Exhibit 10.1
Memorandum of Understanding
for Settlement and Debt Conversion Agreement
     This Memorandum of Understanding (“Agreement”) is entered into by and among
Irvine Sensors Corporation (the “Company”), Optex Systems, Inc. (“Optex- Texas”)
and Longview Fund, LP and Alpha Capital Anstalt (collectively, “Lenders”) as of
September 19, 2008.
1. Global Settlement. The Parties are entering into this Agreement to effect a
global settlement and restructuring of the Obligations (as described below),
with the intent that a portion of the Obligations shall be extinguished by the
Lenders as a result of a public foreclosure sale of the assets of Optex-Texas at
which the Lenders shall make an agreed minimum credit bid as set forth in
Section 4.3 below and the remaining portion of the Obligations shall be
converted into a new class of convertible preferred stock (“Convertible
Preferred Stock”) of the Company as set forth in Section 5 below as soon as the
Company is permitted to issue such securities in compliance with the listing
requirements of Nasdaq. The Convertible Preferred Stock shall be substantially
the same as the Company’s Series A-1, except that the conversion rate shall be
as set forth in Section 5.2 below. The parties intend that this Agreement be
legally binding, but that the parties shall promptly negotiate in good faith a
definitive Settlement and Debt Conversion Agreement (“Settlement Agreement”)
that will supersede this Agreement. The Parties intend to execute the Settlement
Agreement on or before September 26, 2008.
2. The Obligations.
     2.1 The Obligation Amount and Security. The total of the principal,
interest and related amounts owed by the Company to the Lenders as of August 24,
2008, is $18,357,844 (collectively, the “Obligations”). The Obligations do not
include the contingent notes payable to Lenders in the original principal amount
of $1.15 million, which notes will be cancelled in accordance with their terms
upon discharge of the Obligations as set forth herein. The Company acknowledges
that the amount of the Obligations shall be increased to include all interest
after August 24, 2008. The amount of accrued interest only shall increase the
Obligations and shall be added to the Second Conversion Amount (as defined
below). The Obligations including any accrued interest thereon have been
guaranteed by Optex-Texas (the “Optex-Texas Guaranty”), and the Optex-Texas
Guaranty is secured by the assets of Optex-Texas as described below. As used
herein the term “Loan Documents” shall include all the existing loan documents
evidencing or relating to the Obligations, any security agreement relating
thereto, or any guaranty thereof.
     2.2 Surviving Obligations. The Company acknowledges that the Obligations do
not include (i) any amounts currently owed to the Lenders pursuant to the Loan
Documents arising under the Company’s indemnification obligations under the Loan
Documents, or (ii) any amounts for expenses, including attorneys fees, incurred
or to be incurred by the Lenders in connection with this MOU or the
implementation of any of the restructuring transactions or enforcement actions
contemplated hereby. Any liabilities of the Company to the Lenders for expense
reimbursement or indemnification shall be accrued as an expense on the Company’s
balance sheet and paid pursuant to terms to be agreed upon in the Settlement
Agreement. The Company further acknowledges that it has a continuing obligation
and duty to indemnify, hold harmless and defend the Lenders and to pay any
amounts or liability incurred by Lenders as provided in the existing
indemnification provisions in the Loan Documents which shall survive this
Agreement, including, but not limited to, any indemnification obligations
related to the duty to defend any litigation or other matters involving Timothy
Looney or TWL Group L.P. Notwithstanding the foregoing upon, the completion of
the conversion into the Convertible Preferred Stock of the Second Conversion
Amount, the indemnification obligations under the Loan Documents shall be
discharged and

 

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replaced with comparable indemnification obligations in the Settlement
Agreement, which shall be retroactive to include the dates covered by the
indemnification obligations in the Loan Documents.  
3. Events of Defaults and Forbearance.
     3.1 Events of Default. The Company may be in default under certain of the
covenants and provisions of the Loan Documents, pursuant to which the Lenders
may have the right to accelerate its Obligations under the Loan Documents. The
Lenders intend to deliver to the Company and Optex-Texas a notice of the
occurrence of an event of default and acceleration under the Loan Documents and
the notice of the exercise of remedies described in Section 4.3 below.
     3.2 Forbearance. The Lenders hereby agree from and after the date of
execution of this Agreement until the conversion into equity of the Second
Conversion Amount to forbear in the exercise of any rights or remedies, whether
granted in the Loan Documents or under law, with respect to the Company or any
of its assets (the “Forbearance Period”), other than the exercise of the
Permitted Remedies. As used herein, the “Permitted Remedies” shall be limited
solely to (i) the exercise of the Lenders rights and remedies under applicable
law to conduct a public foreclosure sale as to all collateral securing the
Optex-Texas Guaranty pursuant to the terms of Section 4.5 below and (ii) to
enforce the terms of this Agreement and (iii) to obtain the benefits of the
continuing indemnification obligations of the Company to Lenders as described in
Section 2.2. The Forbearance Period shall terminate automatically upon the
occurrence of any of the following events: (i) the commencement by the Company
or Optex-Texas of a voluntary proceeding seeking relief with respect to itself
or its debts under any bankruptcy, insolvency or similar law, or seeking
appointment of a trustee, receiver, liquidator or other similar official for it
or any substantial part of its assets; or its consent to any of the foregoing in
any involuntary proceeding against it; or makes an assignment for the benefit
of, or the offering to or entering into by. the Company or Optex-Texas of any
reorganization with its creditors, (ii) commencement of an involuntary
proceeding against the Company or Optex-Texas of the kind described in clause
(i) above; (iii) the Company or Optex-Texas makes any payment on account of the
obligations owed to Looney on TWL Group, L.P., (iv) Looney or TWL Group, L.P.
take any judicial actions to impede the foreclosure against the Optex Texas
Collateral described in Section 4.3 below, or (v) 180 days after the date
hereof.
4. Foreclosure on Assets of Optex-Texas.
     4.1 Senior Security Interest. The Optex-Texas Guaranty is secured by a
first priority, perfected security interest in the assets of Optex-Texas
(“Optex-Texas Collateral”), which is senior to the claims of other creditors,
including the TWL Group, L.P. loan of $2,000,000 (the “TWL Loan”), which has
been subordinated to the Obligations pursuant to a Subordination Agreement dated
as of January 17, 2007 and for which a payment blockage notice has been sent by
the Lenders.
     4.2 Limitations on Use of Optex-Texas Collateral. Pursuant to the terms of
the Loan Documents, the Lenders have the right to seize or obtain control of,
and to use, operate, consume and sell the Optex-Texas Collateral in its
possession as appropriate. During the Forbearance Period and pending the
exercise of the remedies described in Section 4.3 below, the Company shall
continue to operate Optex-Texas in the ordinary course of business with the
intent of safeguarding the Optex-Texas Collateral and preserving the value of
Optex-Texas as a going concern.
     4.3 Foreclosure Process. The Lenders (or the Collateral Agent at the
direction of the Lenders) shall provide timely notice under the New York Uniform
Commercial Code (“NY UCC”) and any other applicable laws of a public sale under
the NY UCC, in which the Lenders, or an entity controlled by Lenders, will
credit bid not less than $15,000,000 of the Obligations (the “Optex-Texas
Allocation Amount”). The Company agrees not to object to the exercise of these
remedies by the

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Lenders. Except as provided in Section 5 below, the Lenders hereby waive any
right to seek any deficiency against the Company in connection with the
Optex-Texas Collateral or Optex-Texas Allocation Amount with the intent that the
full amount of the Optex-Texas Allocation Amount shall be indefeasibly
discharged and extinguished upon Lenders’ indefeasible receipt of the
Optex-Texas Collateral in connection with such foreclosure proceedings.
     4.4 Post Closing Relationship. If the Lenders, or an entity controlled by
the Lenders (“Optex-Delaware”), acquires the Optex-Texas Collateral at the
public sale, they will agree (a) to provide access to its books and records to
the extent reasonably necessary for the Company to prepare financial statements,
tax returns or comply with its SEC reporting duties or SOX obligations and
(b) to negotiate in good faith with the Company regarding (i) a contract
manufacturing relationship under which Optex-Delaware will manufacture products
for the Company and (ii) a consulting arrangement under which the Company will
facilitate transition of government contracts or assist in possible
renegotiation of government contracts or otherwise assist in the transition of
operations to Optex-Delaware.
In addition, Optex-Delaware shall acquire all of the assets of Optex-Texas and
none of the liabilities, with the exception of the specific liabilities set
forth on Schedule A attached hereto (provided that Schedule A shall be updated
immediately prior to the date of the foreclosure sale to reflect amounts that
were incurred in the ordinary course of business consistent with past practices
after the date of the attached Schedule A and are approved in writing by the
Lenders with Lenders reserving the right to reject any liability in their sole
discretion.) . Except as expressly provided in Schedule A , Lenders or
Optex-Delaware shall not assume or be obligated to pay any other liabilities of
Optex-Texas, including without limitation, the TWL Loan, any obligation or debt
owed by Optex-Texas to the Company, any tax liability or any tort claim asserted
against Optex-Texas.
The Company, Optex-Texas and Optex-Delaware shall cooperate and use commercially
reasonable efforts to cause the assignment, as determined by Optex-Delaware is
its sole discretion, of any contract, real or personal property lease,
government contract, any other contract right, or any permit or license right
not acquired by Optex-Delaware as a result of the foreclosure sale.
5. Debt Conversion.
     5.1 Amount of Obligations. The portion of the Obligations remaining after
the Optex-Texas Allocation Amount has been applied under Section 4.3 above
(including any accrued interest and other related amounts since the date of this
Agreement shall be converted into the Company’s Convertible Preferred Stock as
described below. The initial $1.0 million amount of the Obligations to be
converted is referred to as the “Initial Conversion Amount”. The remaining
amount of the Obligations that may be converted after the Initial Conversion
Amount is referred to as the “Second Conversion Amount.”
     5.2 Securities to be Issued. The Company shall issue Convertible Preferred
Stock of the Company in consideration of the cancellation and indefeasible
discharge of the Initial Conversion Amount and the Second Conversion Amount.
During the period preceding the issuance of the Convertible Preferred Stock, the
Initial Conversion Amount and the Second Conversion Amount shall remain
outstanding, but shall be subordinated to the New Debt Facility and the Bridge
Notes as described in Section 5.5 below. The Convertible Preferred Stock shall
be convertible into shares of the Company’s Common Stock at a conversion price
equal to the price per share of Common Stock issued pursuant to the Equity
Offering described in Section 5.4 below. In the event that the Equity Offering
is not consummated within 180 days after the date hereof, then such conversion
price shall be set at the lowest price offered in the Equity Offering, if such
price is determinable. If such price is not determinable, then the conversion
price shall be equal to the fair market value (as determined in accordance with
Nasdaq’s rules) of the Company’s Common Stock immediately preceding the issuance
of the Convertible Preferred Stock, but

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the conversion price shall be subject to ratchet anti-dilution adjustment for
one year following the date of issuance of the Convertible Preferred Stock in
the event of subsequent issuances of Common Stock at a purchase price below the
Convertible Preferred Stock (other than issuances in connection with any of the
Company’s existing benefit plans). The Convertible Preferred Stock shall be
issued concurrently with the shares of Common Stock issued pursuant to the
Equity Offering or if no such closing occurs, then at a mutually agreed upon
time. The conversion of the Convertible Preferred Stock shall be subject the
same conversion blocker as set forth in the Certificate of Designation for the
existing Series A-1 Preferred Stock.
     5.3 Bridge Offering. The Company intends to raise $1.0 million through the
issuance of secured promissory notes (“Bridge Notes”) as soon as possible
following the execution of this Agreement (the “Bridge Offering”). The Lenders
hereby consent to the Bridge Offering and shall execute all the documentation
necessary to effect the conversion of the Initial Conversion Amount into the
Convertible Preferred Stock with the sole condition precedent being the
consummation of the Bridge Offering.
     5.4 New Debt Facility and Equity Offerings. The Company also intends to
obtain additional capital by either (i) securing a new debt facility with net
proceeds of at least $2.0 million (the “New Debt Facility”) or (ii) completing
an equity offering with net proceeds of at least $2 million (the “Equity
Offering”). The Lenders hereby consent to the New Debt Facility and the Equity
Offering and agree to execute all the documentation necessary to effect the
conversion of the Second Conversion Amount into the Convertible Preferred Stock
with the sole condition precedent being the consummation of either the New Debt
Facility or the Equity Offering with net proceeds of at least $2.0 million.
Until December 31, 2009, the Lenders shall have the right, but not the
obligation, to proportionately purchase Common Stock from the Company in one or
more tranches for the aggregate amount of up to $1.0 million subject to Nasdaq
approval, if required. The purchase price of the Common Stock shall be the
closing price of the Common Stock on the day immediately preceding the date of
the purchase of such Common Stock.
     5.5 Intercreditor Matters. The Lenders agree to execute appropriate
documentation in order to effectuate the following priority among the classes of
the Company’s debt:

     
Upon closing of Bridge Debt:
  Upon closing of New Debt Facility:
 
   
1. Bridge Debt
  1. New Debt Facility
 
   
2. Initial Conversion Amount and Second Conversion Amount (pari passu) until
converted
  2. Bridge Debt
 
   
3. Optex-Texas Allocation Amount
  3. Initial Conversion Amount and Second Conversion Amount (pari passu) until
converted

The documents to be executed shall include: one or more intercreditor agreements
for the benefit of the holders of the Bridge Notes and the New Debt Facility
subordinating the lien in the collateral of the Original Lenders to the lien in
the collateral of the Bridge Note Lenders and the New Debt Facility lenders and
subordinating the Initial Conversion Amount and Second Conversion Amounts and
Optex Texas Allocation Amount to accomplish the priority set forth in the table
above and providing for payment blockage and remedy standstill provisions. For
purposes of this Section 5.5, ‘Collateral’ shall not include any interest of the
Company in the equity of Optex-Texas, nor the Optex-Texas Collateral. The

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replacement indemnification provisions described in Section 2.2 shall not be
subordinate to the Bridge Debt and New Debt Facility.
6. Release and Waiver
     Concurrent with the closing of the Equity Offering and the conversion of
the Initial Conversion Amount and Secondary Conversion Amount, and with the
exception of any rights that arise under this Agreement, the Settlement
Agreement or any other agreements contemplated therein and the Surviving
Obligations set forth in Section 2.2, the parties shall execute a complete
release and waiver of any and all claims they may have against the others
relating to the Obligations and the Lenders shall release all of their liens and
security interests in any of the assets of the Company and its subsidiaries.
Notwithstanding the forgoing, (1) the obligations of the parties set forth in
this Agreement and in the Settlement Agreement shall not be affected by the
foregoing and (2) the effectiveness of any releases, the satisfaction of the
Obligations in whole or in part, the debt conversion set forth in Section 5 and
any other modification of the rights and duties of the parties existing prior to
this Agreement shall not become effective until, and are all expressly
conditioned on, the final completion of the Lenders’ foreclosure on the
Optex-Texas Collateral.  The agreements set forth herein shall be null and void
and the rights and obligations of the parties existing prior to this Agreement
shall be restored as if this Agreement had not existed in the event the Lenders’
foreclosure on the Optex-Texas Collateral for any reason cannot be completed, is
stayed, is set aside, is rescinded or is otherwise voided by judicial process or
otherwise. 

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                  Agreed & Accepted:          
 
                LONGVIEW FUND, L.P.       IRVINE SENSORS CORPORATION
 
               
By:
  /s/ Wayne Coleson       By:   /s/ John J. Stuart, Jr.
 
               
Title:
  Chief Investment Officer        Title:   Senior Vice President and Chief
Financial Officer 
 
               
 
                ALPHA CAPITAL ANSTALT       OPTEX SYSTEMS, INC. (a Texas
Corporation)
 
               
By:
  /s/ Konrad Ackerman        By:   /s/ John J. Stuart, Jr. 
 
               
Title:
          Title:   Chief Financial Officer 
 
               

 *
[SIGNATURE PAGE TO MEMORANDUM OF UNDERSTANDING]

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SCHEDULE A
Liabilities of Optex-Texas to be purchased by Optex-Delaware
(amounts shown are as of August 24, 2008 and will be
adjusted to reflect actual amounts on Optex-Texas balance sheet
on the purchase date)

                 
Accounts Payable
          $ 2,133,100  
(does NOT include intercompany payable to Irvine Sensors)
               
 
               
Accrued Expenses
               
Payroll & payroll related
  $ 144,200          
Benefits
    94,300          
Government contract settlement liability
    351,200          
Accrued operating expenses not yet invoiced
    141,400          
Deferred rent
    87,700          
Property taxes & other
    17,100       835,900  
 
             
 
               
Accrued loss on contracts
            400,000  
 
             
 
               
Total Purchased Liabilities
          $ 3,369,000  
 
             

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