Exhibit 10.5


 


THIS CONVERTIBLE PROMISSORY NOTE HAS BEEN,
AND ANY SHARES ISSUED UPON CONVERSION PURSUANT TO THE TERMS HEREOF WILL BE,
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION WITH,
ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE “ACT”).  THIS CONVERTIBLE
PROMISSORY NOTE, AND ANY SECURITIES ISSUED UPON CONVERSION PURSUANT TO THIS
NOTE, HAVE NOT BEEN REGISTERED UNDER THE ACT OR ANY STATE SECURITIES LAW, AND
MAY BE OFFERED AND SOLD ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF THE
ACT OR THOSE LAWS OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE.


 


SUBORDINATED CONVERTIBLE PROMISSORY NOTE


 


	
  Principal Amount:  $1,000,000

  	
   

  	
  December 31, 2002

  



 


FOR VALUE RECEIVED, INRAD, INC., a New Jersey corporation (hereinafter
called “Issuer”), hereby promises to pay to the order of WELLAND, LTD. and its
successors and assigns (hereinafter called the “Holder”), at such address as
the Holder may designate in writing to Issuer, the principal sum of ONE MILLION
DOLLARS ($1,000,000) plus all accrued interest owing hereunder in lawful money
of the United States of America on or before the Maturity Date (as defined
below), unless this Convertible Promissory Note (the “Note”) is converted by
the Holder as set forth herein.  For
purposes of this Note, “Maturity Date” shall mean January 31, 2006.


 


Interest.  Interest shall accrue on the unpaid
principal amount of this Note at the rate of six percent (6%) per annum and
shall be due and payable on the Maturity Date. 
Interest shall be computed on the basis of a 360 day year for the actual
number of days elapsed.


 


Optional
Prepayment; Order of Payments.  Issuer may prepay this Note at any time, in whole or in part,
without premium or penalty; provided, however, Issuer shall provide to the
Holder written notice at least ten (10) business days prior to such
prepayment.  All payments made on
account of this Note shall be applied first to the payment of any costs of
enforcement then due hereunder, second to the payment of accrued and unpaid
interest then due hereunder, and the remainder, if any, shall be applied to the
unpaid principal balance of this Note.


 


Event
of Default Defined; Acceleration of Maturity.  If one or more of the following events
(“Events of Default”) shall have occurred:


 


a default in the
payment of all or any part of the principal or interest due under this Note as
and when the same shall become due and payable, at maturity, by declaration as
permitted hereunder, upon acceleration or otherwise;


 

















 


Issuer shall merge or consolidate with or into any
other person or entity, sell, transfer, lease or otherwise dispose of all or
any substantial portion of its assets or adopt a plan of liquidation or
dissolution; provided, however, that Issuer shall have the right
to merge with any other entity so long as Issuer shall be the surviving entity
in any such merger;


 


Issuer shall have applied for or consented to the
appointment of a custodian, receiver, trustee or liquidator, or other
court-appointed fiduciary of all or a substantial part of its properties; or a
custodian, receiver, trustee or liquidator or other court appointed fiduciary
shall have been appointed with the consent of Issuer; or Issuer is generally
not paying its debts as they become due or is insolvent, or has made a general
assignment for the benefits of its creditors; or Issuer files a voluntary
petition in bankruptcy, or a petition or an answer seeking reorganization or an
arrangement with its creditors or seeking to take advantage of any insolvency
law, or an answer admitting the material allegations of a petition in any
bankruptcy, reorganization or insolvency proceeding or has taken action for the
purpose of effecting any of the foregoing; or if, within sixty (60) days after
the commencement of any proceeding against Issuer seeking any reorganization,
rehabilitation, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under the Federal bankruptcy code or similar
order under future similar legislation, the appointment of any trustee,
receiver, custodian, liquidator, or other court-appointed fiduciary of Issuer
or of all or any substantial part of its properties, such order or appointment
shall not have been vacated or stayed on appeal or if, within sixty (60) days after
the expiration of any such stay, such order or appointment shall not have been
vacated (all such events, collectively “Insolvency Events”);


 


Then Holder, by notice in writing to Issuer (the “Acceleration
Notice”), may declare the principal amount of this Note and all accrued but
unpaid interest to be due and payable immediately, and upon any such
declaration the same shall become immediately due and payable; provided that if
an Insolvency Event occurs, the principal amount of this Note and all accrued but
unpaid interest shall become and be immediately due and payable without any
declaration or other act on the part of the Holder.


 


Conversion.  The Holder may, at any time prior to the
earlier of the Maturity Date or the prepayment of this Note by Issuer, convert
all or a portion of the principal and accrued interest then outstanding under
this Note into fully paid and non-assessable shares of Issuer’s Common Stock
(the “Common Stock”), at the Conversion Price (as defined below) per share.  Such conversion shall be effected by the
Holder by sending a written notice of conversion and this Note to Issuer for
cancellation and issuance of the number of shares of Common Stock into which
this Note is being converted.  In the
event this Note is being converted in part, a replacement Note representing the
unconverted portion of this Note shall be delivered to the Holder.  Upon conversion of this Note, only whole
shares of Common Stock shall be issued. 
Any remainder due hereunder which is insufficient to purchase a whole
share of Common Stock shall be paid by Issuer in cash.  The Conversion Price shall be (a) the price
at which common stock is first issued for cash after the date of this Note to
an unrelated third party investor or (b) the price mutually agreed to by the
Issuer and the Holder as its then fair market value if no such issuance has
occurred within 12 months of the date hereof (the “Conversion Price”).  To


 

















 


supplement clause (a), if after the date hereof but
before any third party purchase of Common Stock for cash, the Company issues
any security convertible into Common Stock to an unrelated third party investor
for cash, the Conversion Price of this Note shall be the same as the conversion
price of that convertible security. 
Once fixed, the Conversion Price and the amount and kind of securities
issuable upon conversion of this Note shall be subject to adjustment from time
to time in accordance with the provisions of this Section 4.


 


4.1          Subdivision or Combination of Common
Stock.  In case Issuer shall at
any time subdivide (by any stock split, stock dividend or otherwise) its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination shall be proportionately
increased.


 


4.2          Reorganization
or Reclassification.  If any
capital reorganization or reclassification of the capital stock of Issuer
(other than in connection with a merger or other reorganization in which Issuer
is not the surviving entity) shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization or reclassification, lawful and adequate provisions shall be
made whereby the Holder shall thereupon have the right to receive upon the
conversion of this Note, upon the terms and conditions specified herein and in
lieu of the shares of Common Stock immediately theretofore receivable upon the
conversion of this Note, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the shares of Common Stock
immediately theretofore receivable upon such conversion had such reorganization
or reclassification not taken place, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holder
to the end that the provisions hereof shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of such conversion rights.


 


4.3           Notice of Adjustment.  Upon any adjustment of the Conversion Price,
then and in each such case Issuer shall give written notice thereof, by
delivery in person, certified or registered mail, return receipt requested,
telecopier or telex, addressed to the Holder at the address of the Holder, as
provided to Issuer, which notice shall state the Conversion Price resulting
from such adjustment, setting forth in reasonable detail the method upon which
such calculation is based.


 


4.4          Due Issuance
of Shares Upon Conversion. 
Issuer covenants and agrees that all shares of Common Stock or any such
other securities which may be issued upon any whole or partial conversion of
this Note will, upon issuance, be validly issued, fully paid and non-assessable
and free from all taxes, liens and charges with respect to the issue thereof.


 


4.5          Stock to be
Reserved.  Issuer will at all
times reserve and keep


 

















 


available
out of its authorized Common Stock, solely for the purpose of issuance upon the
conversion of this Note as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion hereof.  Issuer will not take any action which
results in any adjustment of the Conversion Price if the total number of shares
of Common Stock issued and issuable after such action upon conversion of this
Note would, when added to the number of shares of Common Stock then reserved
for issuance, exceed the total number of shares of Common Stock then authorized
by Issuer’s Certificate of Incorporation.


 


5.             Subordination.  The Issuer hereby agrees, and the Holder of this Note by its
acceptance agrees, that the payment of the principal of and interest on the
Note is hereby expressly made subordinate and junior in right of payment, to
the extent set forth in the following paragraphs (a), (b) and (c), to the prior
payment in full of all Senior Debt of the Issuer, whether such Senior Debt,
except as provided in Section 5 below, is incurred prior to, on or after the
date hereof:


 


(a)           In the event of insolvency
or bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings relative to the Issuer or to any of the property of
the Issuer, or in the event or any proceedings for voluntary liquidation,
dissolution, or other winding-up of the Issuer, whether or not involving
insolvency or bankruptcy, then the holders of Senior Debt shall be entitled to
receive payment in full of all principal of and interest on all Senior Debt
before the Holder of this Note shall be entitled to receive any payment on
account of principal or interest on this Note, and to that end the holders of
Senior Debt shall be entitled to receive for application in payment thereof any
payment or distribution of any kind or character, whether in cash or property
or securities, which may be payable or deliverable in any such proceedings in
respect of this Note.


 


(b)           In
the event that this Note is declared due and payable prior to its stated
maturity, by reason of the occurrence of an Event of Default hereunder (under
circumstances when the provisions of the foregoing paragraph (a) shall not be
applicable), then all principal of and interest on all Senior Debt outstanding
at the time of such declaration shall first be paid in full, before any payment
on account of principal or interest is made upon this Note.


 


(c)           The
Issuer may make payments and, subject to Section 1 of this Note, prepayments of
the principal of and interest of this Note if, at the time of the payment and
immediately after giving effect thereto, (i) there exists no default in any
payment with respect to any Senior Debt and (ii) there shall not have occurred
an event of default (other than a default in the payment of amounts due
thereon) with respect to any Senior Debt, as defined in the instrument under
which the same is outstanding, permitting the holders thereof to accelerate the
maturity thereof, other than an event of default which shall have been cured or
waived or shall have ceased to exist.  Should
the Holder of this Note, while there exists a default or an event of default as
provided in the immediately preceding sentence, and after being notified by the
holder of the Senior Debt of the default, receive any such payment, or should
the Holder of this Note receive any distribution in bankruptcy, dissolution, or
similar insolvency proceedings in regard to the Issuer, the Holder of the Note
will hold such payment or distribution in trust for


 

















 


the holder of the Senior Debt
and will pay over such amounts to such holder to apply to the Senior Debt until
the same is paid in full.


 


The provisions of this Section 5 are for the purpose of defining the
relative rights of the holders of Senior Debt and the Holder of the Note
against the Issuer and its property. 
Nothing herein shall impair, as between the Issuer and the Holder of
this Note, the obligation of the Issuer, which is unconditional and absolute,
to pay to the Holder the principal and interest in accordance with the terms
and the provisions hereof; nor shall anything herein prevent the Holder of this
Note from exercising all remedies otherwise permitted by applicable law or
hereunder upon default under this Note, subject to the rights, if any, under
this Section 5 of holders of Senior Debt to receive cash, property, stock or
obligation otherwise payable or deliverable to the Holder of this Note.  The Issuer acknowledges and agrees that the
rights of the Holder of this Note with respect to the Issuer’s cash, property,
rights and other assets of any kind are senior and prior to the rights of any
holder of capital stock of the Issuer arising from such capital stock.


 


(d)         Definition.  “Senior Debt” shall mean the principal of, interest on
and, if applicable, any premium on (i) the debt of the Issuer outstanding
as of the date hereof, (ii) additional indebtedness incurred by the Issuer
after date hereof for money borrowed from a bank, savings and loan association
trust Issuer, insurance Issuer or similar financial institution,
(iii) purchase money secured debt, (iv) obligations of the Issuer as
lessee under leases of real or personal property which are treated as capital
lease obligations under generally accepted accounting principals, and (v) any
deferrals, renewals, refinancings or extensions of any of the foregoing.


 


6.             Miscellaneous.


 


6.1           Binding Effect; Assignability.  This Note shall be binding upon Issuer, its
successors and its assigns, and shall inure to the benefit of Holder, its
successors and its assigns.  This Note
is transferable or assignable by the Holder or any transferee of the Holder
only to an Affiliate or a partner, or an heir, administrator, executor or
successor of the Holder; provided that such transfer or assignment is made in
compliance with the Act and any applicable state and foreign securities laws.


 


6.2           Governing Law; Jurisdiction; Venue.  This Note has been executed in and shall be
governed by the laws of the State of New Jersey.  Issuer irrevocably submits to the exclusive jurisdiction of the
courts of the State of New Jersey which will be the exclusive jurisdiction for
disputes arising under the Note and the United States District Court for the
District of New Jersey for the purpose of any suit, action, proceeding or
judgment relating to or arising out of this Note.


 


IN WITNESS
WHEREOF, Issuer has caused this Note to be signed in its name by its duly
authorized officer and its corporate seal to be affixed hereto.


 

















 


	
   

  	
  INRAD, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William S. Miraglia

  	
   

  
	
   

  	
   

  
	
   

  	
  William S. Miraglia, Secretary