notes converted on such date a pro rata
amount of such holder’s portion of its Notes submitted for conversion based on
the principal portion submitted for conversion on such date by such holder
relative to the aggregate principal portions of all Notes submitted for
conversion on such date. In the event of a dispute as to the number of shares of
Company Common Stock issuable to the Holder in connection with a conversion of
this Note, the Company shall issue to the Holder the number of shares of Company
Common Stock not in dispute and resolve such dispute in accordance with Section
26.

(4) [Reserved]

 

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(5) EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT.
(a) Events of Default. Each of the following events (so long as it is
continuing) shall constitute an “Event of Default”:

  (i)  
the Company’s (A) failure to cure a Conversion Failure with respect to any of
the Notes by delivery of the required number of shares of Company Common Stock
within ten (10) Business Days after the applicable Conversion Date or
(B) notice, written or oral, to any holder of the Notes, including by way of
public announcement or through any of its agents, at any time, of its intention
not to comply with a request for conversion of any Notes into shares of Company
Common Stock that is tendered for conversion in compliance with the provisions
of the Notes and applicable securities laws;

  (ii)  
the Company’s failure to pay to any Holder any amount of Principal, premium (if
any), Interest, or other amounts when and as due under this Note (including,
without limitation, the Company’s failure to pay any redemption payments
hereunder), any other Transaction Document or any other agreement, document,
certificate or other instrument delivered in connection with the transactions
contemplated hereby and thereby to which such Holder is a party, provided, that
in the case of a failure to pay Interest when and as due, such failure shall
constitute an Event of Default only if such failure continues for a period of at
least five (5) Business Days;

  (iii)  
any event of default under, redemption of or acceleration prior to maturity of
any Indebtedness of the Company or any of its Subsidiaries (other than the
Notes) in an aggregate principal amount in excess of $500,000;

  (iv)  
the Company or any of its Subsidiaries (other than Optex Systems, Inc.
(“Optex”)) pursuant to or within the meaning of Title 11, U.S. Code, or any
similar Federal, foreign or state law for the relief of debtors (collectively,
“Bankruptcy Law”), (A) commences a voluntary case, (B) consents to the entry of
an order for relief against it in an involuntary case, (C) consents to the
appointment of a receiver, trustee, assignee, liquidator or similar official (a
“Custodian”), (D) makes a general assignment for the benefit of its creditors or
(E) admits in writing that it is generally unable to pay its debts as they
become due;

  (v)  
a court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that (A) is for relief against the Company or any of its Subsidiaries (other
than Optex) in an involuntary case, (B) appoints a Custodian of the Company or
any of its Subsidiaries (other than Optex) or (C) orders the liquidation of the
Company or any of its Subsidiaries (other than Optex);

 

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  (vi)  
other than a judgment in connection with the pending litigation between the
Company and FirstMark for which summary judgment has been granted in favor of
FirstMark, but only to the extent the judgment does not exceed $1,731,900, a
final judgment or judgments for the payment of money aggregating in excess of
$500,000 are rendered against the Company or any of its Subsidiaries and which
judgments are not, within sixty (60) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within sixty
(60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a creditworthy party
shall not be included in calculating the $500,000 amount set forth above so long
as the Company provides the Holder Representative with a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder Representative) to the effect that such judgment is
covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within thirty (30) days of the issuance of such
judgment or such later date as provided by the terms of such insurance policy;

  (vii)  
any representation or warranty made by the Company in any Transaction Document
shall prove to be materially false or misleading as of the date made or deemed
made;

  (viii)  
the Company shall breach any covenant or other term or condition of any
Transaction Document and, in the case of a breach of a covenant or term or
condition which is curable, such breach continues for a period of at least ten
(10) consecutive Business Days;

  (ix)  
any material provision of any Transaction Document ceases to be of full force
and effect other than by its terms, or the Company contests in writing (or
supports any other person in contesting) the validity or enforceability of any
provision of any Transaction Document;

  (x)  
the Security Agreement, dated as of July 1, 2011, between the Company and the
Holder Representative (the “Security Agreement”) shall for any reason (other
than pursuant to the terms thereof) cease to create a valid and perfected lien,
with the priority required by the Security Agreement, on, and security interest
in, any material portion of the Collateral purported to be covered thereby,
subject to Permitted Liens and the Liens securing the Existing Secured Note; or

  (xi)  
any Event of Default (as defined in the Other Notes) occurs with respect to any
Other Notes.

(b) Redemption Right. Upon the occurrence and during the continuance of an Event
of Default, but subject to Section 33, the Holder Representative may and, at the
request of the Required Holders, shall, take either or both of the following
actions: (i) declare all or any part of the outstanding Principal, accrued and
unpaid Interest and any other amounts outstanding under this Note (the aggregate
of such amounts, the “Outstanding Note Obligations”) and the Other Notes to be
immediately due and payable, in each case together with the Event of Default
Premium; provided, however, that if an Event of Default shall occur under either
clause (iv) or clause (v) of Section 5(a), the outstanding Principal, accrued
and unpaid Interest and any other amounts outstanding under the Notes shall
automatically become immediately due and payable, and (ii) exercise of behalf of
itself and the other Holders all rights and remedies available to it under the
Security Agreement, the other Transaction Documents and applicable law.
Notwithstanding the

 

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foregoing, to the extent that the Holder Representative declares the Notes to be
immediately due and payable (or the Notes become due and payable following an
Event of Default under clauses (iv) or (v) of Section 5(a)) and the (x) the sum
of the Outstanding Note Obligations plus the Event of Default Premium (if any)
(the sum of such amounts, the “Event of Default Redemption Price”) is less than
(y) the product of (A) the Conversion Rate that would have been applicable to
the Outstanding Note Obligations if the Holder’s Note had been submitted for
conversion into shares of Company Common Stock on the date immediately preceding
such Event of Default and (B) the Closing Sale Price of the Company Common Stock
on the date immediately preceding such Event of Default (the product of such
amounts, the “Alternative Event of Default Redemption Price”), the Company shall
pay to the Holder in cash, in lieu of the Event of Default Redemption Price, the
Alternative Event of Default Redemption Price. The Company shall pay the Event
of Default Redemption Price or the Alternative Event of Default Redemption
Price, as applicable, to the Holder within five (5) Business Days after the date
that the Outstanding Note Obligations are declared due and payable, and upon
full payment, the Notes shall be extinguished.
(6) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the
obligations of the Company under this Note and the other Transaction Documents
in accordance with the provisions of this Section 6(a) pursuant to written
agreements in form and substance satisfactory to the Required Holders and
approved by the Required Holders (such approval not to be unreasonably withheld
or delayed) prior to such Fundamental Transaction, including agreements to
deliver to each holder of Notes in exchange for such Notes a security of the
Successor Entity evidenced by a written instrument substantially similar in form
and substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the principal amounts and the interest rates
of the Notes held by such holder and having similar ranking to the Notes, and
satisfactory to the Required Holders (any such approval not to be unreasonably
withheld or delayed) and (ii) the Successor Entity (including its Parent Entity)
is a publicly traded corporation whose common stock is quoted on or listed for
trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of such Fundamental Transaction, the provisions of
this Note referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Note with the same effect as if
such Successor Entity had been named as the Company herein. Upon consummation of
the Fundamental Transaction, the Successor Entity shall deliver to the Holder
Representative confirmation that there shall be issued upon conversion or
redemption of this Note at any time after the consummation of the Fundamental
Transaction, in lieu of the shares of the Company Common Stock (or other
securities, cash, assets or other property) purchasable upon the conversion or
redemption of the Notes prior to such Fundamental Transaction, such shares of
stock, securities, cash, assets or any other property whatsoever (including
warrants or other purchase or subscription rights) which the Holder would have
been entitled to receive upon the happening of such Fundamental Transaction had
this Note been converted immediately prior to such Fundamental Transaction, as
adjusted in accordance with the provisions of this Note. The provisions of this
Section shall apply similarly and equally to successive Fundamental Transactions
and shall be applied without regard to any limitations on the conversion or
redemption of this Note.

 

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(b) Holder Redemption Right. No later than ten (10) days prior to the
consummation of a Change of Control, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (a “Change of Control
Notice”). Subject to Section 33, at any time during the period beginning after
the Holder’s receipt of a Change of Control Notice and ending on the date of the
consummation of such Change of Control (or, in the event a Change of Control
Notice is not delivered at least ten (10) days prior to a Change of Control, at
any time on or after the date which is ten (10) days prior to a Change of
Control and ending ten (10) days after the consummation of such Change of
Control), the Holder may require the Company to redeem all or any portion of
this Note in cash by delivering written notice thereof (“Holder Change of
Control Redemption Notice”) to the Company, which Holder Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to
redeem. The portion of this Note subject to redemption pursuant to this
Section 6 shall be redeemed by the Company at a price equal to the greater of
(i) the product of (x) the Conversion Amount being redeemed and (y) the quotient
determined by dividing (A) the Closing Sale Price of the Company Common Stock
immediately following the public announcement of such proposed Change of Control
by (B) the Conversion Price and (ii) 125% of the Conversion Amount being
redeemed (the “Holder Change of Control Redemption Price”). Redemptions required
by this Section 6(b) shall be made in accordance with the provisions of
Section 14 and shall have priority to payments to common stockholders in
connection with a Change of Control. Notwithstanding anything to the contrary in
this Section 6(b), until the Holder Change of Control Redemption Price (together
with any interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 6(b) (together with any interest thereon) may be
converted, in whole or in part, by the Holder into Company Common Stock pursuant
to Section 3.
(7) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
(a) [Reserved].
(b) Other Corporate Events. Subject to Section 6(a) hereof, in addition to and
not in substitution for any other rights hereunder, prior to the consummation of
any Fundamental Transaction pursuant to which holders of shares of Company
Common Stock are entitled to receive securities or other assets with respect to
or in exchange for shares of Company Common Stock (a “Corporate Event”), the
Company shall make appropriate provision to insure that the Holder will
thereafter have the right to receive upon a conversion of this Note, (i) in
addition to the shares of Company Common Stock receivable upon such conversion,
such securities or other assets to which the Holder would have been entitled
with respect to such shares of Company Common Stock had such shares of Company
Common Stock been held by the Holder upon the consummation of such Corporate
Event (without taking into account any limitations or restrictions on the
convertibility of this Note) or (ii) in lieu of the shares of Company Common
Stock otherwise receivable upon such conversion, such securities or other assets
received by the holders of shares of Company Common

 

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Stock in connection with the consummation of such Corporate Event in such
amounts as the Holder would have been entitled to receive had this Note
initially been issued with conversion rights for the form of such consideration
(as opposed to shares of Company Common Stock) at a conversion rate for such
consideration commensurate with the Conversion Rate. Provision made pursuant to
the preceding sentence shall be in a form and substance satisfactory to the
Required Holders. The provisions of this Section shall apply similarly and
equally to successive Corporate Events and shall be applied without regard to
any limitations on the conversion or redemption of this Note.
(8) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
(a) Pro Rata Distributions. If the Company, at any time while this Note is
outstanding, distributes to all holders of Company Common Stock (i) evidences of
its indebtedness, (ii) any security (other than a distribution of shares of
Company Common Stock covered by the preceding paragraph), (iii) rights or
warrants to subscribe for or purchase any security, or (iv) any other asset (in
each case “Distributed Property”), then, unless taken into account pursuant to
Section 8(b) below, upon any conversion of this Note that occurs after such
record date, the Holder shall be entitled to receive, in addition to the shares
of Company Common Stock otherwise issuable upon such conversion, the Distributed
Property that the Holder would have been entitled to receive in respect of such
number of shares of Company Common Stock immediately prior to such record date.
(b) Adjustment of Fixed Conversion Price upon Subdivision or Combination of
Company Common Stock. If the Company at any time on or after the Initial Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Company Common Stock into a
greater number of shares, the Fixed Conversion Price in effect immediately prior
to such subdivision will be proportionately reduced. If the Company at any time
on or after the Initial Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Company Common Stock
into a smaller number of shares, the Fixed Conversion Price in effect
immediately prior to such combination will be proportionately increased.
(c) Adjustment of Conversion Price upon Lower Price Issuance. If the Company at
any time on or after the Initial Date issues or agrees to issue additional
shares of Company Common Stock or rights, warrants, options or other securities
or debt convertible, exercisable or exchangeable for shares of Common Stock or
otherwise entitling any Person to acquire shares of Common Stock (or modify any
of the foregoing which may be outstanding) to any person or entity at an
effective price per share or conversion or exercise price per share that is less
than the Conversion Price in effect at such time, then the Conversion Price
shall automatically be reduced to such other lower price. For purposes of the
issuance and adjustment described in this section the issuance of any security
of the Corporation carrying the right to convert such security into shares of
Common Stock or of any warrant, right or option to purchase Common Stock shall
result in the adjustments described above upon the sooner of the agreement to
issue or actual issuance of such convertible security, warrant, right or option
and again at any time upon any subsequent issuances of shares of Common Stock
upon exercise of such conversion or purchase rights if such issuance is at a
price lower than the Conversion Price in effect upon such issuance. This Section
8(c) shall not apply to Excluded Securities.

 

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(9) [Reserved]
(10) [Reserved]
(11) COMPANY’S RIGHT OF MANDATORY CONVERSION.
(a) Mandatory Conversion. If at any time from and after the two year anniversary
of the Initial Date (the “Mandatory Conversion Eligibility Date”), (i) the
Volume Weighted Average Price of the Company Common Stock for thirty
(30) consecutive trading days equals or exceeds $0.25 (subject to appropriate
adjustments for stock splits, stock dividends, stock combinations and other
similar transactions after the Initial Date) following the Mandatory Conversion
Eligibility Date (the “Mandatory Conversion Measuring Period”), and (ii) the
Equity Conditions have been satisfied (or waived in writing by the Holder),
during the period commencing on the Mandatory Conversion Notice Date through the
applicable Mandatory Conversion Date (each, as defined below), the Company shall
have the right to require the Holder to convert all, but not less than all, of
the Conversion Amount then remaining under this Note as designated in the
Mandatory Conversion Notice (as defined below) into fully paid, validly issued
and nonassessable shares of Company Common Stock in accordance with Section 3(c)
hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined
below) (a “Mandatory Conversion”). The Company may exercise its right to require
conversion under this Section 11(a), by delivering within not more than five
(5) Company Trading Days following the end of such Mandatory Conversion
Measuring Period a written notice thereof by facsimile and overnight courier to
all, but not less than all, of the holders of Notes and the Transfer Agent (the
“Mandatory Conversion Notice” and the date all of the holders received such
notice by facsimile is referred to as the “Mandatory Conversion Notice Date”).
The Mandatory Conversion Notice shall be irrevocable. The Mandatory Conversion
Notice shall state (i) the Company Trading Day selected for the Mandatory
Conversion in accordance with Section 11(a), which Company Trading Day shall be
at least twenty (20) Business Days but not more than sixty (60) Business Days
following the Mandatory Conversion Notice Date (the “Mandatory Conversion
Date”), (ii) the aggregate Conversion Amount of the Notes subject to mandatory
conversion from all of the holders of the Notes pursuant to this Section 11(a)
(and analogous provisions under the Other Notes) and (iii) the number of shares
of Company Common Stock to be issued to such Holder on the Mandatory Conversion
Date.
(b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion
of any Conversion Amount of this Note pursuant to Section 11(a), then it must
simultaneously take the same action with respect to the Other Notes. All
Conversion Amounts converted by the Holder after the Mandatory Conversion Notice
Date shall reduce the Conversion Amount of this Note required to be converted on
the Mandatory Conversion Date. If the Company has elected a Mandatory
Conversion, the mechanics of conversion set forth in Section 3(c) shall apply,
to the extent applicable, as if the Company and the Transfer Agent had received
from the Holder on the Mandatory Conversion Date a Conversion Notice with
respect to the Conversion Amount being converted pursuant to the Mandatory
Conversion.

 

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(12) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Certificate of Incorporation, Bylaws or through
any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.
(13) RESERVATION OF AUTHORIZED SHARES.
(a) Reservation. The Company shall reserve out of its authorized and unissued
Company Common Stock a number of shares of Company Common Stock for each of the
Notes equal to 100% of the number of shares of Company Common Stock as shall be
necessary to effect the conversion of all of the Notes then outstanding as of
the Issuance Date at the Conversion Price and any other shares issuable under
the Transaction Documents (the “Required Reserve Amount”). Thereafter, so long
as any of the Notes are outstanding, the Company shall take all action necessary
to reserve and keep available out of its authorized and unissued Company Common
Stock, solely for the purpose of effecting the conversion of the Notes, 100% of
the number of shares of Company Common Stock as shall from time to time be
necessary to effect the conversion of all of the Notes then outstanding at the
then-applicable Conversion Price. The initial number of shares of Company Common
Stock reserved for conversions of the Notes and each increase in the number of
shares so reserved shall be allocated pro rata among the holders of the Notes
based on the principal amount of the Notes held by each holder at the Initial
Date or increase in the number of reserved shares, as the case may be (the
“Authorized Share Allocation”). In the event that a holder shall sell or
otherwise transfer any of such holder’s Notes, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share Allocation. Any
shares of Company Common Stock reserved and allocated to any Person which ceases
to hold any Notes shall be allocated to the remaining holders of Notes, pro rata
based on the principal amount of the Notes then held by such holders.
(14) HOLDER’S REDEMPTIONS.
(a) Mechanics. Subject to Section 33, if the Holder has submitted a Holder
Change of Control Redemption Notice in accordance with Section 6(b), the Company
shall deliver the Holder Change of Control Redemption Price to the Holder,
concurrently with the consummation of such Change of Control if such notice is
received by the Company at least five (5) Business Days prior to the
consummation of such Change of Control and within seven (7) Business Days after
the Company’s receipt of such notice otherwise. In the event of a redemption of
less than all of the Principal of this Note, the Company shall promptly cause to
be issued and delivered to the Holder (after such original Note has been
delivered to the Company) a new Note (in accordance with Section 21(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the Holder Change of Control Redemption Price to
the Holder within the time period required, at any time thereafter and until the
Company pays such unpaid Holder Change of Control Redemption Price in full, the
Holder shall have the option, in lieu of redemption, to require the Company to
promptly return to the Holder all or any portion of this Note representing the
Conversion Amount that was submitted for redemption and for which the Holder
Change of Control Redemption Price has not been paid. Upon the Company’s receipt
of such notice, (x) the Holder Change of Control Redemption Notice shall be null
and void with respect to such Conversion Amount and (y) the Company shall
immediately return this Note, or issue a new Note (in accordance with
Section 21(d)) to the Holder representing such Conversion Amount.

 

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(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences described
in Section 6(b) (each, an “Other Redemption Notice”), the Company shall
immediately forward to the Holder Representative by facsimile a copy of such
notice. If the Company receives a Holder Change of Control Redemption Notice and
one or more Other Redemption Notices during the seven (7) Business Day period
beginning on and including the date which is three (3) Business Days prior to
the Company’s receipt of the Holder Change of Control Redemption Notice and
ending on and including the date which is three (3) Business Days after the
Company’s receipt of the Holder Change of Control Redemption Notice and the
Company is unable to redeem all principal, interest and other amounts designated
in such Holder Change of Control Redemption Notice and such Other Redemption
Notices received during such seven (7) Business Day period, then the Company
shall redeem a pro rata amount from each holder of the Notes (including the
Holder) based on the principal amounts of the Notes submitted for redemption
pursuant to such Holder Change of Control Redemption Notice and pursuant to such
Other Redemption Notices received by the Company during such seven Business Day
period.
(15) [Reserved]
(16) RIGHTS. Except as otherwise provided for herein, the Holder shall have no
rights as a stockholder of the Company as a result of being a holder of this
Note, except as required by law, including, but not limited to, the General
Corporation Law of the State of Delaware, and as expressly provided in this
Note.
(17) COVENANTS.
(a) Incurrence of Indebtedness. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than (i) the Indebtedness evidenced by this Note and the Other Notes,
(ii) Permitted Indebtedness and (iii) the Existing Secured Note.
(b) Existence of Liens. So long as this Note is outstanding, the Company shall
not, and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, allow or suffer to exist any mortgage, lien, pledge, charge,
security interest or other similar encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively “Liens”) other than (i) existing Liens securing the
Existing Secured Note and (ii) Permitted Liens.

 

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(c) Restricted Payments. The Company shall not, and the Company shall not permit
any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase,
repay or make any payments in respect of, by the payment of cash or cash
equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Indebtedness described in clause (A) of the definition of “Permitted
Indebtedness”, whether by way of payment in respect of principal of (or premium,
if any) or interest on such Indebtedness if at the time such payment is due or
is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing.
(18) [Reserved]
(19) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting of
the Required Holders (or the Holder Representative acting at the direction of
the Required Holders) shall be required for any amendment or waiver to this Note
or the Other Notes or to the Security Agreement (including to release all or
substantially all of the Collateral, in any transaction or series of related
transactions); provided that no such amendment or waiver shall:
(a) postpone (i) the Maturity Date or (ii) any Interest Payment Date, in each
case without the consent of the Holder (it being understood that the Required
Holders may waive any increase in the Interest Rate that would otherwise take
effect during the continuance of an Event of Default);
(b) reduce the Principal of, or the Interest Rate or any premiums specified
herein on, the Note, or any other amounts payable hereunder to the Holder,
without the consent of the Holder; provided, however, that only the consent of
the Required Holders shall be necessary to alter the amount by which the
Interest Rate may be increased during the continuance of an Event of Default or
to waive any of the obligation of the Company to pay such increased rate during
the continuance of an Event of Default); or
(c) change any provision of this Section 19, the definition of “Required
Holders” or any other provision hereof specifying the number or percentage of
holders of Notes required to amend, waive or otherwise modify any rights
hereunder or to make any determination or grant any consent hereunder, without
the consent of the Holder and of each of the holders of the Other Notes, in each
case to the extent adversely affected thereby;
and provided further that no amendment, waiver or consent shall, unless in
writing and signed by the Holder Representative in addition to the holders of
Notes required above, affect the rights or duties of the Holder Representative
under this Note or any other Transaction Document.

 

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(20) HOLDER REPRESENTATIVE
(a) Appointment of Holder Representative, etc. By acceptance of this Note, the
Holder hereby appoints Costa Brava Partnership III L.P. to serve as Holder
Representative. The Holder further agrees that the Holder Representative may be
removed at any time by a vote of the Required Holders, and that if the Holder
Representative is so removed, or if it at any time resigns or declines to serve
as Holder Representative, the successor Holder Representative shall be the
holder of the Notes that at any given time holds Notes in an aggregate principal
amount that is greater than the aggregate principal amount of the Notes held by
any other holder of the Notes; provided, that at any time after the Mandatory
Conversion Eligibility Date, the Required Holders may instead designate as the
Holder Representative another Person of their choosing. The Holder hereby
(a) irrevocably authorizes the Holder Representative to (i) enter into the
Security Agreement and (ii) at its discretion, to take or refrain from taking
such actions as Holder Representative and to exercise or refrain from exercising
such powers under the Transaction Documents as are delegated by the terms hereof
or thereof, as applicable, together with all powers reasonably related thereto
and (b) agrees and consents to all of the provisions of the Security Agreement.
(b) Concerning the Holder Representative.

  (i)  
Standard of Conduct. The Holder Representative and its officers, directors,
employees and agents shall be under no liability to the Holder or to any of its
successors or assigns for any action or failure to act taken or suffered in its
capacity as Holder Representative in the absence of gross negligence and willful
misconduct, and any action or failure to act in accordance with an opinion of
its counsel shall conclusively be deemed to be in the absence of gross
negligence and willful misconduct.

  (ii)  
No Implied Duties. The Holder Representative shall have no duties or
responsibilities except as set forth in the Note and the other Transaction
Documents, nor shall it have any fiduciary relationship with the Holder, and no
implied covenants, responsibilities, duties, obligations or liabilities shall be
read into the Transaction Documents or otherwise exist against the Holder
Representative.

  (iii)  
Validity. The Holder Representative shall not be responsible to the Holder or to
any of its successors or assigns (a) for the legality, validity, enforceability
or effectiveness of any of the Transaction Documents, (b) for any recitals,
reports, representations, warranties or statements contained in or made in
connection with any of the Transaction Document, (c) for the existence or value
of any assets included in the Collateral, (d) for the effectiveness of any Lien
purported to be created by the Security Agreement, or (e) unless the Holder
Representative shall have failed to comply with sub-paragraph (i) above, for the
perfection of the security interests created by the Security Agreement.

(c) Compliance. The Holder Representative shall not be obligated to ascertain or
inquire as to the performance or observance of any of the terms of this Note.
(d) Employment of Agents and Counsel. The Holder Representative may execute any
of its duties as Holder Representative under this Note by or through employees,
agents and attorneys-in-fact and shall not be responsible to any of the parties
hereto for the default or misconduct of any such agents or attorneys-in-fact
selected by the Holder Representative acting in the absence of gross negligence
and willful misconduct. The Holder Representative shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder.

 

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(e) Reliance on Documents and Counsel. The Holder Representative shall be
entitled to rely, and shall be fully protected in relying, upon any affidavit,
certificate, cablegram, consent, instrument, letter, notice, order, document,
statement, telecopy, telegram, telex or teletype message or writing reasonably
believed in good faith by the Holder Representative to be genuine and correct
and to have been signed, sent or made by the Person in question, including any
telephonic or oral statement made by such Person, and, with respect to legal
matters, upon an opinion or the advice of counsel selected by the Holder
Representative.
(f) Holder Representative’s Reimbursement. The Company agrees to indemnify the
Holder Representative for any losses arising from its appointment as Holder
Representative or from the performance of its duties hereunder and to reimburse
the Holder Representative for any reasonable expenses; provided, however, that
the Holder Representative shall not be indemnified or reimbursed for liabilities
or expenses to the extent resulting from its own gross negligence, bad faith or
willful misconduct. In addition, if at any time the Holder Representative is a
Person that is not a holder of one or more Notes, such Person shall be entitled
to a fee for acting in the capacity of Holder Representative, in an amount to be
agreed between the Holder Representative and the Required Holders.
(21) TRANSFER RESTRICTIONS; REISSUANCE OF THIS NOTE.
(a) Transfer. If this Note is to be transferred in compliance with Section 21(e)
below, the Holder shall surrender this Note to the Company, whereupon the
Company will forthwith issue and deliver upon the order of the Holder a new Note
(in accordance with Section 21(d)), registered as the Holder may request,
representing the outstanding Principal being transferred by the Holder and, if
less then the entire outstanding Principal is being transferred, a new Note (in
accordance with Section 21(d)) to the Holder representing the outstanding
Principal not being transferred. The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of
Section 3(c)(iii), following conversion or redemption of any portion of this
Note, the outstanding Principal represented by this Note may be less than the
Principal stated on the face of this Note.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of an
indemnification undertaking by the Holder to the Company, in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 21(d)) representing the outstanding Principal.
(c) Note Exchangeable for Different Denominations. This Note is exchangeable,
upon the surrender hereof by the Holder at the principal office of the Company,
for a new Note or Notes (in accordance with Section 21(d) and in principal
amounts of at least $100,000) representing in the aggregate the outstanding
Principal of this Note, and each such new Note will represent such portion of
such outstanding Principal as is designated by the Holder at the time of such
surrender.

 

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(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 21(a) or Section 21(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest of this Note from the Issuance Date.
(e) Transfer Restrictions. The Holder understands that the Company may, as a
condition to the transfer of any Notes or shares of Company Common Stock
issuable upon conversion of such Notes (collectively, the “Securities”), require
that the request for transfer be accompanied by an opinion of counsel reasonably
satisfactory to the Company, to the effect that the proposed transfer does not
result in a violation of the Securities Act, unless such transfer is covered by
an effective registration statement or by Rule 144 or Rule 144A under the
Securities Act; provided, however, that an opinion of counsel shall not be
required for a transfer by the Holder that is (A) a partnership transferring to
its partners or former partners in accordance with partnership interests, (B) a
corporation transferring to a wholly owned subsidiary or a parent corporation
that owns all of the capital stock of the Holder, (C) a limited liability
company transferring to its members or former members in accordance with their
interest in the limited liability company, (D) an individual transferring to the
Holder’s family member or trust for the benefit of an individual Holder, or
(E) transferring its Securities to any Affiliate of the Holder, in the case of
an institutional investor, or other Person under common management with such
Holder; provided, further, that (i) the transferee in each case agrees to be
subject to the restrictions in this Section 21(e) and provides the Company with
a customary securities law representation letter, (ii) the Company satisfies
itself that the number of transferees is sufficiently limited and (iii) in the
case of transferees that are partners or limited liability company members, the
transfer is for no consideration. It is understood that the certificates
evidencing any Securities may bear substantially the following legends (in
addition to any other legends as legal counsel for the Company deems necessary
or advisable under the applicable state and federal securities laws or any other
agreement to which the Company is a party):
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT.”

 

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(22) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF.
(a) The remedies provided in this Note shall be cumulative and in addition to
all other remedies available under this Note and any of the other Transaction
Documents, at law or in equity (including a decree of specific performance
and/or other injunctive relief), and, subject to Section 22(b) and Section 33
below, nothing herein shall limit the Holder’s right to pursue monetary damages
for any failure by the Company to comply with the terms of this Note. Amounts
set forth or provided for herein with respect to payments, conversion and the
like (and the computation thereof) shall be the amounts to be received by the
Holder and shall not, except as expressly provided herein, be subject to any
other obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the Holder shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
(b) Notwithstanding the foregoing, but subject to Section 22(c), the Holder may
not pursue any remedy with respect to this Note unless:

  (i)  
the Holder has previously given the Holder Representative written notice that an
Event of Default is continuing;

  (ii)  
holders of at least 25% in aggregate principal amount of the total outstanding
Notes have requested the Holder Representative to pursue the remedy;

  (iii)  
such holders of the Notes have offered the Holder Representative security or
indemnity reasonably satisfactory to it against any loss, liability or expense;

  (iv)  
the Holder Representative has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity; and

  (v)  
the Required Holders have not given the Holder Representative a direction
inconsistent with such request within such 60-day period.

(c) Notwithstanding the foregoing, but subject to Section 33, the right of the
Holder to receive payment of Principal, premium, if any, and Interest on the
Note, on or after the respective due dates set forth herein (including in
connection with a Change of Control), or convert any portion of the Note into
shares of Company Common Stock on the terms and conditions set forth herein, or
to bring suit for the enforcement of any such right to payment or conversion,
shall not be impaired or affected without the consent of the Holder.
(23) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to,
reasonable attorneys’ fees and disbursements.

 

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(24) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by
the Company and all the Holders of Notes and shall not be construed against any
person as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note.
(25) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder 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.
(26) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price, the Volume Weighted Average Price,
the Weighted Average Price, the Redemption Price or the arithmetic calculation
of the Conversion Rate or the Redemption Price, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within one
(1) Business Day of receipt, or deemed receipt, of the Conversion Notice or the
Holder Change of Control Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder Representative. If the Holder
Representative and the Company are unable to agree upon such determination or
calculation of the Redemption Price or the Conversion Rate, as applicable,
within one (1) Business Day of such disputed determination or arithmetic
calculation being submitted to the Holder Representative, then the Company and
the Holder Representative shall, within one (1) Business Day thereafter submit
via facsimile (a) the disputed determination of the Closing Bid Price, the
Closing Sale Price, the Volume Weighted Average Price or the Weighted Average
Price to an independent, reputable investment bank selected by the Company and
approved by the Holder Representative or (b) the disputed arithmetic calculation
of the Conversion Rate or the Redemption Price to the Company’s independent,
outside accountant. The Company, at the Company’s expense, shall cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder
Representative of the results no later than five (5) Business Days from the time
it receives the disputed determinations or calculations. Such investment bank’s
or accountant’s determination or calculation, as the case may be, shall be
binding upon all parties absent demonstrable error. To the extent of a good
faith dispute by the Company, any related penalty payments due hereunder shall
not be made unless and until such dispute is resolved against the Company.

 

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(27) NOTICES; PAYMENTS.
(a) Notices. All notices, requests, consents, and other communications under
this Note shall be in writing and shall be deemed delivered (a) when delivered,
if delivered personally, (b) four business days after being sent by registered
or certified mail, return receipt requested, postage prepaid; (c) one business
day after being sent via a reputable nationwide overnight courier service
guaranteeing next business day delivery, or (d) when receipt is acknowledged, in
the case of facsimile, in each case to the intended recipient as set forth
below:
If to the Holder, at its address set forth on Schedule I hereto
with a copy to:
Ropes & Gray LLP
One International Place
Boston, MA 02110
Attention: Jeffrey Katz
Facsimile No.: (617) 235-0617
If to the Company:
Irvine Sensors Corporation
3001 Red Hill Avenue
Building 4, Suite 108
Costa Mesa, CA 92626
Attention: John J. Stuart, Jr.
Facsimile No.: (714) 444-8773
with a copy to:
Dorsey & Whitney LLP
38 Technology Drive, Suite 100
Irvine, CA 92618
Attention: Ellen Bancroft, Esq.
Facsimile No: (949) 932-3601
or at such other address as the Company or the Holder each may specify by
written notice in accordance with this Section 27.
The Company shall provide the Holder with prompt written notice of all actions
taken pursuant to this Note, including in reasonable detail a description of
such action and the reason therefore. Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) within one
(1) Business Day upon any adjustment of the Conversion Price, setting forth in
reasonable detail, and certifying, the calculation of such adjustment and
(ii) at least fifteen (15) days prior to the date on which the Company closes
its books or takes a record (A) with respect to any dividend or distribution
upon the Company Common Stock, (B) with respect to any pro rata subscription
offer to holders of Company Common Stock or (C) for determining rights to vote
with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

 

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(b) Payments. Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, such payment shall be made in lawful money of the
United States of America by a check drawn on the account of the Company and sent
via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Holders shall initially be as set forth on Schedule I attached to this Note);
provided that the Holder may elect to receive a payment of cash via wire
transfer of immediately available funds by providing the Company with prior
written notice setting out such request and the Holder’s wire transfer
instructions. Whenever any amount expressed to be due by the terms of this Note
is due on any day which is not a Business Day, the same shall instead be due on
the next succeeding day which is a Business Day.
(c) Withholding Taxes. All payments made by the Company hereunder shall be made
without withholding for or on account of any present or future taxes (other than
overall net income taxes imposed on the recipient). If any such withholding is
so required, the Company shall make the withholding, pay the amount withheld to
the appropriate authority before penalties attach thereto or interest accrues
thereon and pay to the recipient such additional amount as may be necessary to
ensure that the net amount actually received by the recipient free and clear of
such taxes (including taxes on such additional amount) is equal to the amount
that the recipient would have received had such withholding not been made. If
the recipient is required to pay any such taxes, penalties or interest, the
Company shall reimburse the recipient for that payment on demand. If the Company
pays any such taxes, penalties or interest, it shall deliver official tax
receipts or other evidence of payment to the recipient on whose account such
withholding was made on or before the thirtieth day after payment. The Holder
agrees to provide, promptly following the Company’s request therefore, such
forms or certifications as it is legally able to provide to establish an
exemption from, or a reduction in, any withholding taxes that might otherwise
apply.
(28) CANCELLATION. After all Principal, accrued Interest and other amounts at
any time owed on this Note have been paid in full, this Note shall automatically
be deemed canceled, shall be surrendered to the Company for cancellation and
shall not be reissued.
(29) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note.
(30) GOVERNING LAW. This Note shall be construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation
and performance of this Note shall be governed by, the internal laws of the
State of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York.
(31) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall
have the following meanings:
(a) “Approved Stock Plan” means any employee benefit plan, contract or
arrangement which has been approved by the Company Board of Directors, pursuant
to which the Company’s securities may be issued to any employee, consultant,
officer or director for services provided to the Company.

 

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(b) “Bankruptcy Code” means Chapter 11 of Title 11 of the United States Code, as
amended from time to time and any successor statute and all rules and
regulations promulgated thereunder.
(c) “Bloomberg” means Bloomberg Financial Markets.
(d) “Bridge Notes” means the Company’s 10% Unsecured Convertible Promissory
Notes due May 31, 2011 in the original aggregate principal amount of $3,000,000.
(e) “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.
(f) “Contractual Obligation” means, with respect to any Person, any contract,
agreement, deed, mortgage, lease, sublease, license, sublicense or other legally
enforceable commitment, promise, undertaking, obligation, arrangement,
instrument or understanding, whether written or oral, to which or by which such
Person is a party or otherwise subject or bound or to which or by which any
property, business, operation or right of such Person is subject or bound.
(g) “Conversion Shares” means the shares of Company Common Stock into which the
Notes are convertible.
(h) “Change of Control” means any Fundamental Transaction other than (A) a
Fundamental Transaction in which holders of the Company’s voting power
immediately prior to the Fundamental Transaction continue after the Fundamental
Transaction to hold publicly traded securities and, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a majority
of the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities, (B) a Fundamental Transaction with any
Holder, any Affiliate of any Holder or any person otherwise related to or
associated with a Holder, or (C) pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the Company.
(i) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security, as reported by Bloomberg (whether or not such security is
trading on an Eligible Market at such time), or, if the market on which the
security is trading begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
market on which the security is trading is not the principal securities exchange
or trading market for such security, the last closing bid price or last trade
price, respectively, of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price or last trade
price, respectively, of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
closing bid price or last trade price, respectively, is

 

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reported for such security by Bloomberg, the average of the bid prices, or the
ask prices, respectively, of any market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security on
such date shall be the fair market value as mutually determined by the Company
and the Holder Representative. If the Company and the Holder are unable to agree
upon the fair market value of such security, then such dispute shall be resolved
pursuant to Section 26. All such determinations to be appropriately adjusted for
any stock dividend, stock split, stock combination or other similar transaction
during the applicable calculation period.
(j) “Collateral” has the meaning given to such term in the Security Agreement.
(k) “Company Board of Directors” means the board of directors of the Company or
any authorized committee of the board of directors.
(l) “Company Trading Day” means any day on which the Company Common Stock is
traded on the principal securities exchange or securities market on which the
Company Common Stock is then traded; provided that “Company Trading Day” shall
not include any day on which the Company Common Stock is scheduled to trade on
such exchange or market for less than 4.5 hours or any day that the Company
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00 p.m., New York Time).
(m) “Convertible Securities” means with respect to any issuer, any stock or
securities (other than Options) directly or indirectly convertible into or
exercisable or exchangeable for such issuer’s common stock.
(n) “Distribution” means (i) any payment or distribution made by the Company on
account of the Note, whether in the form of cash, securities or other property,
by setoff or otherwise, or (ii) any redemption, purchase or other acquisition by
the Company of all or a portion of the Note, in each of cases (i) and (ii),
other than any payment, distribution, redemption, purchase or other acquisition
made (x) through the conversion or exchange of all or a portion of the Note into
or for (I) equity securities of the Company (including pursuant to the terms
hereof) or (II) debt securities of the Company that (A) are subordinated in
right of payment to the Existing Secured Note to at least the same extent as the
Notes are subordinated to the Existing Secured Note, (B) do not have the benefit
of any obligation of any Person (whether as issuer, guarantor or otherwise)
unless the Existing Secured Note has at least the same benefit of the obligation
of such Person and the obligation of such Person to the Holder is subordinated
to the obligations of such Person to the Existing Secured Note Holder to at
least the same extent that this Note is subordinated to the Existing Secured
Note and (C) is either unsecured or secured by liens that are subordinated to
the liens securing the Existing Secured Note, (y) at any time that no “Default”
(as defined in the Existing Secured Note) has occurred and is continuing under
Section 6(a) or 6(c) of the Existing Secured Note or (z) through the accrual and
addition to principal of capitalized interest in the amounts and at the times
specified in this Note.

 

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(o) “Eligible Market” means a national security exchange that has registered
with the SEC under Section 6 of the Securities Exchange Act of 1934.
(p) “Equity Conditions” means each of the following conditions: (i) during the
period beginning fifteen (15) Company Trading Days prior to the applicable date
of determination and ending on and including the applicable date of
determination (the “Equity Conditions Measuring Period”), the Company shall have
delivered Conversion Shares upon conversion of the Notes on a timely basis as
set forth in Section 3(c)(i) hereof (and analogous provisions under the Other
Notes); (ii) on each day during the Equity Conditions Measuring Period, any
applicable shares of Company Common Stock to be issued in connection with the
event requiring determination may be issued in full without violating the rules
or regulations of the applicable Eligible Market, if applicable; (iii) during
the Equity Conditions Measuring Period, the Company shall not have failed to
timely make any payments within five (5) Business Days of when such payment is
due pursuant to any Transaction Document; (iv) during the Equity Conditions
Measuring Period, there shall not have occurred either (A) the public
announcement of a pending, proposed or intended Fundamental Transaction which
has not been abandoned, terminated or consummated, or (B) an Event of Default;
(v) during the period commencing on the Interest Election Date or the Mandatory
Conversion Notice Date, as applicable, and ending on the Interest Payment Date
or the Mandatory Conversion Date, as applicable, an event that with the passage
of time or giving of notice would constitute an Event of Default; (vi) during
the Equity Conditions Measuring Period, the Company shall have no knowledge of
any fact that would cause any shares of Company Common Stock issuable upon
conversion of the Notes not to be eligible for resale without restriction
pursuant to Rule 144 and any applicable state securities laws; (vii) during the
Equity Conditions Measuring Period, the Company otherwise shall have been in
compliance with and shall not have breached any provision, covenant,
representation or warranty of any Transaction Document to the extent that such
breach would have a Material Adverse Effect; (viii) prior to the Mandatory
Conversion Eligibility Date the Company Common Stock shall be relisted on an
Eligible Market; (ix) prior to the Mandatory Conversion Eligibility Date the
Company shall have timely filed each of its required reports under the
Securities Exchange Act of 1934, as amended; and (x) prior to the Mandatory
Conversion Eligibility Date any shares required for the Mandatory Conversion
have been duly authorized and shall be upon issuance fully-paid and validly
issued.
(q) “Event of Default Premium” means 25% of the Outstanding Note Obligations.
(r) “Excluded Securities” means any Company Common Stock or other securities or
debt obligations issued or issuable: (i) in connection with any Approved Stock
Plan; (ii) upon conversion of the Company’s 12% convertible secured notes due
2015 in an aggregate principal amount not to exceed $11,020,800 owing to Costa
Brava Partnership III L.P., The Griffin Fund, LP and to certain other investors
(on substantially the same terms as such Indebtedness owing to Costa Brava
Partnership III L.P.); (iii) pursuant to a bona fide firm commitment
underwritten public offering with an institution that regularly underwrites as a
principal part of its business public offerings on a firm commitment basis which
generates gross proceeds to the Company in excess of $15,000,000 (other

 

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than an “at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act
and “equity lines”); (iv) in connection with corporate partnering or licensing
transactions or in connection with a strategic merger, acquisition,
consolidation or purchase of substantially all of the securities or assets of a
corporation or other entity, on terms approved by the Board of Directors and the
primary purpose of which is not to raise equity capital; (v) upon exercise or
conversion of any options, warrants or convertible securities of the Company
which are outstanding on the day immediately preceding the date herewith,
provided that the terms of such options, warrants or convertible securities are
not amended, modified or changed on or after the date herewith to decrease the
price, increase the number of shares issuable thereunder or extend the term of
such options or convertible securities; and (vi) in the closings of conversions
of Bridge Notes into the Company’s 12% convertible secured notes due 2015.
(s) “Existing Secured Debt” means all obligations, liabilities and indebtedness
of every nature of the Company from time to time owed to the Existing Secured
Note Holder under the Existing Secured Note, including, without limitation, the
principal amount of all debts, claims and indebtedness, accrued and unpaid
interest and all costs and expenses, whether primary, secondary, direct,
contingent, fixed or otherwise, heretofore, now and from time to time hereafter
owing, due or payable, whether before or after the filing of a Proceeding under
the Bankruptcy Code together with any interest accruing thereon after the
commencement of a Proceeding, without regard to whether or not such interest is
an allowed claim.
(t) “Existing Secured Note” means the Secured Promissory Note, dated April 14,
2010, issued by the Company to Timothy Looney, as in effect as of the date
hereof.
(u) “Existing Secured Note Holder” means Timothy Looney or any of his successors
or assigns as the Payee of the Existing Secured Note (as such term is defined
therein).
(v) “Fundamental Transaction” means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the assets of the Company to another Person, or (iii) allow
another Person to make a purchase, tender or exchange offer that is accepted by
the holders of more than the 50% of the outstanding shares of Company Common
Stock (not including any shares of Company Common Stock held by the Person or
Persons making or party to, or associated or affiliated with the Persons making
or party to, such purchase, tender or exchange offer), or (iv) consummate a
stock purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Company Common Stock (not including any
shares of Company Common Stock held by the other Person or other Persons making
or party to, or associated or affiliated with the other Persons making or party
to, such stock purchase agreement or other business combination), or
(v) reorganize, recapitalize or reclassify its Company Common Stock. A
Fundamental Transaction shall not include any transaction with any Holder, any
Affiliate of any Holder, or any Person otherwise related to or associated with a
Holder.

 

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(w) “Guarantee” means, with respect to any Person, (a) any guarantee of the
payment or performance of, or any contingent obligation in respect of, any
Indebtedness or other Liability of any other Person, (b) any other arrangement
whereby credit is extended to any obligor (other than such Person) on the basis
of any promise or undertaking of such Person (i) to pay the Indebtedness or
other Liability of such obligor, (ii) to purchase any obligation owed by such
obligor, (iii) to purchase or lease assets under circumstances that are designed
to enable such obligor to discharge one or more of its obligations or (iv) to
maintain the capital, working capital, solvency or general financial condition
of such obligor and (c) any liability as a general partner of a partnership or
as a venturer in a joint venture in respect of Indebtedness or other Liabilities
of such partnership or venture.
(x) “Holder Representative” means, as of the Initial Date, Costa Brava
Partnership III L.P. and at any time thereafter, the Person most recently
appointed to act as Holder Representative pursuant to Section 20(a).
(y) “Indebtedness” means, with respect to any Person, and without duplication,
all Liabilities, including all obligations in respect of principal, accrued
interest, penalties, fees and premiums, of such Person (a) for borrowed money
(including amounts outstanding under overdraft facilities), (b) evidenced by
notes, bonds, debentures or other similar Contractual Obligations, (c) in
respect of “earn-out” obligations and other obligations for the deferred
purchase price of property, goods or services (other than trade payables or
accruals incurred in the ordinary course of business), (d) for the capitalized
liability under all capital leases of such Person (determined in accordance with
GAAP), (e) in respect of letters of credit and bankers’ acceptances, (f) for
Contractual Obligations relating to interest rate protection, swap agreements
and collar agreements, in each case, to the extent payable if such Contractual
Obligation is terminated at the Closing, and (g) in the nature of Guarantees of
the obligations described in clauses (a) through (f) above of any other Person.
(z) “Initial Date” shall mean December 23, 2010.
(aa) “Interest Conversion Price” means, with respect to any Interest Payment
Date, the price computed as the Weighted Average Price of the Company Common
Stock on each of the twenty (20) consecutive Company Trading Days ending on the
second (2nd) Company Trading Day immediately preceding such Interest Payment
Date. All such determinations to be appropriately adjusted for any stock split,
stock dividend, stock combination or other similar transaction during such
period.
(bb) “Interest Period” means, initially, the period beginning on and including
the Issuance Date and ending on and including September 30, 2011 and each
successive period for each year until the Maturity Date as follows: the period
beginning on and including October 1 and ending on and including December 31;
the period beginning on and including January 1 and ending on and including
March 31; the period beginning on and including April 1 and ending on and
including June 30; the period beginning on and including July 1 and ending on
and including September 30.

 

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(cc) “Interest Rate” means twelve percent (12.0%) per annum; provided that upon
the occurrence and during the continuance of an Event of Default, the Interest
Rate shall be increased to twenty percent (20.0%) per annum. In the event that
such Event of Default is subsequently cured or waived, the Interest Rate shall
be reduced to twelve percent (12.0%) per annum as of the date of such cure or
waiver, it being understood, however, that unless the Required Holders otherwise
agree in writing, such reduction shall not apply retroactively to the period
when such Event of Default was continuing.
(dd) “Issuance Date” has the meaning set forth in Section 2 hereof.
(ee) “Liability” means, with respect to any Person, any liability or obligation
of such Person whether known or unknown, whether asserted or unasserted, whether
determined, determinable or otherwise, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, whether directly
incurred or consequential, whether due or to become due and whether or not
required under GAAP to be accrued on the financial statements of such Person.
(ff) “Material Adverse Effect” means any (i) adverse effect on the issuance or
validity of the Notes or the transactions contemplated hereby or on the ability
of the Company to perform its obligations under the Notes or the other
Transaction Documents, or (ii) material adverse effect on the condition
(financial or otherwise), properties, assets, liabilities, business or
operations of the Company and its Subsidiaries taken as a whole.
(gg) “Options” means with respect to any issuer, any rights, warrants or options
to subscribe for or purchase such issuer’s common stock or such issuer’s
Convertible Securities.
(hh) “Outstanding Note Obligations” shall have the meaning given to such term in
Section 5(b).
(ii) “Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of the Fundamental
Transaction.
(jj) “Permitted Indebtedness” means (A) Indebtedness incurred by the Company
that is made expressly subordinate in right of payment to the Indebtedness
evidenced by this Note, as reflected in a written agreement reasonably
acceptable to the Holder Representative and approved by the Holder
Representative in writing, and which Indebtedness does not provide at any time
for (1) the payment, prepayment, repayment, repurchase or defeasance, directly
or indirectly, of any principal or premium, if any, thereon until ninety-one
(91) days after the Maturity Date or later and (2) total interest and fees at a
rate in excess of six percent (6%) per annum, (B) Indebtedness secured by
Permitted Liens, (C) Indebtedness to trade creditors or for professional
services incurred in the ordinary course of business, (D) any Bridge Notes,
(E) senior subordinated Indebtedness in an aggregate principal amount not to
exceed $4,000,000 owing to Costa Brava Partnership III L.P., The Griffin Fund,
LP and to certain other investors (on substantially the same terms as such
Indebtedness owing to Costa Brava Partnership III L.P.), (F) Indebtedness owing
under the Company’s 12% convertible

 

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secured notes due 2015 in an aggregate principal amount not to exceed
$11,020,800 owing to Costa Brava Partnership III L.P., The Griffin Fund, LP and
to certain other investors (on substantially the same terms as such Indebtedness
owing to Costa Brava Partnership III L.P.), (G) Indebtedness owing to or held by
Summit Financial Resources, L.P. incurred by the Company (but in the case of any
such obligations in respect of principal, limited to an aggregate principal
amount not more than $500,000 in excess of the aggregate principal amount of the
Indebtedness owing under this clause (G) on March 16, 2011) to factor or finance
its accounts receivable, and (H) extensions, refinancings and renewals of any
items of Permitted Indebtedness described in clauses (A) through (F) above,
provided that the principal amount is not increased or the terms modified to
impose more burdensome terms upon the Company or its Subsidiary, as the case may
be.
(kk) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by operation
of law, such as materialmen’s liens, mechanics’ liens and other similar liens,
arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings, (iv) Liens securing the Company’s obligations under the
Notes, (v) Liens (A) upon or in any equipment acquired or held by the Company or
any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (B) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment,
(vi) Liens securing the Company’s obligations under the Indebtedness described
in clauses (E), (F) and (G) of the definition of “Permitted Indebtedness” (but
in the case of any Indebtedness described in such clause (G), limited to the
security interests granted under the agreement governing such Indebtedness as in
effect on the Initial Date), (vii) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (i) through (vi) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the Indebtedness being extended,
renewed or refinanced does not increase, (viii) leases or subleases and licenses
and sublicenses granted to others in the ordinary course of the Company’s
business, not interfering in any material respect with the business of the
Company and its Subsidiaries taken as a whole, (ix) Liens in favor of customs
and revenue authorities arising as a matter of law to secure payments of custom
duties in connection with the importation of goods, and (x) Liens arising from
judgments, decrees or attachments in circumstances not constituting an Event of
Default under Section 5(a)(vi).
(ll) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.
(mm) “Principal Market” means the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the
American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market,
the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin
Board.

 

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(nn) “Proceeding” means any voluntary or involuntary insolvency, bankruptcy,
receivership, custodianship, liquidation, dissolution, reorganization,
assignment for the benefit of creditors, appointment of a custodian, receiver,
trustee or other officer with similar powers or any other proceeding for the
liquidation, dissolution or other winding up of a Person.
(oo) “Redemption Price” means any of an Event of Default Redemption Price,
Alternative Event of Default Redemption Price or Holder Change of Control
Redemption Price.
(pp) “Required Holders” means the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.
(qq) “SEC” means the United States Securities and Exchange Commission.
(rr) “Subsidiary” means any corporation, association trust, limited liability
company, partnership, joint venture or other business association or entity
(i) at least 50% of the outstanding voting securities of which are at the time
owned or controlled directly or indirectly by the Company or (ii) with respect
to which the Company possesses, directly or indirectly, the power to direct or
cause the direction of the affairs or management of such Person.
(ss) “Successor Entity” means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with which
such Fundamental Transaction shall have been made, provided that if such Person
is not a publicly traded entity whose common stock or equivalent equity security
is quoted or listed for trading on an Eligible Market, Successor Entity shall
mean such Person’s Parent Entity.
(tt) “Transaction Documents” means this Note, the Other Notes, the Security
Agreement and any other documents or agreements which the parties agree shall
constitute a “Transaction Document”.
(uu) “Volume Weighted Average Price” for a period of days means the quotient of
(i) the sum of (a) the Weighted Average Price for a particular day multiplied by
the trading volume for such day, plus (b) the same calculation for each
successive day in the period, divided by (ii) the sum of the trading volume for
the entire period.
(vv) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York Time (or such other time as the
Principal Market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as the Principal Market
publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply,
the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as such market publicly
announces is the official close of trading) as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the Weighted Average Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Weighted Average Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the Holder Representative. If the Company and the Holder
Representative are unable to agree upon the fair market value of such security,
then such dispute shall be resolved pursuant to Section 26. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

 

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(32) SECURITY. The Notes shall be secured by and to the extent provided in the
Security Agreement.
(33) SUBORDINATION. It is a requirement of the Existing Secured Note that any
secured Indebtedness of the Company, including this Note, be subordinated in
right of payment to the Existing Secured Note. Accordingly, each of the Company
and, by acceptance of this Note, the Holder and each of its successors and
assigns hereby covenants and agrees that for so long (but only for so long) as
the Outstanding Note Obligations are secured by any of the assets of the
Company, the following provisions of this Section 33 shall apply:
(a) Subordination of Note to Existing Secured Debt. Notwithstanding anything to
the contrary set forth herein or in any of the Transaction Documents, this Note
shall be subordinated in right and time of payment, to the extent and in the
manner set forth in this Section 33, to the prior indefeasible payment in full
in cash of the Existing Secured Debt.
(b) Payment Restrictions. The Company hereby agrees that it may not make, and
the Holder hereby agrees that it will not accept, any Distribution with respect
to this Note until the earlier of (a) the date that is one (1) day following the
date the Existing Secured Debt is indefeasibly paid in full in cash and (b) in
the event that the Existing Secured Note Holder has acknowledged in writing that
the Existing Secured Debt has been indefeasibly paid in full in cash, the date
of such payment and acknowledgment in writing.
(34) Registered Obligation. The Company shall establish and maintain a record of
ownership (the “Register”) in which it will register by book entry the interest
of the initial Holder and of each subsequent assignee in this Note, and in the
right to receive any payments of principal and interest or any other payments
hereunder, and any assignment of any such interest. Notwithstanding anything
herein to the contrary, this Note is intended to be treated as a registered
obligation for federal income tax purposes and the right, title, and interest of
the Holder and its assignees in and to payments under this Note shall be
transferable only upon notation of such transfer in the Register. This Section
shall be construed so that the Note is at all times maintained in “registered
form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the
Internal Revenue Code and any related regulations (or any successor provisions
of the Code or such regulations).
[Signature Page Follows]

 

30

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

            IRVINE SENSORS CORPORATION
      By:           Name:           Title:      

Note

 

 

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EXHIBIT I
IRVINE SENSORS CORPORATION
CONVERSION NOTICE
TO BE EXECUTED BY THE REGISTERED HOLDER TO CONVERT THIS NOTE
INTO COMMON STOCK
Reference is made to the Subordinated Secured Convertible Note (the “Note”)
issued to the undersigned by Irvine Sensors Corporation (the “Company”). In
accordance with and pursuant to the Note, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Note) of the Note indicated
below into shares of Company Common Stock, par value $.01 per share (the
“Company Common Stock”), of the Company as of the date specified below. The
undersigned hereby represents and warrants that it is (i) an “accredited
investor” as that term is defined in Regulation D promulgated under the
Securities Act, (ii) acquiring the Company Common Stock for its own account for
investment and not with a view toward distribution in a manner which would
violate the Securities Act or any applicable state securities laws and
(iii) aware that the shares of Company Common Stock are “restricted securities”
under the federal securities laws and must be held indefinitely unless
subsequently registered under the Securities Act and under applicable state
securities laws or an exemption from such registration is available.
Date of Conversion:                                                     
          
Aggregate Conversion Amount to be converted:                          
                                                         
Please confirm the following information:                             
                                                       
Conversion Price:                                                     
                               
Number of shares of Company Common Stock to be issued:
                                                            
                    
Please issue the Company Common Stock into which the Note is being converted in
the following name and to the following address:
Issue to:                                                                  
                                                       
                                                      
                                                      
                                                       
                                                      
                                                      
                                                      
                                                       
                                                                 
Facsimile Number:                                                     
                                                                
                                                  
Authorization:                                                      
                                                                    
                       
By:                                                        
                                                
Title:                                           

 

 

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Dated:                                                          
                                                                     
                                       
Account Number:                                                      
                                                                      
                                          
   (if electronic book entry transfer)
Transaction Code Number:                                                    
                                                                          
   (if electronic book entry transfer)
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby directs
                                        , the Company’s transfer agent (the
“Transfer Agent”), to issue the above indicated number of shares of Company
Common Stock in accordance with the Transfer Agent Instructions dated
                    , 20  _____  from the Company and acknowledged and agreed to
by Transfer Agent.

            IRVINE SENSORS CORPORATION
      By:           Name:           Title:      

 

 

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Schedule I
Payment and Notice Address of Holder