Exhibit 10.3
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of November 5, 2008 (the “Agreement”) is by
and between IRVINE SENSORS CORPORATION, a corporation organized and existing
under the laws of the State of Delaware (the “Company”), and S. MICHAEL RUDOLPH,
as collateral agent for the Bridge Lenders (in such capacity, together with its
successors in such capacity, the “Collateral Agent”).
Pursuant to the terms of a Private Placement Memorandum dated as of
September 29, 2008 (as modified and supplemented and in effect from time to
time, the “PPM”), the Company has issued to each of the Lenders (each, a “Bridge
Lender” and collectively, the “Bridge Lenders”), severally and not jointly,
certain Notes in the aggregate principal amount of up to $1,000,000 (the “Bridge
Notes”), as more fully described in the PPM. It is a material benefit to the
Company that the Bridge Lenders purchase the Notes from the Company.
To induce each of the Bridge Lenders to purchase the Bridge Notes and to secure
the Company’s obligations under the Bridge Notes, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company has agreed to pledge and grant a security interest in
the Collateral (as hereinafter defined) as security for the Secured Obligations
(as hereinafter defined). Accordingly, the parties hereto agree as follows:
Section 1. Definitions. Each capitalized term used herein and not otherwise
defined shall have the meaning assigned to such term in the Purchase Agreement.
In addition, as used herein:
“Accounts” shall have the meaning ascribed thereto in Section 3(d) hereof.
“Business” shall mean the businesses from time to time, now or hereafter,
conducted by the Company and the Issuers.
“Collateral” shall have the meaning ascribed thereto in Section 3 hereof.
“Collateral Agent Agreement” shall mean the Collateral Agent Agreement of even
date herewith among the Bridge Lenders, the Junior Lenders and the Collateral
Agent, as amended from time to time hereafter.
“Copyright Collateral” shall mean all Copyrights, whether now owned or hereafter
acquired by the Company, that are associated with the Business.
“Copyrights” shall mean all copyrights, copyright registrations and applications
for copyright registrations, including, without limitation, all renewals and
extensions thereof, the right to recover for all past, present and future
infringements thereof, and all other rights of any kind whatsoever accruing
thereunder or pertaining thereto.
“Documents” shall have the meaning ascribed thereto in Section 3(j) hereof.
“Equipment” shall have the meaning ascribed thereto in Section 3(h) hereof.
“Event of Default” shall have the meaning ascribed thereto in Section 5 of the
Notes.
“Excluded Collateral” shall mean the “Optex Collateral” as such term is defined
in the Collateral Agent Agreement. “Excluded Collateral” also includes any
(i) licenses or user or other agreements, or consents, permits, variances, or
any contracts which by their terms cannot be assigned, (ii) software or computer
programs not owned by the Company or any of its Subsidiaries and
(iii) information the assignment of which would violate privacy laws.
“Government Contracts Collateral” shall mean all non-classified government
contracts with a value in excess of $1,000,000 entered into and to be entered
into by the Company.

 

 

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“Instruments” shall have the meaning ascribed thereto in Section 3(e) hereof.
“Intellectual Property” shall mean, collectively, all Copyright Collateral, all
Patent Collateral and all Trademark Collateral, together with (a) all
inventions, processes, production methods, proprietary information, know-how and
trade secrets used or useful in the Business; (b) all licenses or user or other
agreements granted to the Company with respect to any of the foregoing, in each
case whether now or hereafter owned or used including, without limitation, the
licenses or other agreements with respect to the Copyright Collateral, the
Patent Collateral or the Trademark Collateral; (c) all customer lists,
identification of suppliers, data, plans, blueprints, specifications, designs,
drawings, recorded knowledge, surveys, manuals, materials standards, processing
standards, catalogs, computer and automatic machinery software and programs, and
the like pertaining to the operation by the Company of the Business; (d) all
sales data and other information relating to sales now or hereafter collected
and/or maintained by the Company that pertain to the Business; (e) all
accounting information which pertains to the Business and all media in which or
on which any of the information or knowledge or data or records which pertain to
the Business may be recorded or stored and all computer programs used for the
compilation or printout of such information, knowledge, records or data; (f) all
licenses, consents, permits, variances, certifications and approvals of
governmental agencies now or hereafter held by the Company pertaining to the
operation by the Company and its Subsidiaries of the Business; and (g) all
causes of action, claims and warranties now or hereafter owned or acquired by
the Company in respect of any of the items listed above.
“Intercreditor Agreement” shall mean that certain Intercreditor Agreement dated
the date hereof by and among the Bridge Lenders, the Junior Lenders and the
Collateral Agent.
“Inventory” shall have the meaning ascribed thereto in Section 3(f) hereof.
“Issuers” shall mean, collectively, the respective entities identified on Annex
1 hereto, and all other entities formed by the Company or entities in which the
Company owns or acquires greater than a majority of the capital stock or similar
interest excluding Optex Systems.
“Junior Lenders” shall mean, collectively, Longview Fund, L.P. and Alpha Capital
Anstalt.
“Lien” shall mean any mortgage or deed of trust, pledge, hypothecation,
assignment, deposit arrangement, lien, charge, claim, security interest,
easement or encumbrance, or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including any lease
or title retention agreement, any financing lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement perfecting a security interest under the Uniform
Commercial Code or comparable law of any jurisdiction).
“Motor Vehicles” shall mean motor vehicles, tractors, trailers and other like
property, whether or not the title thereto is governed by a certificate of title
or ownership.
“Optex” shall mean Optex Systems, Inc., a Texas corporation.
“Patent Collateral” shall mean all Patents, whether now owned or hereafter
acquired by the Company that are associated with the Business.
“Patents” shall mean all patents and patent applications, including, without
limitation, the inventions and improvements described and claimed therein
together with the reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof, all income, royalties, damages and payments now
or hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past or future infringements
thereof, the right to sue for past, present and future infringements thereof,
and all rights corresponding thereto throughout the world.
“Permitted Indebtedness” shall mean the Indebtedness permitted in favor of the
Junior Lenders.
“Permitted Liens” shall mean the Liens permitted pursuant to the Collateral
Agent Agreement.

 

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“Pledged Stock” shall have the meaning ascribed thereto in Section 3(a) hereof.
“Real Estate” shall have the meaning ascribed thereto in Section 3(l) hereof.
“Secured Obligations” shall mean, collectively, all obligations of the Company
to the Bridge Lenders in respect of the Bridge Notes.
“Stock Collateral” shall mean, collectively, the Collateral described in clauses
(a) through (c) of Section 3 hereof and the proceeds of and to any such property
and, to the extent related to any such property or such proceeds, all books,
correspondence, credit files, records, invoices and other papers.
“Trademark Collateral” shall mean all Trademarks, whether now owned or hereafter
acquired by the Company, that are associated with the Business. Notwithstanding
the foregoing, the Trademark Collateral does not and shall not include any
Trademark which would be rendered invalid, abandoned, void or unenforceable by
reason of its being included as part of the Trademark Collateral.
“Trademarks” shall mean all trade names, trademarks and service marks, logos,
trademark and service mark registrations, and applications for trademark and
service mark registrations, including, without limitation, all renewals of
trademark and service mark registrations, all rights corresponding thereto
throughout the world, the right to recover for all past, present and future
infringements thereof, all other rights of any kind whatsoever accruing
thereunder or pertaining thereto, together, in each case, with the product lines
and goodwill of the business connected with the use of, and symbolized by, each
such trade name, trademark and service mark.
“Uniform Commercial Code” or “UCC” shall mean the Uniform Commercial Code as in
effect in the State of New York from time to time.
Section 2. Representations and Warranties. The Company represents and warrants
to the Collateral Agent and each of the Bridge Lenders that:
a. the Company is the sole beneficial owner of the Collateral and no Lien exists
or will exist upon any Collateral at any time (and, with respect to the Stock
Collateral, no right or option to acquire the same exists in favor of any other
Person), except for Permitted Liens and the pledge and security interest in
favor of each of the Bridge Lenders created or provided for herein which pledge
and security interest constitutes a perfected pledge and security interest in
and to all of the Collateral, assuming applicable financing statements are duly
and properly filed (other than Intellectual Property of the Company registered
or otherwise located outside of the United States of America);
b. the Pledged Stock directly or indirectly owned by the Company in the entities
identified in Annex 1 hereto is, and all other Pledged Stock, whether issued now
or in the future, will be, duly authorized, validly issued, fully paid and
nonassessable, free and clear of all Liens other than Permitted Liens and none
of such Pledged Stock is or will be subject to any contractual restriction,
preemptive and similar rights, or any restriction under the charter or by-laws
of the respective Issuers of such Pledged Stock, upon the transfer of such
Pledged Stock (except for any such restriction contained herein or in a Security
Agreement creating a Permitted Lien);
c. the Pledged Stock directly or indirectly owned by the Company in the entities
identified in Annex 1 hereto constitutes all of the issued and outstanding
shares of capital stock of any class of such Issuers beneficially owned by the
Company on the date hereof (whether or not registered in the name of the
Company) and said Annex 1 correctly identifies, as at the date hereof, the
respective Issuers of such Pledged Stock; and
d. the Company owns and possesses the right to use, and, has done nothing to
authorize or enable any other Person to use, all of its Copyrights, Patents and
Trademarks (other than licenses which are not material). The Company owns or
possesses the right to use all material Copyrights, Patents and Trademarks,
necessary for the operation of the Business.

 

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e. to the Company’s knowledge, (i) there is no violation by others of any right
of the Company with respect to any material Copyrights, Patents or Trademarks,
respectively, and (ii) the Company is not, in connection with the Business,
infringing in any respect upon any Copyrights, Patents or Trademarks of any
other Person; and no proceedings have been instituted or are pending against the
Company or, to the Company’s knowledge, threatened, and no claim against the
Company has been received by the Company, alleging any such violation; and
f. the Company does not own any material Trademarks registered in the United
States of America to which the last sentence of the definition of Trademark
Collateral applies.
Section 3. Collateral. As collateral security for the prompt payment in full
when due (whether at stated maturity, by acceleration or otherwise) of the
Secured Obligations, the Company hereby pledges, grants, assigns, hypothecates
and transfers to the Collateral Agent on behalf of the Bridge Lenders as
hereinafter provided, a security interest in and Lien upon all of the Company’s
right, title and interest in, to and under all personal property and other
assets of the Company, whether now owned or hereafter acquired by or arising in
favor of the Company, whether now existing or hereafter coming into existence,
whether owned or consigned by or to the Company, or leased from or to the
Company and regardless of wherever located, except for the Excluded Collateral
(all being collectively referred to herein as “Collateral”) including:
a. the Company’s direct or indirect ownership interest in the respective shares
of capital stock of the Issuers and all other shares of capital stock of
whatever class of the Issuers, now or hereafter owned by the Company, together
with in each case the certificates evidencing the same (collectively, the
“Pledged Stock”);
b. all shares, securities, moneys or property representing a dividend on any of
the Pledged Stock, or representing a distribution or return of capital upon or
in respect of the Pledged Stock, or resulting from a split-up, revision,
reclassification or other like change of the Pledged Stock or otherwise received
in exchange therefor, and any subscription warrants, rights or options issued to
the holders of, or otherwise in respect of, the Pledged Stock;
c. without affecting the obligations of the Company under any provision
prohibiting such action hereunder or under the Purchase Agreement or the Notes,
in the event of any consolidation or merger in which any Issuer is not the
surviving corporation, all shares issued to the Company of each class of the
capital stock of the successor corporation (unless such successor corporation is
the Company itself) formed by or resulting from such consolidation or merger
(the Pledged Stock, together with all other certificates, shares, securities,
properties or moneys as may from time to time be pledged hereunder pursuant to
clause (a) or (b) above and this clause (c) being herein collectively called the
“Stock Collateral”);
d. all accounts and general intangibles (each as defined in the Uniform
Commercial Code) of the Company constituting any right to the payment of money,
including (but not limited to) all moneys due and to become due to the Company
in respect of any loans or advances for the purchase price of Inventory or
Equipment or other goods sold or leased or for services rendered, all moneys due
and to become due to the Company under any guarantee (including a letter of
credit) of the purchase price of Inventory or Equipment sold by the Company and
all tax refunds (such accounts, general intangibles and moneys due and to become
due being herein called collectively “Accounts”);
e. all instruments, chattel paper or letters of credit (each as defined in the
Uniform Commercial Code) of the Company evidencing, representing, arising from
or existing in respect of, relating to, securing or otherwise supporting the
payment of, any of the Accounts, including (but not limited to) promissory
notes, drafts, bills of exchange and trade acceptances (herein collectively
called “Instruments”);
f. all inventory (as defined in the Uniform Commercial Code) of the Company and
all goods obtained by the Company in exchange for such inventory (herein
collectively called “Inventory”);

 

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g. all Intellectual Property of the Company and all other accounts or general
intangibles of the Company not constituting Intellectual Property or Accounts;
h. all equipment (as defined in the Uniform Commercial Code) of the Company
(herein collectively called “Equipment”);
i. each contract and other agreement of the Company relating to the sale or
other disposition of Inventory or Equipment;
j. all documents of title (as defined in the Uniform Commercial Code) or other
receipts of the Company covering, evidencing or representing Inventory or
Equipment (herein collectively called “Documents”);
k. all rights, claims and benefits of the Company against any Person arising out
of, relating to or in connection with Inventory or Equipment purchased by the
Company, including, without limitation, any such rights, claims or benefits
against any Person storing or transporting such Inventory or Equipment;
l. all estates of the Company in land together with all improvements and other
structures now or hereafter situated thereon, together with all rights,
privileges, tenements, hereditaments, appurtenances, easements, including, but
not limited to, rights and easements for access and egress and utility
connections, and other rights now or hereafter appurtenant thereto (“Real
Estate”);
m. all Government Contracts Collateral;
n. all other tangible or intangible property of the Company, including, without
limitation, all proceeds, products and accessions of and to any of the property
of the Company described in clauses (a) through (m) above in this Section 3
(including, without limitation, any proceeds of insurance thereon), and, to the
extent related to any property described in said clauses or such proceeds,
products and accessions, all books, correspondence, credit files, records,
invoices and other papers, including without limitation all tapes, cards,
computer runs and other papers and documents in the possession or under the
control of the Company or any computer bureau or service company from time to
time acting for the Company.
Section 4. Further Assurances; Remedies. In furtherance of the grant of the
pledge and security interest pursuant to Section 3 hereof, the Company hereby
agrees with the Collateral Agent and each of the Bridge Lenders as follows:
4.01 Delivery and Other Perfection. Subject to the terms of the Collateral Agent
Agreement and the Intercreditor Agreement, the Company shall:
a. if any of the above-described shares, securities, monies or property required
to be pledged by the Company under clauses (a), (b) and (c) of Section 3 hereof
are received by the Company, forthwith either (x) deliver and pledge to the
Collateral Agent such shares or securities so received by the Company (together
with the certificates for any such shares and securities duly endorsed in blank
or accompanied by undated stock powers duly executed in blank) all of which
thereafter shall be held by the Collateral Agent, pursuant to the terms of this
Agreement, as part of the Collateral (subject to the Company’s obligations
pursuant to the Security Agreements by the Company in favor of the Junior
Lenders) or (y) take such other action as the Collateral Agent shall reasonably
deem necessary or appropriate to duly record the Lien created hereunder in such
shares, securities, monies or property referred to in said clauses (a), (b) and
(c) of Section 3;
b. deliver and pledge to the Collateral Agent, at the Collateral Agent’s
reasonable request, any and all Instruments, endorsed and/or accompanied by such
instruments of assignment and transfer in such form and substance as the
Collateral Agent may request (subject to the Company’s obligations pursuant to
the Security Agreements by the Company in favor of the Junior Lenders);
provided, that so long as no Event of Default shall have occurred and be
continuing, the Company may retain for collection in the ordinary course any
Instruments received by it in the ordinary course of business and any
Instruments relating to Government Contracts Collateral;

 

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c. give, execute, deliver, file and/or record, or authorize the Collateral Agent
to file and/or record, any financing statement, notice, instrument, document,
agreement or other papers that may be necessary or desirable (in the reasonable
judgment of the Collateral Agent) to create, preserve, perfect or validate any
security interest granted pursuant hereto or to enable the Collateral Agent to
exercise and enforce their rights hereunder with respect to such security
interest, including, without limitation, causing any or all of the Stock
Collateral to be re-registered as pledged in the name of the Collateral Agent or
its nominee for the benefit of the Company (subject to the Company’s obligations
pursuant to the Security Agreements by the Company in favor of the Junior
Lenders) (and the Collateral Agent agrees that if any Stock Collateral is
registered in its name or the name of its nominee for the benefit of the
Company, the Collateral Agent will thereafter promptly give to the Company
copies of any notices and communications received by it with respect to the
Stock Collateral), provided that notices to account debtors in respect of any
Accounts or Instruments shall be subject to the provisions of Section 4.09
below;
d. upon the acquisition after the date hereof by the Company of any Equipment
covered by a certificate of title or ownership cause the Collateral Agent to be
listed as a lienholder on such certificate of title and within 120 days of the
acquisition thereof deliver evidence of the same to the Collateral Agent;
e. keep accurate books and records relating to the Collateral, and stamp or
otherwise mark such books and records in such manner as the Collateral Agent may
reasonably require in order to reflect the security interests granted by this
Agreement;
f. furnish to the Collateral Agent from time to time (but, unless an Event of
Default shall have occurred and be continuing, no more frequently than
quarterly) statements and schedules further identifying and describing the
Copyright Collateral, the Patent Collateral and the Trademark Collateral,
respectively, and such other reports in connection with the Copyright
Collateral, the Patent Collateral and the Trademark Collateral, as the
Collateral Agent may reasonably request, all in reasonable detail;
g. permit representatives of the Collateral Agent, upon reasonable notice, at
any time during normal business hours to inspect and make abstracts from its
books and records pertaining to the Collateral, and permit representatives of
the Collateral Agent to be present at the Company’s place of business to receive
copies of all communications and remittances relating to the Collateral, and
forward copies of any notices or communications by the Company with respect to
the Collateral, all in such manner as the Collateral Agent may reasonably
require; provided, however, that in each case, the Company shall not be required
to provide access to any materials or by any representatives of the Collateral
Agent if the Company determines that access to such information or by such
representatives could adversely affect the attorney-client privilege between the
Company and its counsel or could result in the disclosure of trade secrets,
material nonpublic information or other confidential or proprietary information;
and
h. upon the occurrence and during the continuance of any Event of Default, upon
request of the Collateral Agent, promptly notify each account debtor in respect
of any Accounts or Instruments that such Collateral has been assigned to the
Collateral Agent hereunder, and that any payments due or to become due in
respect of such Collateral are to be made directly to the Collateral Agent.
4.02 Other Financing Statements and Liens. Except with respect to Permitted
Indebtedness, without the prior written consent of the Collateral Agent, the
Company shall not file or suffer to be on file, or authorize or permit to be
filed or to be on file, in any jurisdiction, any financing statement or like
instrument with respect to the Collateral in which the Collateral Agent is not
named as the sole secured party for the benefit of each of the Bridge Lenders.
4.03 Preservation of Rights. The Collateral Agent shall not be required to take
steps necessary to preserve any rights against prior parties to any of the
Collateral.

 

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4.04 Special Provisions Relating to Certain Collateral.
a. Stock Collateral.
(1) The Company will cause the Stock Collateral to constitute at all times 100%
of the total number of shares of each class of capital stock of each Issuer then
outstanding that is owned directly or indirectly by the Company.
(2) So long as no Event of Default shall have occurred and be continuing, the
Company shall have the right to exercise all voting, consensual and other powers
of ownership pertaining to the Stock Collateral for all purposes not
inconsistent with the terms of this Agreement, any other Transaction Document or
any other instrument or agreement referred to herein or therein, provided that
the Company agrees that it will not vote the Stock Collateral in any manner that
is inconsistent with the terms of this Agreement, and the Collateral Agent shall
execute and deliver to the Company or cause to be executed and delivered to the
Company all such proxies, powers of attorney, dividend and other orders, and all
such instruments, without recourse, as the Company may reasonably request for
the purpose of enabling the Company to exercise the rights and powers which it
is entitled to exercise pursuant to this Section 4.04(a)(2).
(3) Unless and until an Event of Default has occurred and is continuing, the
Company shall be entitled to receive and retain any dividends on the Stock
Collateral paid in cash out of earned surplus.
(4) If any Event of Default shall have occurred, then so long as such Event of
Default shall continue, and whether or not the Collateral Agent exercises any
available right to declare any Secured Obligations due and payable or seeks or
pursues any other relief or remedy available to it under applicable law or under
this Agreement, the Bridge Notes or any other agreement relating to such Secured
Obligations, all dividends and other distributions on the Stock Collateral shall
be paid directly to the Collateral Agent (subject to the Company’s obligations
pursuant to the Security Agreements by the Company in favor of the Junior
Lenders) and retained by it as part of the Stock Collateral, subject to the
terms of this Agreement, and, if the Collateral Agent shall so request in
writing, the Company agrees to execute and deliver to the Collateral Agent
appropriate additional dividend, distribution and other orders and documents to
that end (subject to the Company’s obligations pursuant to the Security
Agreements by the Company in favor of the Junior Lenders), provided that if such
Event of Default is cured, any such dividend or distribution theretofore paid to
the Collateral Agent shall, upon request of the Company (except to the extent
theretofore applied to the Secured Obligations) be returned by the Collateral
Agent to the Company.
b. Intellectual Property.
(1) For the purpose of enabling the Collateral Agent to exercise rights and
remedies under Section 4.05 hereof at such time as the Collateral Agent shall be
lawfully entitled to exercise such rights and remedies, and for no other
purpose, the Company hereby grants to the Collateral Agent, to the extent
assignable, an irrevocable, non-exclusive license without the right to grant
sublicenses (exercisable without payment of royalty or other compensation to the
Company) to use any of the Intellectual Property now owned or hereafter acquired
by the Company, wherever the same may be located, including in such license
reasonable access to all media in which any of the licensed items may be
recorded or stored and to all computer programs used for the compilation or
printout thereof.
(2) Notwithstanding anything contained herein to the contrary, so long as no
Event of Default shall have occurred and be continuing, the Company will be
permitted to exploit, use, enjoy, protect, license, sublicense, assign, sell,
dispose of or take other actions with respect to the Intellectual Property in
the ordinary course of the business of the Company. In furtherance of the
foregoing, unless an Event of Default shall have occurred and is continuing, the
Collateral Agent shall from time to time, upon the request of the Company,
execute and deliver any instruments, certificates or other documents, in the
form so requested, which the Company shall have certified are appropriate (in
its judgment) to allow it to take any action permitted above (including
relinquishment of the license provided pursuant to clause (1) immediately above
as to any specific Intellectual Property). Further, upon the payment in full of
all of the Secured Obligations or earlier expiration of this Agreement or
release of the Collateral, the Collateral Agent shall grant back to the Company
the license granted pursuant to clause (1) immediately above. The exercise of
rights and remedies under Section 4.05 hereof by the Collateral Agent shall not
terminate the rights of the holders of any licenses or sublicenses theretofore
granted by the Company in accordance with the first sentence of this clause (2).

 

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4.05 Events of Default, etc. During the period during which an Event of Default
shall have occurred and be continuing:
a. the Company shall, at the request of the Collateral Agent, assemble the
Collateral owned by it at such place or places, reasonably convenient to both
the Collateral Agent and the Company, designated in its request (subject to the
Company’s obligations pursuant to the Security Agreements by the Company in
favor of the Junior Lenders);
b. the Collateral Agent may make any reasonable compromise or settlement deemed
desirable with respect to any of the Collateral and may extend the time of
payment, arrange for payment in installments, or otherwise modify the terms of,
any of the Collateral;
c. the Collateral Agent shall have all of the rights and remedies with respect
to the Collateral of a secured party under the Uniform Commercial Code (whether
or not said Code is in effect in the jurisdiction where the rights and remedies
are asserted) and such additional rights and remedies to which a secured party
is entitled under the laws in effect in any jurisdiction where any rights and
remedies hereunder may be asserted, including, without limitation, the right, to
the maximum extent permitted by law, to exercise all voting, consensual and
other powers of ownership pertaining to the Collateral as if the Collateral
Agent were the sole and absolute owner thereof (and the Company agrees to take
all such action as may be appropriate to give effect to such right);
d. the Collateral Agent in its discretion may, in its name or in the name of the
Company or otherwise, demand, sue for, collect or receive any money or property
at any time payable or receivable on account of or in exchange for any of the
Collateral, but shall be under no obligation to do so; and
e. the Collateral Agent may upon 10 Business Days’ prior written notice to the
Company of the time and place, with respect to the Collateral or any part
thereof which shall then be or shall thereafter come into the possession,
custody or control of the Collateral Agent, or any of its respective agents,
sell, lease, assign or otherwise dispose of all or any of such Collateral, at
such place or places as the Collateral Agent deems best, and for cash or on
credit or for future delivery (without thereby assuming any credit risk), at
public or private sale, without demand of performance or notice of intention to
effect any such disposition or of time or place thereof (except such notice as
is required above or by applicable statute and cannot be waived) and the
Collateral Agent or anyone else may be the Purchaser, lessee, assignee or
recipient of any or all of the Collateral so disposed of at any public sale (or,
to the extent permitted by law, at any private sale), and thereafter hold the
same absolutely, free from any claim or right of whatsoever kind, including any
right or equity of redemption (statutory or otherwise), of the Company, any such
demand, notice or right and equity being hereby expressly waived and released.
In the event of any sale, assignment, or other disposition of any of the
Trademark Collateral, the goodwill of the Business connected with and symbolized
by the Trademark Collateral subject to such disposition shall be included, and
the Company shall supply to the Collateral Agent or its designee, for inclusion
in such sale, assignment or other disposition, all Intellectual Property
relating to such Trademark Collateral. The Collateral Agent may, without notice
or publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned.
The proceeds of each collection, sale or other disposition under this
Section 4.05, including by virtue of the exercise of the license granted to the
Collateral Agent in Section 4.04(b)(1) hereof, shall be applied in accordance
with Section 4.09 hereof.

 

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The Company recognizes that, by reason of certain prohibitions contained in the
Securities Act of 1933, as amended, and applicable state securities laws, the
Collateral Agent may be compelled, with respect to any sale of all or any part
of the Collateral, to limit Purchasers to those who will agree, among other
things, to acquire the Collateral for their own account, for investment and not
with a view to the distribution or resale thereof. The Company acknowledges that
any such private sales to an unrelated third party in an arm’s length
transaction may be at prices and on terms less favorable to the Collateral Agent
than those obtainable through a public sale without such restrictions, and,
notwithstanding such circumstances, agrees that any such private sale shall be
deemed to have been made in a commercially reasonable manner and that the
Collateral Agent shall have no obligation to engage in public sales and no
obligation to delay the sale of any Collateral for the period of time necessary
to permit the respective Issuer thereof to register it for public sale.
4.06 Deficiency. If the proceeds of sale, collection or other realization of or
upon the Collateral pursuant to Section 4.05 hereof are insufficient to cover
the costs and expenses of such realization and the payment in full of the
Secured Obligations, the Company shall remain liable for any deficiency.
4.07 Removals, etc. Without at least 30 days’ prior written notice to the
Collateral Agent, the Company shall not (i) maintain any of its books or records
with respect to the Collateral at any office or maintain its chief executive
office or its principal place of business at any place, or permit any Inventory
or Equipment to be located anywhere other than at the address set forth on the
Company’s signature page hereto or at one of the locations identified in Annex 2
hereto or in transit from one of such locations to another or (ii) change its
corporate name, or the name under which it does business, from the name shown on
the Company’s signature page hereto.
4.08 Private Sale. The Collateral Agent shall incur no liability as a result of
the sale of the Collateral, or any part thereof, at any private sale to an
unrelated third party in an arm’s length transaction pursuant to Section 4.05
hereof conducted in a commercially reasonable manner. The Company hereby waives
any claims against the Collateral Agent arising by reason of the fact that the
price at which the Collateral may have been sold at such a private sale was less
than the price which might have been obtained at a public sale or was less than
the aggregate amount of the Secured Obligations, even if the Collateral Agent
accepts the first offer received and does not offer the Collateral to more than
one offeree.
4.09 Application of Proceeds. Except as otherwise herein expressly provided, the
proceeds of any collection, sale or other realization of all or any part of the
Collateral pursuant hereto, and any other cash at the time held by the
Collateral Agent under this Section 4, shall be applied by the Collateral Agent
in accordance with the Collateral Agent Agreement.
4.10 Attorney-in-Fact. Without limiting any rights or powers granted by this
Agreement to the Collateral Agent while no Event of Default has occurred and is
continuing, upon the occurrence and during the continuance of any Event of
Default, the Collateral Agent is hereby appointed the attorney-in-fact of the
Company for the purpose of carrying out the provisions of this Section 4 and
taking any action and executing any instruments which the Collateral Agent may
deem necessary or advisable to accomplish the purposes hereof, which appointment
as attorney-in-fact is irrevocable and coupled with an interest. Without
limiting the generality of the foregoing, so long as the Bridge Lenders shall be
entitled under Section 4 to make collections in respect of the Collateral, the
Collateral Agent shall have the right and power to receive, endorse and collect
all checks made payable to the order of the Company representing any dividend,
payment, or other distribution in respect of the Collateral or any part thereof
and to give full discharge for the same.
4.11 Perfection. (i) Prior to or concurrently with the execution and delivery of
this Agreement, the Company shall file or deliver to Collateral Agent for filing
such financing statements and other documents, prepared by the Collateral Agent,
in such offices as the Collateral Agent may reasonably request to perfect the
security interests granted by Section 3 of this Agreement, and (ii) at any time
requested by the Collateral Agent, the Company shall deliver to the Collateral
Agent all share certificates of capital stock directly or indirectly owned by
the Company in the entities identified in Annex 1 hereto, accompanied by undated
stock powers duly executed in blank (subject to the Company’s obligations
pursuant to the Security Agreements by the Company in favor of the Junior
Lenders).

 

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4.12 Termination. When all Secured Obligations shall have been paid in full,
this Agreement shall immediately terminate without any further action on the
part of either party, and the Collateral Agent shall forthwith cause to be
assigned, transferred and delivered, against receipt but without any recourse,
warranty or representation whatsoever, any remaining Collateral and money
received in respect thereof in accordance with the Collateral Agent Agreement.
The Collateral Agent shall also execute and deliver to the Company upon such
termination such Uniform Commercial Code termination statements, certificates
for terminating the Liens on the Motor Vehicles and such other documentation as
shall be reasonably requested by the Company to effect the termination and
release of the Liens on the Collateral.
4.13 Expenses. The Company agrees to pay to the Collateral Agent all reasonable
out-of-pocket expenses (including reasonable expenses for legal services of
every kind) of, or incident to, the enforcement of any of the provisions of this
Section 4, or performance by the Collateral Agent of any obligations of the
Company in respect of the Collateral which the Company has failed or refused to
perform upon reasonable notice, or any actual or attempted sale, or any
exchange, enforcement, collection, compromise or settlement in respect of any of
the Collateral, and for the care of the Collateral and defending or asserting
rights and claims of the Collateral Agent in respect thereof, by litigation or
otherwise, including expenses of insurance, and all such expenses shall be
Secured Obligations to the Collateral Agent secured under Section 3 hereof.
4.14 Further Assurances. The Company agrees that, from time to time upon the
written request of the Collateral Agent, the Company will execute and deliver
such further documents and do such other acts and things as the Collateral Agent
may reasonably request in order fully to effect the purposes of this Agreement
(subject to the Company’s obligations pursuant to the Security Agreements by the
Company in favor of the Junior Lenders).
4.15 Indemnity. Each of the Bridge Lenders hereby jointly and severally
covenants and agrees to reimburse, indemnify and hold the Collateral Agent
harmless from and against any and all claims, actions, judgments, damages,
losses, liabilities, costs, transfer or other taxes, and expenses (including,
without limitation, reasonable attorneys’ fees and expenses) incurred or
suffered without any bad faith or willful misconduct by the Collateral Agent,
arising out of or incident to this Agreement or the administration of the
Collateral Agent’s duties hereunder, or resulting from its actions or inactions
as Collateral Agent.
Section 5. Miscellaneous.
5.01 No Waiver. No failure on the part of the Collateral Agent or any of its
agents to exercise, and no course of dealing with respect to, and no delay in
exercising, any right, power or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise by the Collateral Agent or any
of its agents of any right, power or remedy hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The remedies herein are cumulative and are not exclusive of any remedies
provided by law.
5.02 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the law of the State of New York.
5.03 Notices. Any and all notices or other communications or deliveries required
or permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 6:30 p.m. (New York City time) on a business
day, (ii) one business day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Agreement later than 6:30 p.m. (New York City time) on any date and earlier
than 11:59 p.m. (New York City time) on such date, (iii) one business day
following the date of mailing, if sent by nationally recognized overnight
courier service specifying next business day delivery, or (iv) upon actual
receipt by the party to whom such notice is required to be given, if by hand
delivery. All notices, requests, consents and demands hereunder shall be in
writing and facsimiled (facsimile confirmation required) or delivered to the
intended recipient at its address or facsimile number specified on the signature
pages hereto or such other address as may be designated by such party by ten
(10) days’ prior notice to the other party in accordance with this Section 5.03.

 

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5.04 Waivers, etc. The terms of this Agreement may be waived, altered or amended
only by an instrument in writing duly executed by the Company and the Collateral
Agent. Any such amendment or waiver shall be binding upon each of the Bridge
Lenders and the Company.
5.05 Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the respective successors and assigns of the Company and each of
the Bridge Lenders (provided, however, that the Company shall not assign or
transfer its rights hereunder without the prior written consent of the
Collateral Agent).
5.06 Counterparts. This Agreement may be executed in any number of counterparts,
all of which together shall constitute one and the same instrument and any of
the parties hereto may execute this Agreement by signing any such counterpart.
5.07 Severability. If any provision hereof is invalid and unenforceable in any
jurisdiction, then, to the fullest extent permitted by law, (i) the other
provisions hereof shall remain in full force and effect in such jurisdiction and
shall be liberally construed in favor of the Bridge Lenders in order to carry
out the intentions of the parties hereto as nearly as may be possible and
(ii) the invalidity or unenforceability of any provision hereof in any
jurisdiction shall not affect the validity or enforceability of such provision
in any other jurisdiction.
[SIGNATURE PAGES FOLLOW]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
duly executed as of the day and year first above written.

              COMPANY:   IRVINE SENSORS CORPORATION    
 
           
 
  By:   /s/ JOHN J. STUART, JR.
 
Name: John J. Stuart, Jr.    
 
      Title: Sr. VP & CFO    
 
           
Address for Notices:
           
 
           
Irvine Sensors Corporation
3001 Redhill Avenue, Building #4
Costa Mesa, CA 92626
           
 
           
Facsimile: (714) 444-8773
Attention: John Stuart
           
 
            COLLATERAL AGENT:   S. MICHAEL RUDOLPH    
 
           
 
  By:   /s/ S. MICHAEL RUDOLPH    
 
           
 
      Name: S. Michael Rudolph    
 
      Title: CFO    

Address for Notices:
S. Michael Rudolph
Viking Asset Management, LLC
The Transamerica Pyramid
600 Montgomery Street, 4th Floor
San Francisco, CA 94111
Facsimile: (415) 981-5301
Signature Page to Security Agreement

 

 

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ANNEX 1
ENTITIES IN WHICH THE COMPANY IS PLEDGING ITS CAPITAL STOCK

                      Approximate             Percentage     State of   Entity  
Ownership     Incorporation  
 
               
Optex Systems, Inc.
    100 %   Texas
3001 Red Hill Ave., Building 4 Costa Mesa, California 92626
           
 
               
Novalog, Inc.
    96 %   California
3001 Red Hill Ave., Building 4 Costa Mesa, California 92626
           
 
               
MicroSensors, Inc.
    98 %   Delaware
3001 Red Hill Ave., Building 4 Costa Mesa, California 92626
           
 
               
RedHawk Vision, Inc.
    81 %   Delaware
3001 Red Hill Ave., Building 4 Costa Mesa, California 92626
           
 
               
iNetWorks Corporation
    95 %   Nevada
3001 Red Hill Ave., Building 4 Costa Mesa, California 92626
           

 

 

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ANNEX 2
LIST OF LOCATIONS

1.  
3001 Red Hill Ave., Building 4 Costa Mesa, California 92626