Exhibit 10.4


 


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:  $1,500,000

  	
   

  	
  October 31, 2003

  



 


FOR VALUE RECEIVED, INRAD, INC., a New Jersey corporation (hereinafter
called “Issuer”), hereby promises to pay to the order of CLAREX, 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 FIVE HUNDRED THOUSAND ($1,500,000) 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.


 

















 


	
   

  	
  Photonic
  Products Group, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William
  S. Miraglia

  	
   

  
	
   

  	
   

  
	
   

  	
  William S.
  Miraglia, Secretary