Exhibit 10.1





Exhibit 10.1




FORM OF SUBORDINATED SECURED CONVERTIBLE NOTE




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



Irvine Sensors Corporation




Subordinated Secured Convertible Note




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





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



(1) PAYMENTS OF PRINCIPAL. On the Maturity Date, the Holder shall surrender this Note
to the Company and the Company shall pay to the Holder in cash an amount equal to the outstanding
Principal (if any) and accrued and unpaid Interest thereon. The “Maturity Date” shall be December
23, 2015.


 


 









 





(2) INTEREST. Simple interest (“Interest”) shall accrue on the outstanding Principal
at the Interest Rate from and including the date set forth above opposite the caption “Issuance
Date” (the “Issuance Date”) until the Principal is paid in full, shall be computed on the basis of
a 365-day year and actual days elapsed and, subject to the right of the Holder to include
accrued and unpaid Interest in the Conversion Amount (as defined below) in accordance with Section
3(b)(i) below, shall be payable in arrears for each Interest Period no later than the date that is
ten (10) Business Days after the last day of the applicable Interest Period (each such date, an
“Interest Payment Date”).



(a) Payment of Interest. Interest shall be payable on each Interest Payment Date to
the record holder of this Note as of the last day of the applicable Interest Period, subject to
Section 2(b), (i) in cash (“Cash Interest”) or (ii) prior to the Mandatory Conversion Eligibility
Date, at the option of the Company, either (x) entirely as Cash Interest, (y) in the form of shares
of Company Common Stock (“Interest Shares”) or (z) in a combination of Cash Interest and Interest
Shares, provided that the Interest may be payable in Interest Shares pursuant to this clause (ii)
if, and only if, the Company delivers written notice (each an “Interest Election Notice”) of such
election to each holder of the Notes on or prior to the tenth (10th) Company Trading Day
prior to the Interest Payment Date (each, an “Interest Election Date”). Each Interest Election
Notice must specify the amount of Interest that shall be paid as Cash Interest or PIK Interest, if
any, and the amount of Interest that shall be paid in Interest Shares. Interest to be paid on an
Interest Payment Date in Interest Shares shall be paid in a number of fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with Section 3(a)) of Company Common Stock
equal to the quotient of (a) the amount of Interest payable to the Holder on such Interest Payment
Date less any Cash Interest or PIK Interest paid and (b) the Interest Conversion Price. If any
Interest Shares are to be paid on an Interest Payment Date, then the Company shall issue and
deliver within two (2) business days after the applicable Interest Payment Date, to the address set
forth in the register maintained by the Company for such purpose or to such address as specified by
the Holder in writing to the Company at least two (2) Business Days prior to the applicable
Interest Payment Date, a certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which the Holder shall be entitled. The Company shall pay any and all
taxes that may be payable by the Holder with respect to the issuance and delivery of Interest
Shares; provided that the Company shall not be required to pay any tax that may be payable
in respect of any issuance of Interest Shares to any Person other than the Holder or with respect
to any income tax due by the Holder with respect to such Interest Shares. Notwithstanding the
foregoing, unless the Required Holders otherwise agree in writing, the Company shall not be
entitled to pay Interest in Interest Shares and shall instead, subject to Section 2(b), be required
to pay all accrued and unpaid Interest in the form of Cash Interest on the applicable Interest
Payment Date if, during the period commencing on the applicable Interest Election Date through the
applicable Interest Payment Date the Equity Conditions have not been satisfied.



(b) Restrictions on Cash Interest Payments. Notwithstanding the foregoing, in the
event that the Company would otherwise be required under this Section 2 to pay Interest in the form
of Cash Interest but is not permitted to do so pursuant to Section 33 hereof, the Company shall
instead pay such Interest through the addition of the amount of such Interest to the then
outstanding Principal (any Interest paid in such manner, “PIK Interest”). Interest that is paid in
the form of PIK Interest shall be considered paid or duly provided for, for all purposes under this
Note, and shall not be considered overdue.


 


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(3) CONVERSION OF NOTES. This Note shall be convertible into shares of the Company’s
common stock, par value $.01 per share (the “Company Common Stock”), on the terms and conditions
set forth in this Section 3.



(a) Conversion Right. At any time or times on or after the Issuance Date, the Holder
shall be entitled to convert any portion of the outstanding Principal and accrued and unpaid
Interest thereon, in multiples of $10,000 (or, if less, any remaining Principal and accrued and
unpaid Interest thereon), into fully paid and nonassessable shares of Company Common Stock in
accordance with Section 3(c), at the Conversion Rate (as defined below). The Company shall not
issue any fraction of a share of Company Common Stock upon any conversion. If the issuance would
otherwise result in the issuance of a fraction of a share of Company Common Stock, the Company
shall round such fraction of a share of Company Common Stock down to the nearest whole share and
pay to the Holder such fractional share in cash. The Company shall pay any and all taxes that may
be payable with respect to the issuance and delivery of Company Common Stock upon conversion of any
Conversion Amount; provided that the Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the issue and delivery of Company Common Stock to
any Person other than the Holder or with respect to any income tax due by the Holder with respect
to such Company Common Stock issued upon conversion.



(b) Conversion Rate. The number of shares of Company Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x)
such Conversion Amount by (y) the Conversion Price (as defined below) (the “Conversion Rate”).




	 	(i)	 	“Conversion Amount” means the sum of (A) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is being
made, and (B) accrued and unpaid Interest with respect to such portion of the
Principal.

	 
	 	(ii)	 	“Conversion Price” means as of any Conversion Date (as defined below) or other
date of determination during the period beginning on the Issuance Date and ending on
and including the Maturity Date, the Fixed Conversion Price.







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




 


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(c) Mechanics of Conversion.




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







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




 


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




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







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







(4) [Reserved]


 


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(5) EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT.



(a) Events of Default. Each of the following events (so long as it is continuing)
shall constitute an “Event of Default”:




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







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







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







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







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




 


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







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







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







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







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







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






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


 


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foregoing, to the extent that the Holder Representative declares the Notes to
be immediately due and payable (or the Notes become due and payable following an Event of
Default under clauses (iv) or (v) of Section 5(a)) and the (x) the sum of the Outstanding Note
Obligations plus the Event of Default Premium (if any) (the sum of such amounts, the “Event
of Default Redemption Price”) is less than (y) the product of (A) the Conversion Rate that would
have been applicable to the Outstanding Note Obligations if the Holder’s Note had been submitted
for conversion into shares of Company Common Stock on the date immediately preceding such Event of
Default and (B) the Closing Sale Price of the Company Common Stock on the date immediately
preceding such Event of Default (the product of such amounts, the “Alternative Event of Default
Redemption Price”), the Company shall pay to the Holder in cash, in lieu of the Event of Default
Redemption Price, the Alternative Event of Default Redemption Price. The Company shall pay the
Event of Default Redemption Price or the Alternative Event of Default Redemption Price, as
applicable, to the Holder within five (5) Business Days after the date that the Outstanding Note
Obligations are declared due and payable, and upon full payment, the Notes shall be extinguished.




(6) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.



(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with the provisions of
this Section 6(a) pursuant to written agreements in form and substance satisfactory to the Required
Holders and approved by the Required Holders (such approval not to be unreasonably withheld or
delayed) prior to such Fundamental Transaction, including agreements to deliver to each holder of
Notes in exchange for such Notes a security of the Successor Entity evidenced by a written
instrument substantially similar in form and substance to the Notes, including, without limitation,
having a principal amount and interest rate equal to the principal amounts and the interest rates
of the Notes held by such holder and having similar ranking to the Notes, and satisfactory to the
Required Holders (any such approval not to be unreasonably withheld or delayed) and (ii) the
Successor Entity (including its Parent Entity) is a publicly traded corporation whose common stock
is quoted on or listed for trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after
the date of such Fundamental Transaction, the provisions of this Note referring to the “Company”
shall refer instead to the Successor Entity), and may exercise every right and power of the Company
and shall assume all of the obligations of the Company under this Note with the same effect as if
such Successor Entity had been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity shall deliver to the Holder Representative confirmation that
there shall be issued upon conversion or redemption of this Note at any time after the consummation
of the Fundamental Transaction, in lieu of the shares of the Company Common Stock (or other
securities, cash, assets or other property) purchasable upon the conversion or redemption of the
Notes prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription rights) which the
Holder would have been entitled to receive upon the happening of such Fundamental Transaction had
this Note been converted immediately prior to such Fundamental Transaction, as adjusted in
accordance with the provisions of this Note. The provisions of this Section shall apply similarly
and equally to successive Fundamental Transactions and shall be applied without regard to any limitations
on the conversion or redemption of this Note.


 


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(b) Holder Redemption Right. No later than ten (10) days prior to the consummation of
a Change of Control, the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control Notice”). Subject to Section 33, at any time during
the period beginning after the Holder’s receipt of a Change of Control Notice and ending on the
date of the consummation of such Change of Control (or, in the event a Change of Control Notice is
not delivered at least ten (10) days prior to a Change of Control, at any time on or after the date
which is ten (10) days prior to a Change of Control and ending ten (10) days after the consummation
of such Change of Control), the Holder may require the Company to redeem all or any portion of this
Note in cash by delivering written notice thereof (“Holder Change of Control Redemption Notice”) to
the Company, which Holder Change of Control Redemption Notice shall indicate the Conversion Amount
the Holder is electing to redeem. The portion of this Note subject to redemption pursuant to this
Section 6 shall be redeemed by the Company at a price equal to the greater of (i) the product of
(x) the Conversion Amount being redeemed and (y) the quotient determined by dividing (A) the
Closing Sale Price of the Company Common Stock immediately following the public announcement of
such proposed Change of Control by (B) the Conversion Price and (ii) 125% of the Conversion Amount
being redeemed (the “Holder Change of Control Redemption Price”). Redemptions required by this
Section 6(b) shall be made in accordance with the provisions of Section 14 and shall have priority
to payments to common stockholders in connection with a Change of Control. Notwithstanding
anything to the contrary in this Section 6(b), until the Holder Change of Control Redemption Price
(together with any interest thereon) is paid in full, the Conversion Amount submitted for
redemption under this Section 6(b) (together with any interest thereon) may be converted, in whole
or in part, by the Holder into Company Common Stock pursuant to Section 3.




(7) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.




(a) [Reserved].



(b) Other Corporate Events. Subject to Section 6(a) hereof, in addition to and not in
substitution for any other rights hereunder, prior to the consummation of any Fundamental
Transaction pursuant to which holders of shares of Company Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Company Common Stock (a
“Corporate Event”), the Company shall make appropriate provision to insure that the Holder will
thereafter have the right to receive upon a conversion of this Note, (i) in addition to the shares
of Company Common Stock receivable upon such conversion, such securities or other assets to which
the Holder would have been entitled with respect to such shares of Company Common Stock had such
shares of Company Common Stock been held by the Holder upon the consummation of such Corporate
Event (without taking into account any limitations or restrictions on the convertibility of this
Note) or (ii) in lieu of the shares of Company Common Stock otherwise receivable upon such
conversion, such securities or other assets received by the holders of shares of Company Common



 


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Stock in connection with the consummation of such
Corporate Event in such amounts as the Holder would have been entitled to receive had this
Note initially been issued with conversion rights for the form of such consideration (as opposed to
shares of Company Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant to the preceding sentence shall be in a form and
substance satisfactory to the Required Holders. The provisions of this Section shall apply
similarly and equally to successive Corporate Events and shall be applied without regard to any
limitations on the conversion or redemption of this Note.




(8) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.



(a) Pro Rata Distributions. If the Company, at any time while this Note is
outstanding, distributes to all holders of Company Common Stock (i) evidences of its indebtedness,
(ii) any security (other than a distribution of shares of Company Common Stock covered by the
preceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv)
any other asset (in each case “Distributed Property”), then, unless taken into account pursuant to
Section 8(b) below, upon any conversion of this Note that occurs after such record date, the Holder
shall be entitled to receive, in addition to the shares of Company Common Stock otherwise issuable
upon such conversion, the Distributed Property that the Holder would have been entitled to receive
in respect of such number of shares of Company Common Stock immediately prior to such record date.



(b) Adjustment of Fixed Conversion Price upon Subdivision or Combination of Company Common
Stock. If the Company at any time on or after the Initial Date subdivides (by any stock split,
stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of
Company Common Stock into a greater number of shares, the Fixed Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the Company at any time
on or after the Initial Date combines (by combination, reverse stock split or otherwise) one or
more classes of its outstanding shares of Company Common Stock into a smaller number of shares, the
Fixed Conversion Price in effect immediately prior to such combination will be proportionately
increased.



(c) Adjustment of Conversion Price upon Lower Price Issuance. If the Company at any
time on or after the Initial Date issues or agrees to issue additional shares of Company Common
Stock or rights, warrants, options or other securities or debt convertible, exercisable or
exchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares of
Common Stock (or modify any of the foregoing which may be outstanding) to any person or entity at
an effective price per share or conversion or exercise price per share that is less than the
Conversion Price in effect at such time, then the Conversion Price shall automatically be reduced
to such other lower price. For purposes of the issuance and adjustment described in this section
the issuance of any security of the Corporation carrying the right to convert such security into
shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in
the adjustments described above upon the sooner of the agreement to issue or actual issuance of
such convertible security, warrant, right or option and again at any time upon any subsequent
issuances of shares of Common Stock upon exercise of such conversion or purchase rights if such
issuance is at a price lower than the Conversion Price in effect upon such issuance. This Section
8(c) shall not apply to Excluded Securities.


 


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(9) [Reserved]




(10) [Reserved]




(11) COMPANY’S RIGHT OF MANDATORY CONVERSION.



(a) Mandatory Conversion. If at any time from and after the two year anniversary of
the Initial Date (the “Mandatory Conversion Eligibility Date”), (i) the Volume Weighted Average
Price of the Company Common Stock for thirty (30) consecutive trading days equals or exceeds $0.25
(subject to appropriate adjustments for stock splits, stock dividends, stock combinations and other
similar transactions after the Initial Date) following the Mandatory Conversion Eligibility Date
(the “Mandatory Conversion Measuring Period”), and (ii) the Equity Conditions have been satisfied
(or waived in writing by the Holder), during the period commencing on the Mandatory Conversion
Notice Date through the applicable Mandatory Conversion Date (each, as defined below), the Company
shall have the right to require the Holder to convert all, but not less than all, of the Conversion
Amount then remaining under this Note as designated in the Mandatory Conversion Notice (as defined
below) into fully paid, validly issued and nonassessable shares of Company Common Stock in
accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date (as
defined below) (a “Mandatory Conversion”). The Company may exercise its right to require
conversion under this Section 11(a), by delivering within not more than five (5) Company Trading
Days following the end of such Mandatory Conversion Measuring Period a written notice thereof by
facsimile and overnight courier to all, but not less than all, of the holders of Notes and the
Transfer Agent (the “Mandatory Conversion Notice” and the date all of the holders received such
notice by facsimile is referred to as the “Mandatory Conversion Notice Date”). The Mandatory
Conversion Notice shall be irrevocable. The Mandatory Conversion Notice shall state (i) the
Company Trading Day selected for the Mandatory Conversion in accordance with Section 11(a), which
Company Trading Day shall be at least twenty (20) Business Days but not more than sixty (60)
Business Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”),
(ii) the aggregate Conversion Amount of the Notes subject to mandatory conversion from all of the
holders of the Notes pursuant to this Section 11(a) (and analogous provisions under the Other
Notes) and (iii) the number of shares of Company Common Stock to be issued to such Holder on the
Mandatory Conversion Date.



(b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion of
any Conversion Amount of this Note pursuant to Section 11(a), then it must simultaneously take the
same action with respect to the Other Notes. All Conversion Amounts converted by the Holder after
the Mandatory Conversion Notice Date shall reduce the Conversion Amount of this Note required to be
converted on the Mandatory Conversion Date. If the Company has elected a Mandatory Conversion, the
mechanics of conversion set forth in Section 3(c) shall apply, to the extent applicable, as if the
Company and the Transfer Agent had received from the Holder on the Mandatory Conversion Date a
Conversion Notice with respect to the Conversion Amount being converted pursuant to the Mandatory
Conversion.


 


11









 





(12) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Certificate of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution,
issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Note, and will at all times in good faith carry out all
of the provisions of this Note and take all action as may be required to protect the rights of the
Holder of this Note.




(13) RESERVATION OF AUTHORIZED SHARES.



(a) Reservation. The Company shall reserve out of its authorized and unissued Company
Common Stock a number of shares of Company Common Stock for each of the Notes equal to 100% of the
number of shares of Company Common Stock as shall be necessary to effect the conversion of all of
the Notes then outstanding as of the Issuance Date at the Conversion Price and any other shares
issuable under the Transaction Documents (the “Required Reserve Amount”). Thereafter, so long as
any of the Notes are outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Company Common Stock, solely for the purpose of
effecting the conversion of the Notes, 100% of the number of shares of Company Common Stock as
shall from time to time be necessary to effect the conversion of all of the Notes then outstanding
at the then-applicable Conversion Price. The initial number of shares of Company Common Stock
reserved for conversions of the Notes and each increase in the number of shares so reserved shall
be allocated pro rata among the holders of the Notes based on the principal amount of the Notes
held by each holder at the Initial Date or increase in the number of reserved shares, as the case
may be (the “Authorized Share Allocation”). In the event that a holder shall sell or otherwise
transfer any of such holder’s Notes, each transferee shall be allocated a pro rata portion of such
holder’s Authorized Share Allocation. Any shares of Company Common Stock reserved and allocated to
any Person which ceases to hold any Notes shall be allocated to the remaining holders of Notes, pro
rata based on the principal amount of the Notes then held by such holders.




(14) HOLDER’S REDEMPTIONS.



(a) Mechanics. Subject to Section 33, if the Holder has submitted a Holder Change of
Control Redemption Notice in accordance with Section 6(b), the Company shall deliver the Holder
Change of Control Redemption Price to the Holder, concurrently with the consummation of such Change
of Control if such notice is received by the Company at least five (5) Business Days prior to the
consummation of such Change of Control and within seven (7) Business Days after the Company’s
receipt of such notice otherwise. In the event of a redemption of less than all of the Principal of
this Note, the Company shall promptly cause to be issued and delivered to the Holder (after such
original Note has been delivered to the Company) a new Note (in accordance with Section 21(d))
representing the outstanding Principal which has not been redeemed. In the event that the Company
does not pay the Holder Change of Control Redemption Price to the Holder within the time period
required, at any time thereafter and until the Company pays such unpaid Holder Change of Control
Redemption Price in full, the Holder shall have the option, in lieu of redemption, to require the
Company to promptly return to the Holder all or any portion of this Note representing the
Conversion Amount that was submitted for redemption and for which the Holder Change of Control
Redemption Price has not been paid. Upon the Company’s receipt of such notice, (x) the Holder
Change of Control Redemption
Notice shall be null and void with respect to such Conversion Amount and (y) the Company shall
immediately return this Note, or issue a new Note (in accordance with Section 21(d)) to the Holder
representing such Conversion Amount.


 


12









 





(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 6(b) (each, an “Other
Redemption Notice”), the Company shall immediately forward to the Holder Representative by
facsimile a copy of such notice. If the Company receives a Holder Change of Control Redemption
Notice and one or more Other Redemption Notices during the seven (7) Business Day period beginning
on and including the date which is three (3) Business Days prior to the Company’s receipt of the
Holder Change of Control Redemption Notice and ending on and including the date which is three (3)
Business Days after the Company’s receipt of the Holder Change of Control Redemption Notice and the
Company is unable to redeem all principal, interest and other amounts designated in such Holder
Change of Control Redemption Notice and such Other Redemption Notices received during such seven
(7) Business Day period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amounts of the Notes submitted for redemption
pursuant to such Holder Change of Control Redemption Notice and pursuant to such Other Redemption
Notices received by the Company during such seven Business Day period.




(15) [Reserved]



(16) RIGHTS. Except as otherwise provided for herein, the Holder shall have no rights
as a stockholder of the Company as a result of being a holder of this Note, except as required by
law, including, but not limited to, the General Corporation Law of the State of Delaware, and as
expressly provided in this Note.




(17) COVENANTS.



(a) Incurrence of Indebtedness. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly,
incur or guarantee, assume or suffer to exist any Indebtedness, other than (i) the Indebtedness
evidenced by this Note and the Other Notes, (ii) Permitted Indebtedness and (iii) the Existing
Secured Note.



(b) Existence of Liens. So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien, pledge, charge, security interest or other similar encumbrance
upon or in any property or assets (including accounts and contract rights) owned by the Company or
any of its Subsidiaries (collectively “Liens”) other than (i) existing Liens securing the Existing
Secured Note and (ii) Permitted Liens.


 


13









 





(c) Restricted Payments. The Company shall not, and the Company shall not permit any
of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any
payments in respect of, by the payment of cash or cash equivalents (in whole or in
part, whether by way of open market purchases, tender offers, private transactions or
otherwise), all or any portion of any Indebtedness described in clause (A) of the definition of
“Permitted Indebtedness”, whether by way of payment in respect of principal of (or premium, if any)
or interest on such Indebtedness if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event constituting, or that with the passage of time and without
being cured would constitute, an Event of Default has occurred and is continuing.




(18) [Reserved]



(19) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a meeting
duly called for such purpose or the written consent without a meeting of the Required Holders (or
the Holder Representative acting at the direction of the Required Holders) shall be required for
any amendment or waiver to this Note or the Other Notes or to the Security Agreement (including to
release all or substantially all of the Collateral, in any transaction or series of related
transactions); provided that no such amendment or waiver shall:



(a) postpone (i) the Maturity Date or (ii) any Interest Payment Date, in each case without the
consent of the Holder (it being understood that the Required Holders may waive any increase in the
Interest Rate that would otherwise take effect during the continuance of an Event of Default);



(b) reduce the Principal of, or the Interest Rate or any premiums specified herein on, the
Note, or any other amounts payable hereunder to the Holder, without the consent of the Holder;
provided, however, that only the consent of the Required Holders shall be necessary to
alter the amount by which the Interest Rate may be increased during the continuance of an Event of
Default or to waive any of the obligation of the Company to pay such increased rate during the
continuance of an Event of Default); or



(c) change any provision of this Section 19, the definition of “Required Holders” or any other
provision hereof specifying the number or percentage of holders of Notes required to amend, waive
or otherwise modify any rights hereunder or to make any determination or grant any consent
hereunder, without the consent of the Holder and of each of the holders of the Other Notes, in each
case to the extent adversely affected thereby;



and provided further that no amendment, waiver or consent shall, unless in writing and signed by
the Holder Representative in addition to the holders of Notes required above, affect the rights or
duties of the Holder Representative under this Note or any other Transaction Document.


 


14









 






(20) HOLDER REPRESENTATIVE



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




(b) Concerning the Holder Representative.




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







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







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






(c) Compliance. The Holder Representative shall not be obligated to ascertain or
inquire as to the performance or observance of any of the terms of this Note.



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


 


15









 





(e) Reliance on Documents and Counsel. The Holder Representative shall be entitled to
rely, and shall be fully protected in relying, upon any affidavit, certificate, cablegram, consent,
instrument, letter, notice, order, document, statement, telecopy, telegram, telex or teletype
message or writing reasonably believed in good faith by the Holder Representative to be genuine and
correct and to have been signed, sent or made by the Person in question, including any telephonic
or oral statement made by such Person, and, with respect to legal matters, upon an opinion or the
advice of counsel selected by the Holder Representative.



(f) Holder Representative’s Reimbursement. The Company agrees to indemnify the Holder
Representative for any losses arising from its appointment as Holder Representative or from the
performance of its duties hereunder and to reimburse the Holder Representative for any reasonable
expenses; provided, however, that the Holder Representative shall not be indemnified or
reimbursed for liabilities or expenses to the extent resulting from its own gross negligence, bad
faith or willful misconduct. In addition, if at any time the Holder Representative is a Person
that is not a holder of one or more Notes, such Person shall be entitled to a fee for acting in the
capacity of Holder Representative, in an amount to be agreed between the Holder Representative and
the Required Holders.




(21) TRANSFER RESTRICTIONS; REISSUANCE OF THIS NOTE.



(a) Transfer. If this Note is to be transferred in compliance with Section 21(e)
below, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Note (in accordance with Section 21(d)),
registered as the Holder may request, representing the outstanding Principal being transferred by
the Holder and, if less then the entire outstanding Principal is being transferred, a new Note (in
accordance with Section 21(d)) to the Holder representing the outstanding Principal not being
transferred. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of Section 3(c)(iii), following conversion or redemption of any portion
of this Note, the outstanding Principal represented by this Note may be less than the Principal
stated on the face of this Note.



(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note,
and, in the case of loss, theft or destruction, of an indemnification undertaking by the Holder to
the Company, in customary form and, in the case of mutilation, upon surrender and cancellation of
this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with
Section 21(d)) representing the outstanding Principal.



(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 21(d) and in principal amounts of at least $100,000) representing in
the aggregate the outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time of such surrender.


 


16









 





(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 21(a) or Section 21(c), the Principal
designated by the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest of this Note from the Issuance Date.



(e) Transfer Restrictions. The Holder understands that the Company may, as a
condition to the transfer of any Notes or shares of Company Common Stock issuable upon conversion
of such Notes (collectively, the “Securities”), require that the request for transfer be
accompanied by an opinion of counsel reasonably satisfactory to the Company, to the effect that the
proposed transfer does not result in a violation of the Securities Act, unless such transfer is
covered by an effective registration statement or by Rule 144 or Rule 144A under the Securities
Act; provided, however, that an opinion of counsel shall not be required for a
transfer by the Holder that is (A) a partnership transferring to its partners or former partners in
accordance with partnership interests, (B) a corporation transferring to a wholly owned subsidiary
or a parent corporation that owns all of the capital stock of the Holder, (C) a limited liability
company transferring to its members or former members in accordance with their interest in the
limited liability company, (D) an individual transferring to the Holder’s family member or trust
for the benefit of an individual Holder, or (E) transferring its Securities to any Affiliate of the
Holder, in the case of an institutional investor, or other Person under common management with such
Holder; provided, further, that (i) the transferee in each case agrees to be
subject to the restrictions in this Section 21(e) and provides the Company with a customary
securities law representation letter, (ii) the Company satisfies itself that the number of
transferees is sufficiently limited and (iii) in the case of transferees that are partners or
limited liability company members, the transfer is for no consideration. It is understood that the
certificates evidencing any Securities may bear substantially the following legends (in addition to
any other legends as legal counsel for the Company deems necessary or advisable under the
applicable state and federal securities laws or any other agreement to which the Company is a
party):




“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY
APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO
THE SECURITIES UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT.”


 


17









 





(22) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.



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



(b) Notwithstanding the foregoing, but subject to Section 22(c), the Holder may not pursue any
remedy with respect to this Note unless:




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







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







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







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







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






(c) Notwithstanding the foregoing, but subject to Section 33, the right of the Holder to
receive payment of Principal, premium, if any, and Interest on the Note, on or after the respective
due dates set forth herein (including in connection with a Change of Control), or convert any
portion of the Note into shares of Company Common Stock on the terms and conditions set forth
herein, or to bring suit for the enforcement of any such right to payment or conversion, shall not
be impaired or affected without the consent of the Holder.



(23) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed
in the hands of an attorney for collection or enforcement or is collected or enforced through any
legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’ rights and involving
a claim under this Note, then the Company shall pay the costs incurred by the Holder for such
collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, but not limited to, reasonable
attorneys’ fees and disbursements.


 


18









 





(24) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the
Company and all the Holders of Notes and shall not be construed against any person as the drafter
hereof. The headings of this Note are for convenience of reference and shall not form part of, or
affect the interpretation of, this Note.



(25) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.



(26) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price, the Volume Weighted Average Price, the Weighted Average
Price, the Redemption Price or the arithmetic calculation of the Conversion Rate or the Redemption
Price, the Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt, or deemed receipt, of the Conversion Notice or
the Holder Change of Control Redemption Notice or other event giving rise to such dispute, as the
case may be, to the Holder Representative. If the Holder Representative and the Company are unable
to agree upon such determination or calculation of the Redemption Price or the Conversion Rate, as
applicable, within one (1) Business Day of such disputed determination or arithmetic calculation
being submitted to the Holder Representative, then the Company and the Holder Representative shall,
within one (1) Business Day thereafter submit via facsimile (a) the disputed determination of the
Closing Bid Price, the Closing Sale Price, the Volume Weighted Average Price or the Weighted
Average Price to an independent, reputable investment bank selected by the Company and approved by
the Holder Representative or (b) the disputed arithmetic calculation of the Conversion Rate or the
Redemption Price to the Company’s independent, outside accountant. The Company, at the Company’s
expense, shall cause the investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder Representative of the results
no later than five (5) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank’s or accountant’s determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error. To the extent of a good faith
dispute by the Company, any related penalty payments due hereunder shall not be made unless and
until such dispute is resolved against the Company.




 


19









 





(27) NOTICES; PAYMENTS.



(a) Notices. All notices, requests, consents, and other communications under this
Note shall be in writing and shall be deemed delivered (a) when delivered, if delivered personally,
(b) four business days after being sent by registered or certified mail, return receipt requested,
postage prepaid; (c) one business day after being sent via a reputable nationwide overnight courier
service guaranteeing next business day delivery, or (d) when receipt is acknowledged, in the case
of facsimile, in each case to the intended recipient as set forth below:




If to the Holder, at its address set forth on Schedule I hereto




with a copy to:




Ropes & Gray LLP

One International Place

Boston, MA 02110

Attention: Jeffrey Katz

Facsimile No.: (617) 235-0617




If to the Company:




Irvine Sensors Corporation

3001 Red Hill Avenue

Building 4, Suite 108

Costa Mesa, CA 92626

Attention: John J. Stuart, Jr.

Facsimile No.: (714) 444-8773




with a copy to:




Dorsey & Whitney LLP

38 Technology Drive, Suite 100

Irvine, CA 92618

Attention: Ellen Bancroft, Esq.

Facsimile No: (949) 932-3601




or at such other address as the Company or the Holder each may specify by written notice in
accordance with this Section 27.



The Company shall provide the Holder with prompt written notice of all actions taken pursuant to
this Note, including in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written notice to the
Holder (i) within one (1) Business Day upon any adjustment of the Conversion Price, setting forth
in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least fifteen
(15) days prior to the date on which the Company closes its books or takes a record (A) with
respect to any dividend or distribution upon the Company Common Stock, (B) with respect to any pro
rata subscription offer to holders of Company Common Stock or (C) for determining rights to vote
with respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that
such information shall be made known to the public prior to or in conjunction with such notice
being provided to the Holder.


 


20









 





(b) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Holders shall initially be as set forth on Schedule I
attached to this Note); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by providing the Company with prior written notice
setting out such request and the Holder’s wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a Business Day, the
same shall instead be due on the next succeeding day which is a Business Day.



(c) Withholding Taxes. All payments made by the Company hereunder shall be made
without withholding for or on account of any present or future taxes (other than overall net income
taxes imposed on the recipient). If any such withholding is so required, the Company shall make
the withholding, pay the amount withheld to the appropriate authority before penalties attach
thereto or interest accrues thereon and pay to the recipient such additional amount as may be
necessary to ensure that the net amount actually received by the recipient free and clear of such
taxes (including taxes on such additional amount) is equal to the amount that the recipient would
have received had such withholding not been made. If the recipient is required to pay any such
taxes, penalties or interest, the Company shall reimburse the recipient for that payment on demand.
If the Company pays any such taxes, penalties or interest, it shall deliver official tax receipts
or other evidence of payment to the recipient on whose account such withholding was made on or
before the thirtieth day after payment. The Holder agrees to provide, promptly following the
Company’s request therefore, such forms or certifications as it is legally able to provide to
establish an exemption from, or a reduction in, any withholding taxes that might otherwise apply.



(28) CANCELLATION. After all Principal, accrued Interest and other amounts at any
time owed on this Note have been paid in full, this Note shall automatically be deemed canceled,
shall be surrendered to the Company for cancellation and shall not be reissued.



(29) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note.



(30) GOVERNING LAW. This Note shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and performance of this Note
shall be governed by, the internal laws of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions other than the
State of New York.



(31) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have
the following meanings:



(a) “Approved Stock Plan” means any employee benefit plan, contract or arrangement which has
been approved by the Company Board of Directors, pursuant to which the Company’s securities may be
issued to any employee, consultant, officer or director for services provided to the Company.


 


21









 





(b) “Bankruptcy Code” means Chapter 11 of Title 11 of the United States Code, as amended from
time to time and any successor statute and all rules and regulations promulgated thereunder.




(c) “Bloomberg” means Bloomberg Financial Markets.



(d) “Bridge Notes” means the Company’s 10% Unsecured Convertible Promissory Notes due May 31,
2011 in the original aggregate principal amount of $3,000,000.



(e) “Business Day” means any day other than Saturday, Sunday or other day on which commercial
banks in The City of New York are authorized or required by law to remain closed.



(f) “Contractual Obligation” means, with respect to any Person, any contract, agreement, deed,
mortgage, lease, sublease, license, sublicense or other legally enforceable commitment, promise,
undertaking, obligation, arrangement, instrument or understanding, whether written or oral, to
which or by which such Person is a party or otherwise subject or bound or to which or by which any
property, business, operation or right of such Person is subject or bound.



(g) “Conversion Shares” means the shares of Company Common Stock into which the Notes are
convertible.



(h) “Change of Control” means any Fundamental Transaction other than (A) a Fundamental
Transaction in which holders of the Company’s voting power immediately prior to the Fundamental
Transaction continue after the Fundamental Transaction to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other than a corporation)
of such entity or entities, (B) a Fundamental Transaction with any Holder, any Affiliate of any
Holder or any person otherwise related to or associated with a Holder, or (C) pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of
the Company.



(i) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security, as reported
by Bloomberg (whether or not such security is trading on an Eligible Market at such time), or, if
the market on which the security is trading begins to operate on an extended hours basis and does
not designate the closing bid price or the closing trade price, as the case may be, then the last
bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York Time,
as reported by Bloomberg, or, if the market on which the security is trading is not the principal
securities exchange or trading market for such security, the last closing bid price or last trade
price, respectively, of such security on the principal securities exchange or trading market where
such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
last closing bid price or last trade price, respectively, of such security in the over-the-counter
market on the electronic bulletin board for such security as reported by Bloomberg, or, if no
closing bid price or last trade price, respectively, is


 


22









 






reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National
Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price, as the case may be, of such security on such date shall be the fair market
value as mutually determined by the Company and the Holder Representative. If the Company and the
Holder are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 26. All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination or other similar transaction during the applicable
calculation period.




(j) “Collateral” has the meaning given to such term in the Security Agreement.



(k) “Company Board of Directors” means the board of directors of the Company or any authorized
committee of the board of directors.



(l) “Company Trading Day” means any day on which the Company Common Stock is traded on the
principal securities exchange or securities market on which the Company Common Stock is then
traded; provided that “Company Trading Day” shall not include any day on which the Company Common
Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the
Company Common Stock is suspended from trading during the final hour of trading on such exchange or
market (or if such exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00 p.m., New York Time).



(m) “Convertible Securities” means with respect to any issuer, any stock or securities (other
than Options) directly or indirectly convertible into or exercisable or exchangeable for such
issuer’s common stock.



(n) “Distribution” means (i) any payment or distribution made by the Company on account of the
Note, whether in the form of cash, securities or other property, by setoff or otherwise, or (ii)
any redemption, purchase or other acquisition by the Company of all or a portion of the Note, in
each of cases (i) and (ii), other than any payment, distribution, redemption,
purchase or other acquisition made (x) through the conversion or exchange of all or a portion of
the Note into or for (I) equity securities of the Company (including pursuant to the terms hereof)
or (II) debt securities of the Company that (A) are subordinated in right of payment to the
Existing Secured Note to at least the same extent as the Notes are subordinated to the Existing
Secured Note, (B) do not have the benefit of any obligation of any Person (whether as issuer,
guarantor or otherwise) unless the Existing Secured Note has at least the same benefit of the
obligation of such Person and the obligation of such Person to the Holder is subordinated to the
obligations of such Person to the Existing Secured Note Holder to at least the same extent that
this Note is subordinated to the Existing Secured Note and (C) is either unsecured or secured by
liens that are subordinated to the liens securing the Existing Secured Note, (y) at any time that
no “Default” (as defined in the Existing Secured Note) has occurred and is continuing under Section
6(a) or 6(c) of the Existing Secured Note or (z) through the accrual and addition to principal of
capitalized interest in the amounts and at the times specified in this Note.


 


23









 





(o) “Eligible Market” means a national security exchange that has registered with the SEC
under Section 6 of the Securities Exchange Act of 1934.



(p) “Equity Conditions” means each of the following conditions: (i) during the period
beginning fifteen (15) Company Trading Days prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), the Company shall have delivered Conversion Shares upon conversion of the Notes on a
timely basis as set forth in Section 3(c)(i) hereof (and analogous provisions under the Other
Notes); (ii) on each day during the Equity Conditions Measuring Period, any applicable shares of
Company Common Stock to be issued in connection with the event requiring determination may be
issued in full without violating the rules or regulations of the applicable Eligible Market, if
applicable; (iii) during the Equity Conditions Measuring Period, the Company shall not have failed
to timely make any payments within five (5) Business Days of when such payment is due pursuant to
any Transaction Document; (iv) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended Fundamental
Transaction which has not been abandoned, terminated or consummated, or (B) an Event of Default;
(v) during the period commencing on the Interest Election Date or the Mandatory Conversion Notice
Date, as applicable, and ending on the Interest Payment Date or the Mandatory Conversion Date, as
applicable, an event that with the passage of time or giving of notice would constitute an Event of
Default; (vi) during the Equity Conditions Measuring Period, the Company shall have no knowledge of
any fact that would cause any shares of Company Common Stock issuable upon conversion of the Notes
not to be eligible for resale without restriction pursuant to Rule 144 and any applicable state
securities laws; (vii) during the Equity Conditions Measuring Period, the Company otherwise shall
have been in compliance with and shall not have breached any provision, covenant, representation or
warranty of any Transaction Document to the extent that such breach would have a Material Adverse
Effect; (viii) prior to the Mandatory Conversion Eligibility Date the Company Common Stock shall be
relisted on an Eligible Market; (ix) prior to the Mandatory Conversion Eligibility Date the Company
shall have timely filed each of its required reports under the Securities Exchange Act of 1934, as
amended; and (x) prior to the Mandatory Conversion Eligibility Date any shares required for the
Mandatory Conversion have been duly authorized and shall be upon issuance fully-paid and validly
issued.




(q) “Event of Default Premium” means 25% of the Outstanding Note Obligations.



(r) “Excluded Securities” means any Company Common Stock or other securities or debt
obligations issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon
conversion of the Company’s 12% convertible secured notes due 2015 in an aggregate principal amount
not to exceed $11,020,800 owing to Costa Brava Partnership III L.P., The Griffin Fund, LP and to
certain other investors (on substantially the same terms as such Indebtedness owing to Costa Brava
Partnership III L.P.); (iii) pursuant to a bona fide firm commitment underwritten public offering
with an institution that regularly underwrites as a principal part of its business public offerings
on a firm commitment basis which generates gross proceeds to the Company in excess of $15,000,000
(other


 


24









 






than an “at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act and “equity
lines”); (iv) in connection with corporate partnering or licensing transactions or in connection with a strategic merger,
acquisition, consolidation or purchase of substantially all of the securities or assets of a
corporation or other entity, on terms approved by the Board of Directors and the primary purpose of
which is not to raise equity capital; (v) upon exercise or conversion of any options, warrants or
convertible securities of the Company which are outstanding on the day immediately preceding the
date herewith, provided that the terms of such options, warrants or convertible securities are not
amended, modified or changed on or after the date herewith to decrease the price, increase the
number of shares issuable thereunder or extend the term of such options or convertible securities;
and (vi) in the closings of conversions of Bridge Notes into the Company’s 12% convertible secured
notes due 2015.



(s) “Existing Secured Debt” means all obligations, liabilities and indebtedness of every
nature of the Company from time to time owed to the Existing Secured Note Holder under the Existing
Secured Note, including, without limitation, the principal amount of all debts, claims and
indebtedness, accrued and unpaid interest and all costs and expenses, whether primary, secondary,
direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due
or payable, whether before or after the filing of a Proceeding under the Bankruptcy Code together
with any interest accruing thereon after the commencement of a Proceeding, without regard to
whether or not such interest is an allowed claim.



(t) “Existing Secured Note” means the Secured Promissory Note, dated April 14, 2010, issued by
the Company to Timothy Looney, as in effect as of the date hereof.



(u) “Existing Secured Note Holder” means Timothy Looney or any of his successors or assigns as
the Payee of the Existing Secured Note (as such term is defined therein).



(v) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company is the
surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose
of all or substantially all of the assets of the Company to another Person, or (iii) allow another
Person to make a purchase, tender or exchange offer that is accepted by the holders of more than
the 50% of the outstanding shares of Company Common Stock (not including any shares of Company
Common Stock held by the Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding shares of Company Common Stock (not including any
shares of Company Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock purchase agreement
or other business combination), or (v) reorganize, recapitalize or reclassify its Company Common
Stock. A Fundamental Transaction shall not include any transaction with any Holder, any Affiliate
of any Holder, or any Person otherwise related to or associated with a Holder.


 


25









 





(w) “Guarantee” means, with respect to any Person, (a) any guarantee of the payment or
performance of, or any contingent obligation in respect of, any Indebtedness or other
Liability of any other Person, (b) any other arrangement whereby credit is extended to any
obligor (other than such Person) on the basis of any promise or undertaking of such Person (i) to
pay the Indebtedness or other Liability of such obligor, (ii) to purchase any obligation owed by
such obligor, (iii) to purchase or lease assets under circumstances that are designed to enable
such obligor to discharge one or more of its obligations or (iv) to maintain the capital, working
capital, solvency or general financial condition of such obligor and (c) any liability as a general
partner of a partnership or as a venturer in a joint venture in respect of Indebtedness or other
Liabilities of such partnership or venture.



(x) “Holder Representative” means, as of the Initial Date, Costa Brava Partnership III L.P.
and at any time thereafter, the Person most recently appointed to act as Holder Representative
pursuant to Section 20(a).



(y) “Indebtedness” means, with respect to any Person, and without duplication, all
Liabilities, including all obligations in respect of principal, accrued interest, penalties, fees
and premiums, of such Person (a) for borrowed money (including amounts outstanding under overdraft
facilities), (b) evidenced by notes, bonds, debentures or other similar Contractual Obligations,
(c) in respect of “earn-out” obligations and other obligations for the deferred purchase price of
property, goods or services (other than trade payables or accruals incurred in the ordinary course
of business), (d) for the capitalized liability under all capital leases of such Person (determined
in accordance with GAAP), (e) in respect of letters of credit and bankers’ acceptances, (f) for
Contractual Obligations relating to interest rate protection, swap agreements and collar
agreements, in each case, to the extent payable if such Contractual Obligation is terminated at the
Closing, and (g) in the nature of Guarantees of the obligations described in clauses (a) through
(f) above of any other Person.




(z) “Initial Date” shall mean December 23, 2010.



(aa) “Interest Conversion Price” means, with respect to any Interest Payment Date, the price
computed as the Weighted Average Price of the Company Common Stock on each of the twenty (20)
consecutive Company Trading Days ending on the second (2nd) Company Trading Day
immediately preceding such Interest Payment Date. All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other similar transaction during
such period.



(bb) “Interest Period” means, initially, the period beginning on and including the Issuance
Date and ending on and including September 30, 2011 and each successive period for each year until
the Maturity Date as follows: the period beginning on and including October 1 and ending on and
including December 31; the period beginning on and including January 1 and ending on and including
March 31; the period beginning on and including April 1 and ending on and including June 30; the
period beginning on and including July 1 and ending on and including September 30.


 


26









 





(cc) “Interest Rate” means twelve percent (12.0%) per annum; provided that upon the
occurrence and during the continuance of an Event of Default, the Interest Rate shall be increased
to twenty percent (20.0%) per annum. In the event that such Event of Default is
subsequently cured or waived, the Interest Rate shall be reduced to twelve percent (12.0%) per
annum as of the date of such cure or waiver, it being understood, however, that unless the Required
Holders otherwise agree in writing, such reduction shall not apply retroactively to the period when
such Event of Default was continuing.




(dd) “Issuance Date” has the meaning set forth in Section 2 hereof.



(ee) “Liability” means, with respect to any Person, any liability or obligation of such Person
whether known or unknown, whether asserted or unasserted, whether determined, determinable or
otherwise, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, whether directly incurred or consequential, whether due or to become due and whether
or not required under GAAP to be accrued on the financial statements of such Person.



(ff) “Material Adverse Effect” means any (i) adverse effect on the issuance or validity of the
Notes or the transactions contemplated hereby or on the ability of the Company to perform its
obligations under the Notes or the other Transaction Documents, or (ii) material adverse effect on
the condition (financial or otherwise), properties, assets, liabilities, business or operations of
the Company and its Subsidiaries taken as a whole.



(gg) “Options” means with respect to any issuer, any rights, warrants or options to subscribe
for or purchase such issuer’s common stock or such issuer’s Convertible Securities.




(hh) “Outstanding Note Obligations” shall have the meaning given to such term in Section 5(b).



(ii) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent
Entity with the largest public market capitalization as of the date of consummation of the
Fundamental Transaction.



(jj) “Permitted Indebtedness” means (A) Indebtedness incurred by the Company that is made
expressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflected
in a written agreement reasonably acceptable to the Holder Representative and approved by the
Holder Representative in writing, and which Indebtedness does not provide at any time for (1) the
payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal
or premium, if any, thereon until ninety-one (91) days after the Maturity Date or later and (2)
total interest and fees at a rate in excess of six percent (6%) per annum, (B) Indebtedness secured
by Permitted Liens, (C) Indebtedness to trade creditors or for professional services incurred in
the ordinary course of business, (D) any Bridge Notes, (E) senior subordinated Indebtedness in an
aggregate principal amount not to exceed $4,000,000 owing to Costa Brava Partnership III L.P., The
Griffin Fund, LP and to certain other investors (on substantially the same terms as such
Indebtedness owing to Costa Brava Partnership III L.P.), (F) Indebtedness owing under the Company’s
12% convertible


 


27









 






secured notes due 2015 in an aggregate principal amount not to exceed $11,020,800 owing to Costa Brava Partnership III
L.P., The Griffin Fund, LP and to certain other investors (on substantially the same terms as such
Indebtedness owing to Costa Brava Partnership III L.P.), (G) Indebtedness owing to or held by
Summit Financial Resources, L.P. incurred by the Company (but in the case of any such obligations
in respect of principal, limited to an aggregate principal amount not more than $500,000 in excess
of the aggregate principal amount of the Indebtedness owing under this clause (G) on March 16,
2011) to factor or finance its accounts receivable, and (H) extensions, refinancings and renewals
of any items of Permitted Indebtedness described in clauses (A) through (F) above, provided that
the principal amount is not increased or the terms modified to impose more burdensome terms upon
the Company or its Subsidiary, as the case may be.



(kk) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or delinquent, (iii)
any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a liability that is not
yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv)
Liens securing the Company’s obligations under the Notes, (v) Liens (A) upon or in any equipment
acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of
such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the
Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of
such equipment, (vi) Liens securing the Company’s obligations under the Indebtedness described in
clauses (E), (F) and (G) of the definition of “Permitted Indebtedness” (but in the case of any
Indebtedness described in such clause (G), limited to the security interests granted under the
agreement governing such Indebtedness as in effect on the Initial Date), (vii) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (i) through (vi) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing Lien and the principal
amount of the Indebtedness being extended, renewed or refinanced does not increase, (viii) leases
or subleases and licenses and sublicenses granted to others in the ordinary course of the Company’s
business, not interfering in any material respect with the business of the Company and its
Subsidiaries taken as a whole, (ix) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payments of custom duties in connection with the importation of goods, and
(x) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event
of Default under Section 5(a)(vi).



(ll) “Person” means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other entity and a government
or any department or agency thereof.



(mm) “Principal Market” means the following markets or exchanges on which the Common Stock is
listed or quoted for trading on the date in question: the American Stock Exchange, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock
Exchange or the OTC Bulletin Board.


 


28









 





(nn) “Proceeding” means any voluntary or involuntary insolvency, bankruptcy, receivership,
custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors,
appointment of a custodian, receiver, trustee or other officer with similar powers or any other
proceeding for the liquidation, dissolution or other winding up of a Person.



(oo) “Redemption Price” means any of an Event of Default Redemption Price, Alternative Event
of Default Redemption Price or Holder Change of Control Redemption Price.



(pp) “Required Holders” means the holders of Notes representing at least a majority of the
aggregate principal amount of the Notes then outstanding.




(qq) “SEC” means the United States Securities and Exchange Commission.



(rr) “Subsidiary” means any corporation, association trust, limited liability company,
partnership, joint venture or other business association or entity (i) at least 50% of the
outstanding voting securities of which are at the time owned or controlled directly or indirectly
by the Company or (ii) with respect to which the Company possesses, directly or indirectly, the
power to direct or cause the direction of the affairs or management of such Person.



(ss) “Successor Entity” means the Person, which may be the Company, formed by, resulting from
or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded entity whose common
stock or equivalent equity security is quoted or listed for trading on an Eligible Market,
Successor Entity shall mean such Person’s Parent Entity.



(tt) “Transaction Documents” means this Note, the Other Notes, the Security Agreement and any
other documents or agreements which the parties agree shall constitute a “Transaction Document”.



(uu) “Volume Weighted Average Price” for a period of days means the quotient of (i) the sum of
(a) the Weighted Average Price for a particular day multiplied by the trading volume for such day,
plus (b) the same calculation for each successive day in the period, divided by (ii) the sum of the
trading volume for the entire period.



(vv) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for
such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National
Quotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Weighted Average Price of such security on such
date shall be the fair market value as mutually determined by the Company and the Holder
Representative. If the Company and the Holder Representative are unable to agree upon the fair
market value of such security, then such dispute shall be resolved pursuant to Section 26. All
such determinations to be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during the applicable calculation period.


 


29









 





(32) SECURITY. The Notes shall be secured by and to the extent provided in the
Security Agreement.



(33) SUBORDINATION. It is a requirement of the Existing Secured Note that any secured
Indebtedness of the Company, including this Note, be subordinated in right of payment to the
Existing Secured Note. Accordingly, each of the Company and, by acceptance of this Note, the
Holder and each of its successors and assigns hereby covenants and agrees that for so long (but
only for so long) as the Outstanding Note Obligations are secured by any of the assets of the
Company, the following provisions of this Section 33 shall apply:



(a) Subordination of Note to Existing Secured Debt. Notwithstanding anything to the
contrary set forth herein or in any of the Transaction Documents, this Note shall be subordinated
in right and time of payment, to the extent and in the manner set forth in this Section 33, to the
prior indefeasible payment in full in cash of the Existing Secured Debt.



(b) Payment Restrictions. The Company hereby agrees that it may not make, and the
Holder hereby agrees that it will not accept, any Distribution with respect to this Note until the
earlier of (a) the date that is one (1) day following the date the Existing Secured Debt is
indefeasibly paid in full in cash and (b) in the event that the Existing Secured Note Holder has
acknowledged in writing that the Existing Secured Debt has been indefeasibly paid in full in cash,
the date of such payment and acknowledgment in writing.



(34) Registered Obligation. The Company shall establish and maintain a record of
ownership (the “Register”) in which it will register by book entry the interest of the
initial Holder and of each subsequent assignee in this Note, and in the right to receive any
payments of principal and interest or any other payments hereunder, and any assignment of any such
interest. Notwithstanding anything herein to the contrary, this Note is intended to be treated as
a registered obligation for federal income tax purposes and the right, title, and interest of the
Holder and its assignees in and to payments under this Note shall be transferable only upon
notation of such transfer in the Register. This Section shall be construed so that the Note is at
all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and
881(c)(2) of the Internal Revenue Code and any related regulations (or any successor provisions of
the Code or such regulations).



[Signature Page Follows]




 


30









 







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



	 	 	 	 	 
	 	IRVINE SENSORS CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 



Note




 


 









 





EXHIBIT I




IRVINE SENSORS CORPORATION

CONVERSION NOTICE




TO BE EXECUTED BY THE REGISTERED HOLDER TO CONVERT THIS NOTE

INTO COMMON STOCK




Reference is
made to the Subordinated Secured Convertible Note (the “Note”) issued to the
undersigned by Irvine Sensors Corporation (the “Company”). In accordance with and pursuant to the
Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of
the Note indicated below into shares of Company Common Stock, par value $.01 per share (the
“Company Common Stock”), of the Company as of the date specified below. The undersigned hereby
represents and warrants that it is (i) an “accredited investor” as that term is defined in
Regulation D promulgated under the Securities Act, (ii) acquiring the Company Common Stock for its
own account for investment and not with a view toward distribution in a manner which would violate
the Securities Act or any applicable state securities laws and (iii) aware that the shares of
Company Common Stock are “restricted securities” under the federal securities laws and must be held
indefinitely unless subsequently registered under the Securities Act and under applicable state
securities laws or an exemption from such registration is available.



Date of Conversion:       
                      
                      
          



Aggregate Conversion Amount to be converted:   
                      
                      
                                  



Please confirm the following information:      
                      
                      
                      
         



Conversion Price:       
                      
                      
               
               



Number of shares of Company Common Stock to be issued:                                                             
                    



Please issue the Company Common Stock into which the Note is being converted in the following name
and to the following address:




Issue to:              
                         
                         
                           
                           
                          
                           
                           
                          
                           
                           
                          
                           
                           
                          
                           
                          
                           
                           
                          
                           
          




Facsimile Number:       
                      
                      
                      
                    
                    
                     
                     
      




Authorization:        
                      
                      
                      
                      
                      
                       




By:          
                      
                      
                      
                         




Title:         
                           
     


 


 









 





Dated:            
                      
                      
                      
                      
                       
                      
                




Account Number:        
                      
                      
                      
                      
                        
                       
                  




   (if electronic book entry transfer)




Transaction Code Number:      
                      
                      
                      
                      
                      
     




   (if electronic book entry transfer)



ACKNOWLEDGMENT




The Company hereby acknowledges this Conversion Notice and hereby directs
                                        , the Company’s transfer agent (the “Transfer Agent”), to issue the above
indicated number of shares of Company Common Stock in accordance with the Transfer Agent
Instructions dated                     , 20
 _____ 
from the Company and acknowledged and agreed to by Transfer
Agent.



	 	 	 	 	 
	 	IRVINE SENSORS CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 



 


 









 





Schedule I




Payment and Notice Address of Holder