**Exhibit 10.4**

 

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

 

**SUBORDINATED CONVERTIBLE PROMISSORY NOTE**

 
| Principal Amount:  $1,500,000 |   | October 31, 2003 |
|-----------------------------------------|--------|------------------|

 

FOR VALUE RECEIVED, INRAD, INC., a New Jersey corporation (hereinaftercalled “Issuer”), hereby promises to pay to the order of CLAREX, LTD. and itssuccessors and assigns (hereinafter called the “Holder”), at such address asthe Holder may designate in writing to Issuer, the principal sum of ONE MILLIONDOLLARS FIVE HUNDRED THOUSAND ($1,500,000) plus all accrued interest owinghereunder in lawful money of the United States of America on or before theMaturity Date (as defined below), unless this Convertible Promissory Note (the“Note”) is converted by the Holder as set forth herein.  For purposes of this Note, “Maturity Date”shall mean January 31, 2006.

 

# *Interest*. Interest shall accrue on the unpaid principal amount of this Note at therate of six percent (6%) per annum and shall be due and payable on the MaturityDate.  Interest shall be computed on thebasis of a 360 day year for the actual number of days elapsed.

 

# *Optional Prepayment; Order of Payments.* Issuer may prepay this Note at any time, inwhole or in part, without premium or penalty; provided, however, Issuer shallprovide to the Holder written notice at least ten (10) business days prior tosuch prepayment.  All payments made onaccount of this Note shall be applied first to the payment of any costs ofenforcement then due hereunder, second to the payment of accrued and unpaidinterest then due hereunder, and the remainder, if any, shall be applied to theunpaid principal balance of this Note.

 

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

 

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

 

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

 

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

 

Then Holder, by notice in writing to Issuer (the “AccelerationNotice”), may declare the principal amount of this Note and all accrued butunpaid interest to be due and payable immediately, and upon any suchdeclaration the same shall become immediately due and payable; provided that ifan Insolvency Event occurs, the principal amount of this Note and all accruedbut unpaid interest shall become and be immediately due and payable without anydeclaration or other act on the part of the Holder.

 

# *Conversion*. The Holder may, at any time prior to the earlier of the Maturity Date orthe prepayment of this Note by Issuer, convert all or a portion of theprincipal and accrued interest then outstanding under this Note into fully paidand non-assessable shares of Issuer’s Common Stock (the “Common Stock”), at theConversion Price (as defined below) per share. Such conversion shall be effected by the Holder by sending a writtennotice of conversion and this Note to Issuer for cancellation and issuance ofthe number of shares of Common Stock into which this Note is beingconverted.  In the event this Note is beingconverted in part, a replacement Note representing the unconverted portion ofthis Note shall be delivered to the Holder. Upon conversion of this Note, only whole shares of Common Stock shall beissued.  Any remainder due hereunderwhich is insufficient to purchase a whole share of Common Stock shall be paidby Issuer in cash.  The Conversion Priceshall be (a) the price at which common stock is first issued for cash after thedate of this Note to an unrelated third party investor or (b) the price mutuallyagreed to by the Issuer and the Holder as its then fair market value if no such

#  

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# issuance has occurredwithin 12 months of the date hereof (the “Conversion Price”).  To supplement clause (a), if after the datehereof but before any third party purchase of Common Stock for cash, theCompany issues any security convertible into Common Stock to an unrelated thirdparty investor for cash, the Conversion Price of this Note shall be the same asthe conversion price of that convertible security.  Once fixed, the Conversion Price and the amount and kind ofsecurities issuable upon conversion of this Note shall be subject to adjustmentfrom time to time in accordance with the provisions of this Section 4.

 

**4.1*          Subdivision or Combination of CommonStock*.  In case Issuer shallat any time subdivide (by any stock split, stock dividend or otherwise) itsoutstanding shares of Common Stock into a greater number of shares, theConversion Price in effect immediately prior to such subdivision shall beproportionately reduced, and, conversely, in case the outstanding shares ofCommon Stock shall be combined into a smaller number of shares, the ConversionPrice in effect immediately prior to such combination shall be proportionatelyincreased.**

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**4.2          *Reorganizationor Reclassification*.  If anycapital reorganization or reclassification of the capital stock of Issuer(other than in connection with a merger or other reorganization in which Issueris not the surviving entity) shall be effected in such a way that holders of CommonStock shall be entitled to receive stock, securities or assets with respect toor in exchange for Common Stock, then, as a condition of such reorganization orreclassification, lawful and adequate provisions shall be made whereby theHolder shall thereupon have the right to receive upon the conversion of thisNote, upon the terms and conditions specified herein and in lieu of the sharesof Common Stock immediately theretofore receivable upon the conversion of thisNote, such shares of stock, securities or assets as may be issued or payablewith respect to or in exchange for the shares of Common Stock immediatelytheretofore receivable upon such conversion had such reorganization orreclassification not taken place, and in any such case appropriate provisionsshall be made with respect to the rights and interests of the Holder to the endthat the provisions hereof shall thereafter be applicable, as nearly as may be,in relation to any shares of stock, securities or assets thereafter deliverableupon the exercise of such conversion rights.**

 

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

 

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

 

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

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

 

(a)           In the event ofinsolvency or bankruptcy proceedings, or any receivership, liquidation,reorganization or other similar proceedings relative to the Issuer or to any ofthe property of the Issuer, or in the event or any proceedings for voluntaryliquidation, dissolution, or other winding-up of the Issuer, whether or notinvolving insolvency or bankruptcy, then the holders of Senior Debt shall beentitled to receive payment in full of all principal of and interest on allSenior Debt before the Holder of this Note shall be entitled to receive anypayment on account of principal or interest on this Note, and to that end theholders of Senior Debt shall be entitled to receive for application in paymentthereof any payment or distribution of any kind or character, whether in cashor property or securities, which may be payable or deliverable in any suchproceedings in respect of this Note.

 

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

 

(c)           The Issuer may makepayments and, subject to Section 1 of this Note, prepayments of the principalof and interest of this Note if, at the time of the payment and immediately aftergiving effect thereto, (i) there exists no default in any payment with respectto any Senior Debt and (ii) there shall not have occurred an event of default(other than a default in the payment of amounts due thereon) with respect toany Senior Debt, as defined in the instrument under which the same isoutstanding, permitting the holders thereof to accelerate the maturity thereof,other than an event of default which shall have been cured or waived or shallhave ceased to exist.  Should the Holderof this Note, while there exists a default or an event of default as providedin the immediately preceding sentence, and after being notified by the holderof the Senior Debt of the default, receive any such payment, or should theHolder of this Note receive any distribution in bankruptcy, dissolution, orsimilar insolvency proceedings in

 

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regard to the Issuer, theHolder of the Note will hold such payment or distribution in trust for theholder of the Senior Debt and will pay over such amounts to such holder toapply to the Senior Debt until the same is paid in full.

 

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

 

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

 

6.             *Miscellaneous*.

 

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

 

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

 

IN WITNESSWHEREOF, Issuer has caused this Note to be signed in its name by its dulyauthorized officer and its corporate seal to be affixed hereto.

 

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|   | Photonic  Products Group, INC.  |
|--------|---------------------------------|
|   |                            |
|   | By:                             | /s/ William  S. Miraglia |   |
|   |                            |
|   | William S.  Miraglia, Secretary |

 

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