Document:

Exhibit
4.5

 

 

Certificate
of Designation

 

of

 

Series A
Redeemable Preferred Stock

 

and

 

Series A-1
Convertible Preferred Stock

 

of

 

Innovative
Micro Technology, Inc.

 

 

Certificate
of Designation

 

of

 

Series A
Redeemable Preferred Stock

 

and

 

Series A-1
Convertible Preferred Stock

 

of

 

Innovative
Micro Technology, Inc.

 

Innovative Micro Technology,
Inc., a Delaware corporation (the “Corporation”), pursuant to Section 151
of the General Corporation Law of the State of Delaware, does hereby make this
Certificate of Designation and does hereby state and certify that pursuant to
the authority expressly vested in the Board of Directors of the Corporation
(the “Board”) by the Certificate of Incorporation of the Corporation, the Board
duly adopted the following resolutions:

 

WHEREAS, the Board is
authorized, within the limitations and restrictions stated in the Certificate
of Incorporation, to fix by resolution or resolutions the designation of each
series of Preferred Stock, par value $.0001 per share (the “Preferred Stock”),
and the rights, preferences, privileges and restrictions thereof, including,
without limiting the generality of the foregoing, such provisions as may be
desired concerning voting, dividends, conversion, dissolution or the
distribution of assets, and such other subjects or matters as may be fixed by
resolution or resolutions of the Board of Directors under the Delaware General
Corporation Law; and

 

WHEREAS, the Board, pursuant
to its authority as aforesaid, has determined that it is in the best interest
of the Corporation and its stockholders to authorize and fix the terms of two
series of Preferred Stock and the number of shares constituting the series;

 

NOW, THEREFORE, BE IT
RESOLVED, that two series of Preferred Stock are hereby created and authorized
to be issued in the number and series, and on the terms and with the
provisions, set forth below.

 

ARTICLE I

Series A
Redeemable Preferred Stock

 

A.                                   Designation of
Series and Number of Shares.  1,000,000 shares of the Corporation’s
authorized Preferred Stock are hereby designated “Series A Redeemable
Preferred Stock” and authorized for issuance with the rights, preferences,
privileges and limitations set forth below.

 

1

 

B.                                     Voting.

 

1.                                       General.  The holders of Series A Redeemable
Preferred Stock (the “Series A Holders”) shall have no voting rights with
respect to their shares of Series A Redeemable Preferred Stock (the “Series A
Shares”), except as set forth in Section F below and as otherwise may be required
by law.

 

2.                                       Series A
Directors.  So long as
Series A Shares remain outstanding, at any meeting held for the purpose of
electing directors (or in a written consent in lieu thereof), the presence in
person or by proxy (or the written consent) of the Series A Holders
holding at least a majority of the Series A Shares then outstanding shall
constitute a quorum of the Series A Redeemable Preferred Stock for the
election of two (2) directors who shall be elected solely by the Series A
Holders (the “Series A Directors”). 
So long as Series A Shares remain outstanding, a vacancy in the
directorships elected by the Series A Holders as provided in this Section I.B.2
shall be filled only by the vote or written consent of the Series A
Holders.  Notwithstanding anything to the
contrary in the Certificate of Incorporation or Bylaws of the Corporation, so
long as Series A Shares remain outstanding, the Series A Holders
shall have sole authority to nominate the candidates for election as
Series A Directors, provided such candidate must be qualified to serve
under any applicable law, regulation or rule applicable to the
Corporation.  The Corporation shall
reimburse the Series A Directors for reasonable expenses incurred in attending
meetings of directors.  Notwithstanding
the foregoing, in the event of the consummation of a redemption of the
Series A Shares as contemplated under Section I.E below such that no
Series A Shares remain outstanding, the Series A Holders immediately
shall cease to have the right to elect such directors and the directorships
formerly elected by the Series A Holders shall thereupon become a general
directorship elected by all the stockholders voting together as a single class
at any meeting held for the purpose of electing directors (or in a written
consent in lieu thereof).

 

C.                                     Dividends.

 

1.                                       Mandatory
Dividend. Until the fourth anniversary of the Original
Issuance Date, the Series A Shares shall bear mandatory, cumulative
dividends per share at the rate of 4.665% of the Series A Original Issuance
Price (as defined in Article III below) per annum, to be paid each year in
cash on or before December 31 of such year out of Available Funds and
Assets, and to be paid on a pro rata basis based on the actual number of days
elapsed for any partial year (the “Mandatory Dividend”).  If the Mandatory Dividend is not paid by December 31
of any year in which the Mandatory Dividend is payable, or if the Series A
Shares are redeemed in any such year prior to December 31 of such year and
the Mandatory Dividend had not yet been paid for such year at the time of such
redemption, in each such case the Mandatory Dividend amount for such year shall
accumulate and be added to the Series A Redemption Price as set forth
below.

 

2.                                       Preferred
Dividends.  Beginning
on the fourth anniversary of the Original Issuance Date, the Series A
Shares shall bear dividends per share at the rate of 4.665% of the
Series A Original Issuance Price (as defined in Article III below)
per annum (the “Preferred Dividend”), out of Available Funds and Assets, when,
as and if declared by the Board of Directors of the Corporation (the “Board”).  No dividend or distribution shall be declared
with

 

2

 

respect to the Series A-1
Convertible Preferred Stock or the Common Stock in any year unless full
provision has been made to pay the Preferred Dividend with respect to the
Series A Shares.

 

D.                                    Liquidation.  In the event of any Liquidating Transaction,
the Series A Holders shall be entitled to receive, prior and in preference
to any distribution to the holders of Common Stock and the Series A-1
Convertible Preferred Stock, the following sum:

 

(i)                                     an amount per
share equal to the Series A Original Issuance Price, plus

 

(ii)                                  all accumulated
unpaid Mandatory Dividend amounts; plus

 

(iii)                               the amount of
any unpaid additional dividends that have been declared with respect to the
Series A Redeemable Preferred Stock, including without limitation any Preferred
Dividends.

 

E.                                      Redemption.

 

1.                                       Redemption at
Option of Corporation. At any time, and from time to time, the
Corporation may by resolution of the Board redeem all or a part of the
Series A Shares, out of Available Funds and Assets.  Upon notice to the Series A Holders of such
redemption, the Series A Shares so redeemed shall be cancelled and the
certificates therefor shall represent only the right of each Series A
Holder to receive, on surrender of such certificate, payment of the following
sum (the “Series A Redemption Price”):

 

(i)                                     an amount per
share equal to the Series A Original Issuance Price; plus

 

(ii)                                  all accumulated
unpaid Mandatory Dividend amounts; plus

 

(iii)                               the amount of
any unpaid additional dividends that have been declared with respect to the
Series A Redeemable Preferred Stock, including without limitation any Preferred
Dividends.

 

If the Corporation redeems
part of the Series A Shares pursuant to this Section I.E(1), each
Series A Holder shall receive, in addition to the payment of the
Series A Redemption Price for the cancelled shares, a new certificate
evidencing the holder’s remaining Series A Shares.

 

2.                                       Redemption at
Option of Series A Holders.  At any time after the fourth anniversary of
the Original Issuance Date, the Series A Holders may, by an affirmative
vote of the Series A Holders holding at least a majority of the
then-outstanding Series A Shares, elect to cause the Corporation to redeem
all of the Series A Shares.  In so
electing, the Series A Holders shall also elect to receive as payment in
full for the Series A Shares the consideration set forth in either subsection (a)
or subsection (b) below:

 

(a)                                  Cash Redemption.  If elected by the Series A Holders
holding at least a majority of the then-outstanding Series A Shares, each
such Series A Holder shall receive the Series A Redemption Price for
each share surrendered to the Corporation.

 

3

 

(b)                                 Conversion.  If elected by the Series A Holders
holding at least a majority of the then-outstanding Series A Shares, each
Series A Holder shall receive in exchange for his Series A Shares
surrendered to the Corporation a note evidencing indebtedness of the
Corporation (an “Exchange Note”) in a principal amount equal to (i) the number
of Series A Shares held by the Series A Holder, multiplied by (ii)
the Series A Redemption Price.  The
Exchange Notes shall bear interest at the rate of 9% per annum, shall be
secured by all assets of the Corporation, be senior to any debt incurred
subsequent to the issuance of the Exchange Notes and shall mature on the one-year
anniversary of their date of issuance.

 

Immediately after the Corporation
receives a valid notice of the election by the Series A Holders to redeem
the Series A Shares in accordance with this Section I.E(2), all
outstanding Series A Shares shall be cancelled and the certificates
therefor shall evidence only the right to receive the payment described in Section I.E(2)(a)
above or the Exchange Note described in Section I.E(2)(b) above (as
elected by the Series A Holders holding at least a majority of the then-outstanding
Series A Shares) upon the surrender of such certificates.

 

If the funds of the
Corporation legally available for redemption of Series A Shares on any
date for redemption pursuant to this Section I.E(2) are insufficient to
redeem the total number of Series A Shares to be redeemed on such date,
those funds that are legally available will be used to redeem the maximum
possible number of such shares ratably among the Series A Holders based
upon their holdings of Series A Shares to be redeemed.  The Series A Shares not redeemed on a
particular date for redemption hereunder shall remain outstanding and entitled
to all of the rights and preferences provided herein.  To the extent the Corporation has Available
Funds, such funds will as promptly as practicable be used to redeem the balance
of the Series A Shares that the Corporation has become obliged to redeem
on any date for redemption hereunder but which it has not redeemed.

 

3.                                       Automatic
Redemption. Upon the closing of a Qualified Public Offering (as
defined in Article III below), all then-outstanding Series A Shares
shall be automatically redeemed at a price per share equal to the Series A
Redemption Price.  At the time of such
closing, all of the then-outstanding Series A Shares shall be cancelled,
and the certificates therefor shall evidence only the right to receive upon
surrender the Series A Redemption Price.

 

F.                                      Protective
Provisions.  So long as
any Series A Shares remain outstanding, the Corporation shall not, by
merger, consolidation or otherwise, without obtaining the prior written consent
or affirmative vote of the Series A Holders holding at least a majority of
the Series A Shares then outstanding, voting together as a single class
and given by written consent in lieu of a meeting or by votes at a special
meeting called for such purpose (for which written notice shall have been given
to all Series A Holders in the manner provided in the Bylaws of the
Corporation), do any of the following:

 

1.                                       Consummate a
Liquidating Transaction, enter in to an agreement to consummate a Liquidating
Transaction, or dissolve, liquidate or wind up the Corporation.

 

2.                                       Purchase or
acquire another company or entity, whether by way of acquiring a majority of
the outstanding stock of such entity, purchasing the assets of such entity, or
otherwise.

 

4

 

3.                                       Amend the
Corporation’s Certificate of Incorporation or Bylaws.

 

4.                                       Change or amend
the rights, preferences or privileges of the Series A Redeemable Preferred
Stock.

 

5.                                       Cease to
conduct or carry on the business of the Corporation or make a material change
to the basic nature of its principal business activities.

 

6.                                       Increase,
decrease or cancel the authorized capital shares of the Corporation or any
subsidiary of the Corporation, or allot, purchase or redeem any shares or
securities convertible into or carrying a right of subscription in respect of
shares or any warrants or grant or issue any options, rights or warrants,
except for the redemption of Series A Redeemable Preferred Stock in
accordance with this Certificate of Designation and the repurchase of unvested
stock in connection with the termination of a service provider’s relationship
with the Corporation pursuant to the terms of, and at the price provided for in,
a written agreement that is in effect on the filing date of this Certificate of
Designation, or that has been approved by the Board and at least two of the
Series A and Series A-1 Directors, between such individual and the
Corporation that provides for such repurchase.

 

7.                                       Create any new
class or series of stock with rights, preferences or privileges superior to or pari passu with the Series A Redeemable Preferred
Stock.

 

8.                                       Change the
number of authorized directors, unless such change is approved by the Board,
including at least two of the Series A and Series A-1 Directors.

 

9.                                       Borrow in
excess of $500,000 in aggregate principal amount outstanding at any time,
unless approved by the Board, including at least two of the Series A and
Series A-1 Directors.

 

10.                                 Grant a
security interest in, encumber, transfer or otherwise dispose of any of the
Corporation’s or its subsidiaries’ real or intellectual property.

 

11.                                 Declare or pay
a dividend, or effect any type of recapitalization or reclassification of the
Corporation’s capital stock.

 

12.                                 Increase the
number of shares reserved for issuance in the Corporation’s current option
plan, or adopt a new option or stock incentive plan or increase the number of
shares reserved for issuance in such future plan.

 

G.                                     No Reissuance
of Series A Redeemable Preferred Stock.  No Series A Share or Shares acquired by
the Corporation by reason of redemption, purchase, conversion to indebtedness
or otherwise shall be reissued, and upon reacquisition by the Corporation all
such shares shall be cancelled, retired and eliminated from the Series A
Shares that the Corporation shall be authorized to issue.

 

5

 

ARTICLE II

Series A-1
Convertible Preferred Stock

 

A.                                   Designation of
Series and Number of Shares.  1,000,000 shares of the Corporation’s
authorized Preferred Stock are hereby designated “Series A-1 Convertible
Preferred Stock” and authorized for issuance with the rights, preferences,
privileges and limitations set forth below.

 

B.                                     Voting.

 

1.                                       General.  Each of the holders (the “Series A-1
Holders”) of shares of Series A-1 Convertible Preferred Stock (the “Series A-1
Shares”) shall be entitled to notice of any and all meetings of the holders of
the Common Stock and notice of any actions taken by the holders of the Common
Stock by written consent, and shall be entitled to vote on all matters
(excluding the election of directors by the holders of Common Stock) presented
to the holders of Common Stock on which such holders vote, voting together with
the holders of the Common Stock as a single class, and shall be entitled to the
number of votes equal to the largest whole number of shares of Common Stock
into which the Series A-1 Holder’s Series A-1 Shares could be
converted at the record date for the determination of the stockholders entitled
to vote on such matters or, if no record date is established, at the date such
vote is taken or any written consent of stockholders is solicited.

 

2.                                       Series A-1
Director.

 

(a)                                  In addition to
the voting rights of the Series A-1 Convertible Preferred Stock pursuant
to Section II.B(1) above, at any meeting held for the purpose of electing
directors (or in a written consent in lieu thereof), the presence in person or
by proxy (or the written consent) of the Series A-1 Holders holding at
least a majority of the Series A-1 Shares then outstanding shall
constitute a quorum of the Series A-1 Convertible Preferred Stock for the
election of one (1) director who shall be elected solely by the Series A-1
Holders (the “Series A-1 Director”). 
A vacancy in the directorship elected by the Series A-1 Holders as
provided in this Section II.B(2) shall be filled only by the vote or
written consent of the Series  A-1 Holders.  Notwithstanding anything to the contrary in
the Certificate of Incorporation or Bylaws of the Corporation, the
Series A-1 Holders shall have sole authority to nominate the candidates
for election as the Series A-1 Director, provided such candidates must be
qualified to serve under any applicable law, regulation or rule applicable to
the Corporation.

 

(b)                                 The Corporation
shall reimburse the Series A-1 Director for reasonable expenses incurred
in attending meetings of directors.

 

C.                                     Dividends.  The Series A-1 Convertible Preferred
Stock shall be entitled to receive dividends in parity with the Common Stock
when, as and if declared by the Board on the Common Stock, out of Available
Funds and Assets.  When any such dividend
is declared or paid, each Series A-1 Holder shall be deemed to hold a
number of shares of Common Stock equal to the largest number of whole shares of
Common Stock into which the Series A-1 Holder’s Series A-1 Shares
could be converted on the record date for the declaration of the dividend.

 

D.                                    Liquidation.  In the event of any Liquidating Transaction,
after payment in full of any liquidation preference to the Series A
Holders, then all of the remaining Available Funds and

 

6

 

Assets shall be distributed
in parity among the Series A-1 Holders and the holders of the Common Stock
on a pro rata basis, with each Series A-1 Holder deemed to hold a number
of shares equal to the largest number of whole shares of Common Stock into
which the holder’s Series A-1 Shares could be converted at the effective
date of the Liquidating Transaction.

 

E.                                      Optional
Conversion.

 

1.                                       Each
Series A-1 Holder has the right, at such Series A-1 Holder’s option,
at any time and from time to time, to convert any of such Series A-1
Holder’s Series A-1 Shares into Common Stock, on the basis hereinafter
provided.  Each Series A-1 Share
shall be converted into the number of fully paid, non-assessable shares of
Common Stock that is equal to the Series A-1 Conversion Ratio, as
determined pursuant to Section II.E(4) below.

 

2.                                       A Series A-1
Holder may exercise the conversion right described in Section II.E(1) by
delivering to the Corporation during regular business hours, at the office of
the Corporation or to any transfer agent designated by the Corporation for the
Series A-1 Convertible Preferred Stock, the certificate or certificates
for the shares to be converted, duly endorsed or assigned in blank or to the
Corporation (if required by it), accompanied by written notice stating that the
Series A-1 Holder elects to convert the Series A-1 Shares, stating
the number of shares to be converted if less than the full number represented
by the surrendered certificate, and stating the name or names (with address) in
which the certificate or certificates for the shares of Common Stock are to be
issued.  Conversions shall be effective
on the date when such delivery is made (the “Conversion Date”), and the person
entitled to receive the Common Stock issuable upon such conversion shall be
deemed for all purposes the record holder of the number shares of Common Stock
then issuable, as of the Conversion Date. 
As promptly as practicable thereafter, and in any event within twenty
business days, the Corporation shall issue and deliver to the holder (or to the
place designated in writing by the holder), a certificate or certificates in
appropriate form and executed as provided under Section 158 of the
Delaware General Corporation Law, evidencing the shares of Common Stock to
which the holder is entitled and a check or cash in the amount of any
fractional interest in a share of Common Stock as provided in Section II.E(3)
below.  Upon conversion of only a portion
of the Series A-1 Shares covered by a certificate, the Corporation shall
issue and deliver to or upon the written order of the holder of the certificate
so surrendered for conversion, at the expense of the Corporation, a new
certificate covering the number of Series A-1 Shares representing the
unconverted portion of the certificate so surrendered.

 

3.                                       No fractional
shares of Common Stock or scrip shall be issued upon conversion of
Series A-1 Convertible Preferred Stock. 
Instead of any fractional shares of Common Stock that would otherwise be
issuable upon conversion of Series A-1 Convertible Preferred Stock, after
issuing the largest whole number of shares of Common Stock issuable in any
conversion, the Corporation shall pay a cash adjustment in place of the
fractional interest in an amount equal to the then current market price per
share (determined in accordance with Section II.E(4)(f) below) multiplied
by such fractional interest.  Fractional
interests shall not be entitled to dividends, and a holder of a fractional
interest shall not be entitled to any rights as a stockholder of the
Corporation in respect of a fractional interest.

 

7

 

4.                                       The initial “Series A-1
Conversion Ratio” shall be 5.6667, and shall be subject to adjustment at any
time and from time to time as follows:

 

(a)                                  If the
Corporation shall issue, after the Original Issuance Date, Additional Shares of
Common Stock without consideration or for consideration per share less than the
Trigger Price, then the Series A-1 Conversion Ratio shall (unless
otherwise provided in this Section II.E(4)) automatically be adjusted to a
number determined by multiplying the Series A-1 Conversion Ratio in effect
immediately prior to the issuance by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
issuance (including shares of Common Stock deemed to be issued pursuant to Section II.E(4)(a)(iv)(A)
or (B)) plus the number of shares of Additional Shares of Common Stock actually
issued, and the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to the issuance (including shares of Common
Stock deemed to be issued pursuant to Section II.E(4)(a)(iv)(A) or (B))
plus the number of shares of Common Stock that the aggregate consideration
received by the Corporation for the issuance would purchase at a price per
share equal to the Trigger Price in effect immediately prior to the issuance
(the “Adjustment Fraction”).  The initial
“Trigger Price” shall be $3.00, and the Trigger Price at any time after the
Original Issuance Date shall be $17 divided by the Conversion Ratio then in
effect.

 

In any adjustment of the
Series A-1 Ratio pursuant to this Section II.E(4)(a), the following
provisions shall apply:

 

(i)                                     If Common Stock
is issued for cash, the consideration shall be deemed to be the amount of cash
paid for the Common Stock after deducting therefrom any discounts and
commissions, but not legal fees or other expenses of the Corporation, paid or
incurred by the Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.

 

(ii)                                  If Common Stock
is issued for consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market value
thereof as determined in good faith by the Board.

 

(iii)                               If Common Stock
is issued without consideration, the consideration shall be deemed to be
$0.0001 per share.

 

(iv)                              If the
Corporation issues (x) options to purchase or rights to subscribe for
Common Stock, (y) securities by their terms convertible into or
exchangeable for Common Stock or (z) options to purchase or rights to
subscribe for such convertible or exchangeable securities:

 

(A)                              the aggregate
maximum number of shares of Common Stock deliverable upon exercise of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration, if any, received by the

 

8

 

Corporation upon the issuance of such options or
rights plus the minimum purchase price provided in such options or rights for
the Common Stock covered thereby (the consideration to be determined in each
case in the manner provided in subdivisions (i), (ii) and (iii) above);

 

(B)                                the aggregate
maximum number of shares of Common Stock deliverable upon conversion of or in
exchange for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to the
consideration received by the Corporation for any such securities and related
options or rights (excluding any cash received on account of accrued interest
or accrued dividends), plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration to be
determined in each case in the manner provided in subdivisions (i), (ii) and
(iii) above);

 

(C)                                on any change
in the exercise price deliverable upon exercise of any such options or rights
or conversions of or exchanges for such securities, other than a change
resulting from an antidilution provision thereof, the applicable Series A-1
Conversion Ratio shall automatically be readjusted to such Series A-1
Conversion Ratio as would have resulted had the change in exercise price been
made at the time of issuance of such options, rights or securities not
converted prior to such change (or options or rights related to such securities
not converted prior to such change); and

 

(D)                               Upon the
expiration of any such options or rights, or the termination of any such rights
to convert or exchange or the expiration of any options or rights related to
such convertible or exchangeable securities, the Series A-1 Conversion
Ratio, to the extent in any way affected by or computed using such options,
rights or securities or options or rights related to such securities, shall be
recomputed to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities which remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or rights
related to such securities.

 

(b)                                 If, at any time
after the Original Issuance Date, the number of shares of Common Stock outstanding
is increased by a stock dividend payable in shares of

 

9

 

Common Stock or by a
subdivision or split-up of shares of Common Stock without a similar stock
dividend, subdivision or split-up of the Series A-1 Convertible Preferred
Stock, then, as of the record date fixed for the determination of holders of
Common Stock entitled to receive the stock dividend, subdivision or split-up,
the Series A-1 Conversion Ratio shall be increased in proportion to such
increase in outstanding shares.

 

(c)                                  If, at any time
after the Original Issuance Date, the number of shares of Common Stock
outstanding is decreased by a combination of the outstanding shares of Common
Stock without a similar combination of the Series A-1 Convertible
Preferred Stock, then, as of the record date for such combination, the
Series A-1 Conversion Ratio shall be decreased in proportion to such
decrease in outstanding shares.

 

(d)                                 If, at any time
after the Original Issuance Date, the Common Stock issuable upon the conversion
of the Series A-1 Convertible Preferred Stock is changed into the same or
a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification, reorganization, merger, consolidation, sale
of assets or other change (other than by a Liquidating Event or a stock
dividend or distribution provided for elsewhere in this Section II.E(4)),
then in any such event each Series A-1 Holder shall have the right
thereafter to convert such holder’s Series A-1 Shares into the kind and
amount of stock and other securities and property receivable upon such
recapitalization, reclassification, reorganization, merger, consolidation, sale
of assets, or other change by a holder of the number of shares of Common Stock
into which such Series A-1 Shares could have been converted immediately
prior to such recapitalization, reclassification, reorganization, merger,
consolidation, sale of assets or other change, all subject to further
adjustment as provided herein or with respect to such other securities or
property by the terms thereof.

 

(e)                                  All
calculations under this Section II.E(4) shall be made to the nearest one
tenth (1/10) of a share or one hundredth (1/100) of a cent, as the case may be.

 

(f)                                    For the purpose
of any computation pursuant to Section II.E(3) above or this Section II.E(4),
the current market price at any date of one share of Common Stock shall be
determined as follows:

 

(i)                                     If traded on a
national securities exchange or the Nasdaq National Market, the current market
price shall be deemed to be the average of the closing prices of the securities
on such exchange over the period of twenty trading days ending three trading
days prior to the date of determination;

 

(ii)                                  If actively
traded over-the-counter, the value shall be deemed to be the average of the
closing bid prices over the period of twenty trading days ending three trading
days prior to the date of determination; or

 

(iii)                               If there is no
active public market, then in good faith by the Board, or if such determination
cannot be made, by a nationally-recognized independent investment banking firm
selected mutually by the Series A-1 Holders holding at least a majority of
the Series A-1 Shares then outstanding and the Corporation (or, if such
selection cannot be made, by

 

10

 

a nationally recognized independent investment
banking firm selected by the American Arbitration Association in accordance
with its rules).

 

5.                                       Whenever Section II.E(4)
provides that an adjustment shall be effective immediately after a record date
for an event, the Corporation may defer the following actions until the
occurrence of the event: (A) when Series A-1 Shares are converted as
a result of such event, issuing to the holder of such Series A-1 Shares
any additional shares of capital stock issuable by reason of an adjustment
required by the event over and above the shares of capital stock issuable
before giving effect to the adjustment, or (B) paying to such holder any
amount in cash in lieu of a fractional share of capital stock pursuant to Section II.E(3)
above; provided, however, that in either case the Corporation shall deliver to
such holder a due bill or other appropriate instrument evidencing the holder’s
right to receive such additional shares, and such cash, upon the occurrence of
the event requiring such adjustment.

 

6.                                       Whenever the
Series A-1 Conversion Ratio is adjusted as provided in Section II.E(4)
above, the Corporation shall promptly file, at the office of the Corporation or
any transfer agent designated by the Corporation for the Series A-1
Convertible Preferred Stock, a statement, signed by its chief financial
officer, showing in detail the facts requiring such adjustment and the adjusted
Series A-1 Conversion Ratio.  The
Corporation shall also cause a copy of such statement to be sent by first-class
certified mail, return receipt requested, postage prepaid, to each holder of
shares of Series A-1 Convertible Preferred Stock at his or its address
appearing on the Corporation’s records. 
Where appropriate, such copy may be given in advance and may be included
as part of a notice required to be mailed under the provisions of Section II.E(7).

 

7.                                       If the
Corporation proposes to take any action of the type described in Sections
II.E(4)(a), (b), (c) or (d), or to commence a Liquidating Transaction, the
Corporation shall give notice to each Series A-1 Holder in the manner set
forth in this Section II.E(7), which notice shall specify the record date,
if any, with respect to any such action and the date on which such action is to
take place.  The notice shall also set
forth such facts as are reasonably necessary to indicate the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Series A-1 Conversion Ratio then in effect and the number, kind or
class of shares or other securities or property that shall be deliverable or
purchasable upon the occurrence of such action or deliverable upon conversion
of Series A-1 Shares.  In the case
of any action that would require the fixing of a record date, the notice shall
be given at least 10 days prior to the date so fixed, and in case of all other
action, the notice shall be given at least 30 days prior to the taking of such
proposed action.  Failure to give such
notice, or any defect therein, shall not affect the legality or validity of any
such action.

 

8.                                       The Corporation
shall pay all documentary, stamp or other transactional taxes attributable to
the issuance or delivery of shares of capital stock of the Corporation upon
conversion of any Series A-1 Shares.

 

9.                                       The Corporation
shall reserve, free from preemptive rights, out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of
the shares of Series A-1 Convertible Preferred Stock, sufficient shares to
provide for the conversion of all outstanding Series A-1 Shares, including
any additional shares of

 

11

 

Common Stock that may be
issuable from time to time pursuant to the adjustment provisions of Section II.E(4).

 

10.                                 All shares of
Common Stock that may be issued in connection with the conversion provisions
set forth herein will, upon issuance by the Corporation, be validly issued,
fully paid and nonassessable, with no personal liability attaching to the
ownership thereof, and be free from all taxes, liens or charges with respect
thereto.

 

F.                                      Mandatory
Conversion.

 

1.                                       Qualified
Public Offering or Election.  Each outstanding Series A-1 Share shall
automatically be converted into fully paid and nonassessable shares of Common
Stock, at the then applicable Series A-1 Conversion Ratio, immediately
upon the closing of a Qualified Public Offering.  Upon receipt by the Corporation of notice (a “Conversion
Notice”) that the Series A-1 Holders holding at least a majority of the
then-outstanding Series A-1 Shares have elected to convert all or a
portion of their Series A-1 Convertible Preferred Stock, then that number
of Series A-1 Shares of each Series A-1 holder equal to the
percentage of Series A-1 Shares converted by the Series A-1 Holders submitting
the Conversion Notice, shall automatically be converted as well.

 

2.                                       Special
Mandatory Conversion Upon Future Financing.

 

(a)                                  At any time
after the Original Issuance Date, if (i) the Board grants to each
Series A-1 Holder a right to purchase its Pro Rata Share of Qualified
Securities (as each term is defined below) offered by the Corporation in a
transaction or series of transactions primarily for equity financing purposes
(an “Equity
Financing”), (ii) the Corporation has given written notice to each
Series A-1 Holder of its intention, describing the Qualified Securities,
the price and the terms and conditions upon which the Corporation proposes to
issue such Qualified Securities, (iii) the Corporation has provided to each
Series A-1 Holder not less than ten
(10) business days from the
giving of such written notice to agree to purchase its Pro Rata Share of the
Qualified Securities for the price and upon the terms and conditions specified
in the notice by giving written notice to the Corporation and stating therein
the quantity of Qualified Securities to be purchased, and (iv) any such
Series A-1 Holder (or any predecessor, successor or affiliated entity to
such Series A-1 Holder) purchases less than one hundred percent (100%) of
such Series A-1 Holder’s Pro Rata Share of such Qualified Securities in
such Equity Financing (such Series A-1 Holder being referred to herein as
a “Non-Fully
Participating Holder”), then the Converted
Percentage (as defined below) of such Non-Fully Participating Holder’s
Series A-1 Shares shall automatically and without further action on the
part of such Non-Fully Participating Holder be converted, subject to and
effective upon the consummation of such Equity Financing, into that number of
shares of Common Stock that equals the number of shares of Common Stock that
such Non-Fully Participating Holder would have received upon the conversion of
such Series A-1 Shares had such shares been converted to Common Stock at
the Series A-1 Conversion Ratio in effect immediately prior to such Equity
Financing.  Such conversion shall be
effected in accordance with the provisions of Section II.E.

 

(b)                                 “Converted
Percentage” means one minus a fraction, the numerator of which is the
number of Qualified Securities purchased by a Non-Fully Participating Holder

 

12

 

and the denominator of which
is the number of Qualified Securities that comprise such
Non-Fully-Participating Holder’s Pro Rata Share of the Qualified Securities
offered.

 

(c)                                  “Pro Rata Share”
means a fraction, the numerator of which is the number of Series A-1
Shares by a Series A-1 Holder and the denominator of which is the total
number of Series A-1 Shares then outstanding.

 

(d)                                 “Qualified
Securities” means the number of shares of a class or series of equity
securities (or securities convertible into or exercisable for equity
securities) of the Corporation that is (1) issued subsequent to the Original
Issuance Date and (2) issued for consideration per share (on an
as-converted-to-common-stock basis) of less than $3.00, subject to adjustment
for any stock dividends, combinations or splits with respect to the Common
Stock taking place after the date of filing of this Certificate of Designation.

 

G.                                     Protective
Provisions.

 

So long as any Series A-1
Shares remain outstanding, the Corporation shall not, by merger, consolidation
or otherwise, without obtaining the prior written consent or affirmative vote
of the Series A-1 Holders holding a majority of the Series A-1 Shares
then outstanding, voting together as a single class, on an as-converted basis
and given by written consent in lieu of a meeting or by votes at a special
meeting called for such purpose (for which written notice shall have been given
to all Series A-1 Holders in the manner provided in the Bylaws of the
Corporation), do any of the following:

 

1.                                       Consummate a
Liquidating Transaction, enter in to an agreement to consummate a Liquidating
Transaction, or dissolve, liquidate or wind up the Corporation.

 

2.                                       Purchase or
acquire another company or entity, whether by way of acquiring a majority of
the outstanding stock of such entity, purchasing the assets of such entity, or
otherwise.

 

3.                                       Amend the
Corporation’s Certificate of Incorporation or Bylaws.

 

4.                                       Change or amend
the rights, preferences or privileges of the Series A-1 Convertible
Preferred Stock.

 

5.                                       Cease to
conduct or carry on the business of the Corporation or make a material change
to the basic nature of its principal business activities.

 

6.                                       Increase,
decrease or cancel the authorized capital shares of the Corporation or any
subsidiary of the Corporation, or allot, purchase or redeem any shares or
securities convertible into or carrying a right of subscription in respect of
shares or any warrants or grant or issue any options, rights or warrants,
except for the redemption of Series A Redeemable Preferred Stock in
accordance with this Certificate of Designation and the repurchase of unvested
stock in connection with the termination of a service provider’s relationship
with the Corporation pursuant to the terms of, and at the price provided for
in, a written agreement that is in effect on the filing date of this
Certificate of Designation or that has 

 

13

 

been approved by the Board
including at least two of the Series A and Series A-1 Directors,
between such individual and the Corporation, that provides for such repurchase.

 

7.                                       Create any new
class or series of stock with rights, preferences or privileges superior to or pari passu with the Series A-1 Convertible Preferred
Stock.

 

8.                                       Change the
number of authorized directors, unless such change is approved by the Board,
including at least two of the Series A and Series A-1 Directors.

 

9.                                       Borrow in
excess of $500,000 in aggregate principal amount outstanding at any time,
unless approved by the Board, including at least two of the Series A and
Series A-1 Directors.

 

10.                                 Grant a
security interest in, encumber, transfer or otherwise dispose of any of the
Corporation’s or its subsidiaries’ real or intellectual property.

 

11.                                 Declare or pay
a dividend, or effect any type of recapitalization or reclassification of the
Corporation’s capital stock.

 

12.                                 Increase the
number of shares reserved for issuance in the Corporation’s current option
plan, or adopt a new option or stock incentive plan or increase the number of
shares reserved for issuance in such future plan.

 

H.                                    No Reissuance
of Series A-1 Convertible Preferred Stock.  No Series A-1 Share or Shares acquired
by the Corporation by reason of conversion, redemption, purchase or otherwise
shall be reissued, and upon reacquisition by the Corporation all such shares
shall be cancelled, retired and eliminated from the shares of Series A-1
Shares that the Corporation shall be authorized to issue.

 

[Remainder of this page
intentionally left blank.]

 

14

 

ARTICLE III

Definitions

 

“Additional Shares of
Common Stock” means all shares of Common Stock issued (or, pursuant to
clauses (A) or (B) of Subparagraph (iv) of Section II.E(4)(a) above,
deemed to be issued) by the Corporation after the Original Issue Date, other
than Excluded Securities.

 

“Available Funds and
Assets” means the funds and assets of the Corporation that may be legally
distributed to the Corporation’s stockholders.

 

“Common Stock” means
the common stock, par value $0.0001 per share, of the Corporation.

 

“Conversion Notice”
has the meaning set forth in Section II.F(1).

 

“Converted Percentage”
has the meaning set forth in Section II.F(2)(b).

 

“Equity Financing” has the meaning set forth
in Section II.F(2)(a).

 

“Exchange Note” has
the meaning set forth in Section I(E)(2)(b).

 

“Excluded Securities”
shall mean securities issued:

 

(i)                                     to directors,
employees or consultants of the Corporation or any subsidiary thereof as a form
of compensation in accordance with a plan approved by the Board and
stockholders of the Corporation; provided, that the number of securities issued
under this clause (i) after the Original Issue Date does not exceed 3,000,000
(as adjusted for any stock dividends, combinations or splits with respect to
such shares effected after the date of filing of this Certificate of
Designation) unless approved by at least two of the Series A and
Series A-1 Directors;

 

(ii)                                  in connection
with any merger with, or acquisition of substantially all of the assets of, or
a controlling interest in, any entity;

 

(iii)                               to a strategic
(non-financial) investor as part of a collaborative effort to conduct business,
and not primarily for equity financing purposes, in which the Corporation
receives other consideration, including by way of entering into a joint venture
or a distribution or licensing arrangement; provided such effort or transaction
is approved by the Board, including at least two of the Series A and
Series A-1 Directors;

 

(iv)                              as warrants in
connection with any institutional debt financing approved by the Board,
including at least two of the Series A and Series A-1 Directors, or
on exercise of such warrants;

 

(v)                                 upon conversion
of any convertible securities now outstanding, upon conversion of the
Series A-1 Convertible Preferred Stock, or upon

 

15

 

exercise of any options or
warrants for which an adjustment to the Conversion Ratio has previously
occurred pursuant to Section II.E(4)(a) above; or

 

(vi)                              in any actions
described in Subsections (b), (c) or (d) of Section II.E(4) above.

 

“Issuance Date” means
the date that the Series A Redeemable Preferred Stock and Series A-1
Convertible Preferred Stock were first issued by the Corporation.

 

“Liquidating Transaction”
means either (i) a merger or acquisition of the Corporation in which the
stockholders of the Corporation prior to such transaction do not own (in the
same relative proportions) a majority of the outstanding shares of the
surviving corporation or if the surviving corporation is a wholly owned
subsidiary, then its parent; (ii) a sale, transfer or other disposition of all
or substantially all of the assets of the Corporation, or (iii) any other
winding up or dissolution of the Corporation.

 

“Mandatory Dividend” has the
meaning set forth in Section I.C(1).

 

“Non-Fully Participating Holder” has
the meaning set forth in Section II.F(2)(a).

 

“Original Issuance Date”
means the date of the first issuance of shares of Series A Redeemable
Preferred Stock and Series A-1 Convertible Preferred Stock.

 

“Preferred Dividend”
has the meaning set forth in Section I.C(2).

 

“Pro Rata Share” has
the meaning set forth in Section II.F(2)(c).

 

“Qualified Public
Offering” means the Corporation’s first underwritten public offering of its
shares after the Original Issuance Date, pursuant to registration under the
Securities Act and resulting in gross proceeds of at least $35 million and a
price per share that is equal to at least $6.00 (subject to adjustment for
recapitalizations, splits, reverse splits and the like affecting the Common
Stock).

 

“Qualified Securities”
has the meaning set forth in Section II.F(2)(d).

 

“Series A Holder”
means any holder of Series A Redeemable Preferred Stock.

 

“Series A Original
Issuance Price” means $14.1667 (subject to adjustment for
recapitalizations, splits, reverse splits and the like affecting the
Series A Shares).

 

“Series A Shares”
means shares of Series A Redeemable Preferred Stock.

 

“Series A-1 Holders”
means any holder of Series A-1 Convertible Preferred Stock.

 

“Series A-1
Conversion Ratio” has the meaning set forth in Section II.E.(4).

 

“Series A-1 Shares”
means shares of Series A-1 Convertible Preferred Stock.

 

16

 

“Trigger Price” has
the meaning set forth in Section II.E.(4)(a).

 

The
next page is the signature page.

 

17

 

IN WITNESS HEREOF, the
undersigned has caused this Certificate of Designation to be duly executed by
its President this 24th day of January, 2005.

 

	
   

  	
  INNOVATIVE
  MICRO TECHNOLOGY, INC. 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/
  John Foster

  	
   

  
	
   

  	
  John
  Foster, President

  

 

18Exhibit
4.6

 

THIS WARRANT AND THE
SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER
THE ACT, SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO AND ALL APPLICABLE
QUALIFICATIONS UNDER STATE SECURITIES LAWS SHALL HAVE BEEN OBTAINED WITH
RESPECT THERETO; (ii) A WRITTEN OPINION FROM COUNSEL FOR THE HOLDER
REASONABLY SATISFACTORY TO THE ISSUER HAS BEEN OBTAINED STATING THAT NO SUCH
REGISTRATION OR QUALIFICATION IS REQUIRED; OR (iii) SOLD PURSUANT TO RULE 144
UNDER SUCH ACT.

 

 

WARRANT TO PURCHASE COMMON STOCK OF

INNOVATIVE MICRO TECHNOLOGY, INC.

 

For good and valuable
consideration, the receipt of which is hereby acknowledged, Innovative Micro
Technology, Inc., a Delaware corporation (the “Company”), hereby grants to INVESTOR
GROWTH CAPITAL LIMITED, a limited partnership, its successors and assigns
(collectively, the “Holder”), an irrevocable warrant (the “Warrant”) to
purchase, subject to the satisfaction of the conditions set forth in Section 1
below and subject to the other terms hereof, the number of shares of Common
Stock, par value $0.0001 per share, of the Company (the “Shares”), if any,
determined in accordance with Section I hereto, at the Warrant Price, as
defined below, at any time beginning on March 15, 2006 (the “Determination
Date”) and ending on January 24, 2008 (the “Expiration Date” and such
period beginning on the Determination Date and ending on the Expiration Date,
the “Exercise Period”).

 

1.                                       Conditions to Exercise;
Number of Shares; Early Termination.  On or before March 15, 2006, the Company
shall deliver to the Holder a report in the form of Exhibit A
hereto (the “Performance Report”) setting forth the Company’s total Contract
Activity (as defined below) and gross profit for calendar year 2005.  If the Company’s performance described in the
Performance Report does not satisfy the Target Amounts set forth on Exhibit B
hereto, then this Warrant shall then become exercisable for the lesser of one
hundred sixty-four, seven hundred six (164,706) shares of Common Stock and the
number of shares of Common Stock calculated as purchasable pursuant to Exhibit B
hereto, subject to adjustment as provided below.  For purposes of this Warrant, “Contract
Activity” shall mean total revenue, as adjusted by work-in-process inventory,
for the period measured.  For purposes of
this Warrant, the terms “revenue” and “work-in-process inventory” shall have
the meanings ascribed to them under U.S. Generally Accepted Accounting
Principles (“GAAP”).  “Gross profit”
shall have the same meaning as that used in the budgets of the Company provided
heretofore to the Investors, in which “gross profit” means gross profit, within
the meaning of GAAP, before any deduction for profit sharing.  If, on the Determination Date, the number of
Shares purchasable is zero (0), this Warrant shall terminate and be of no
further force or effect.

 

1

 

2.                                       Exercise; Issuance of
Certificates; Payment for Shares.

 

This Warrant may be
exercised by the Holder, in whole or in part, and on one or more occasions, by
written notice to the Company, in the form attached as Exhibit C hereto
(the “Notice”), at any time within the Exercise Period and by payment to the
Company by wire transfer (in accordance with the wire transfer instructions
attached hereto as Exhibit D) of the aggregate Warrant Price for the
number of Shares designated by the Holder (but not more than the number of
Shares for which this Warrant then remains subject and unexercised).  Consideration received by the Company under a
broker-assisted sale and remittance program acceptable to the Company may also
be used to exercise this Warrant. 
Certificates for the Shares so purchased will be delivered to the Holder
within a reasonable time, not exceeding fifteen (15) business days, after
this Warrant has been exercised, and, unless this Warrant has expired, it will
continue in effect with respect to the number of Shares, if any, as to which it
has not then been exercised and which remain covered by this Warrant as herein
provided.  Each exercise of this Warrant
shall be deemed to have been effected immediately prior to the close of
business on the business day on which the Notice is given to the Company.  At such time, the person or persons in whose
name or names any certificate for the Shares shall be issuable upon such
exercise shall be deemed to have become the holder or holders of record of the
Shares represented by such certificate or certificates, and to be entitled to
all rights of a Stockholder with respect to such Shares, including without
limitation voting rights.

 

3.                                       Shares to be Fully Paid;
Reservation of Shares.  The
Company covenants and agrees as follows:

 

3.1                                 All shares issued upon the
exercise of this Warrant will, upon issuance, be fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issuance
thereof.

 

3.2                                 During the period within
which this Warrant may be exercised, the Company will at all times have
authorized and reserved for the purpose of issuance or transfer upon exercise
of this Warrant a sufficient number of Shares to provide for the exercise of
this Warrant.

 

3.3                                 The Company will take all
actions necessary to assure that the Shares issuable upon the exercise of this
Warrant may be so issued without violation of any applicable law or regulation,
or of any requirements of any securities exchange upon which the shares of the
Company may then be listed.

 

4.                                       Warrant Price.

 

4.1                                 Initial Warrant Price;
Subsequent Adjustment of Price and Number of Purchasable Shares.  The initial Warrant Price (“Initial Warrant
Price”) will be $0.30 per Share, and will be adjusted from time to time as
provided below.  The Initial Warrant
Price or, if such price has been adjusted, the price per Share as last adjusted
pursuant to the terms hereof, is referred to as the “Warrant Price” herein.

 

4.2                                 Subdivision or Combination
of Shares.  If the
Company at any time while this Warrant, or any portion hereof, remains
outstanding and unexpired shall split, subdivide or

 

2

 

combine the securities as to
which purchase rights under this Warrant exist, into a different number of
securities of the same class, the number of Shares for which this Warrant may
be exercised shall be adjusted to represent the aggregate number of securities
that, if this Warrant had been exercised immediately prior to such event, the
Holder would have owned upon such dividend, distribution, subdivision,
combination or reclassification, and the Warrant Price for such securities
shall be proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination.

 

4.3                                 Reclassification.  If the Company, at any time while this
Warrant, or any portion hereof, remains outstanding and unexpired, by
reclassification of securities or otherwise shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant
shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with
respect to the securities that were subject to the purchase rights under this
Warrant immediately prior to such reclassification or other change and the
Warrant Price therefor shall be appropriately adjusted.

 

4.4                                 Adjustments for Dividends in
Stock or Other Securities or Property.  If while this Warrant, or any portion hereof,
remains outstanding and unexpired holders of the securities as to which
purchase rights under this Warrant exist at the time shall have received, or,
on or after the record date fixed for the determination of eligible
stockholders, shall have become entitled to receive, without payment therefor,
other or additional stock or other securities or property (other than cash) of
the Company by way of dividend, then and in each case, this Warrant shall
represent the right to acquire, in addition to the number of shares of the
security receivable upon exercise of this Warrant, and without payment of any
additional consideration therefor, the amount of such other or additional stock
or other securities or property (other than cash) of the Company that the
Holder would hold on the date of such exercise had it been holder of record of
the security receivable upon exercise of this Warrant on the date hereof and
had thereafter, during the period from the date hereof to and including the
date of such exercise, retained such shares and/or all other additional
securities available to it as aforesaid during such period, giving effect to
all adjustments called for during such period.

 

4.5                                 Reorganization,
Reclassification, Consolidation, Merger or Sale.  If, while this Warrant, or any portion
hereof, remains outstanding and unexpired, any capital reorganization or
reclassification of the stock of the Company, or any consolidation or merger of
the Company with another corporation or entity, or the sale of all or
substantially all of the Company’s assets to another corporation will be
effected in such a way that holders of the securities for which this Warrant is
exercisable will be entitled to receive shares, securities or assets with
respect to or in exchange for such securities, then, upon exercise of this
Warrant, the Holder will thereafter have the right to receive such shares,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding securities equal to the number of securities
purchasable and receivable upon the exercise of this Warrant immediately prior
to such event.  If a purchase, tender or
exchange offer is made to and accepted by holders of more than 50% of the
outstanding capital stock of the Company (on an as-converted to Common Stock
basis), the Company will not effect any consolidation, merger or sale with the
Person, as defined below, making such offer or with any Affiliate, as defined
below, of such Person, unless, before the consummation of such consolidation,
merger or sale, the Holder of this

 

3

 

Warrant is given at least
ten (10) business days’ notice prior to the scheduled closing date (the “Closing
Date”) of such transaction (which notice shall specify the material terms of
such transaction and the proposed Closing Date).  In the event the Holder elects to exercise
this Warrant or any portion thereof following such notice and such
consolidation, merger or sale is not consummated within ten (10) days of
the proposed Closing Date (or any subsequent proposed Closing Date), then the
Holder may rescind its exercise of this Warrant by providing
written notice thereof to the Company, the Company shall take all actions
consistent therewith (including without limitation the immediate return of the
Warrant Price paid with respect to such rescinded exercise) and this Warrant shall
continue in full force and effect.  As
used in this paragraph, the term “Person” includes an individual, a
partnership, a corporation, a trust, a joint venture, a limited liability
company, an unincorporated organization and a government or any department or
agency thereof, and an “Affiliate” of a Person means any Person directly or
indirectly controlling, controlled by or under direct or indirect common
control with, such other Person.  A
Person will be deemed to control a corporation or other business entity if such
Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise.

 

4.6                                 Notice of Adjustment.  Upon any adjustment of the number of Shares
and/or the Warrant Price, the Company will give written notice thereof, by
first-class mail, postage prepaid, addressed to the Holder at the Holder’s
address as shown on the books of the Company, which notice will state
(i) the Warrant Price resulting from such adjustment and the increase or
decrease, if any, in the number of Shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based, and
(ii) whether, after giving effect to such adjustment, the maximum number
of Shares issuable upon the exercise of this Warrant will constitute more than
5% of the total number of the then issued and outstanding Shares (including in
such total number the maximum number of Shares issuable upon the exercise of
this Warrant).

 

4.7                                 Other Notices.  If at any time:

 

4.7.1                        the Company
declares a cash dividend on its Common Stock payable at a rate in excess of the
rate of the last cash dividend theretofore paid;

 

4.7.2                        the Company
declares a dividend on its Common Stock payable in securities or pays a special
dividend or other distribution (other than regular cash dividends) to holders
of its Shares;

 

4.7.3                        the Company offers
for subscription to holders of any of its Common Stock additional shares of any
class or other rights;

 

4.7.4                        there is a
reorganization, reclassification, consolidation or merger of the Company with,
or sale of all or substantially all of its assets to, another corporation or
other entity; or

 

4.7.5                        there is a
voluntary or involuntary dissolution, liquidation or winding up of the Company;

 

4

 

then the Company will give,
as provided in paragraph 15 below, to the Holder’s address as shown on the
books of the Company, (i) at least ten (10) business days’ prior
written notice of the date on which the books of the Company will close or
a record will be taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
ten (10) business days’ prior written notice of the date when the
same will take place.  Any notice
required by clause (i) will also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the Holder
will be entitled thereto, and any notice required by (ii) will also specify the
anticipated date on which the Holder will be entitled to exchange its Shares
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.

 

5.                                       Listing.  If any Shares required to be reserved for the
purpose of issuance upon the exercise of this Warrant require registration with
or approval of any governmental authority under any federal or state law (other
than the filing of a Registration Statement under the Securities Act of 1933,
as then in effect (the “Securities Act”), or any similar law then in effect),
or listing on any securities exchange, before such Shares may be issued upon
such exercise, the Company will, at its expense and as expeditiously as
possible, use its commercially reasonable efforts to cause such Shares to be
duly registered or approved or listed on the relevant securities exchange, as
the case may be.

 

6.                                       Closing of Books.  The Company will at no time close its
transfer books against the transfer of this Warrant or of any Shares issued or
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.

 

7.                                       Definition of Common Stock.  As used in this Warrant the term “Common
Stock” includes the Company’s authorized Common Stock, par value $0.0001 per
share, as constituted on the date hereof and also includes any shares of any
class of stock or other equity securities of the Company thereafter authorized
which will not be limited to a fixed sum or percentage of par value in respect
of the rights of holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company.

 

8.                                       Definition of Shares.  Except as provided in paragraph 4.5, the
Shares purchasable pursuant to this Warrant will include only Shares designated
as “common stock” of the Company or, in the case of any reclassification of the
outstanding Shares, the Shares, securities or assets provided for in
paragraph 4.5.

 

9.                                       No Voting Rights.  This Warrant will not entitle the Holder to
any voting rights or other rights as a stockholder of the Company.

 

10.                                 Warrant Transferable.  This Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder, by written
notice to the Company at the address referred to in paragraph 15 below by
the Holder, in person or by duly authorized attorney; provided that either (i) a
written opinion of counsel for the Holder reasonably satisfactory to the
Company has been obtained stating that such transfer will not violate the
registration

 

5

 

requirements of the
Securities Act or any applicable state securities laws, and (ii) the transferee
has delivered to the Company a written agreement to be bound by the terms and
conditions hereof.  The Holder agrees
that after such notice, the Holder may be treated by the Company and all other
persons dealing with this Warrant as the absolute owner hereof for any purpose
and as the person entitled to exercise the rights represented by this Warrant,
or to further assign this Warrant, any notice to the contrary notwithstanding;
but until receipt of any such notice of assignment, the Company may treat the
Holder as shown on its records as the owner for all purposes.  Nothing in this paragraph 10 shall be
deemed to limit the effect of any agreement among the Holder, the Company and
other security holders of the Company restricting the transfer of this Warrant
or the Shares.

 

11.                                 Mutilation or Loss of
Warrant.  Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction)
receipt of reasonably satisfactory indemnification, and (in the case of
mutilation) upon surrender and cancellation of this Warrant, the Company will
execute and deliver a new Warrant of like tenor and date and any such lost,
stolen, destroyed or mutilated Warrant shall thereupon become void.

 

12.                                 Taxes.  The Company shall not be required to pay any
tax or taxes attributable to the issuance of this Warrant or of the Warrant
Shares.

 

13.                                 No Limitation on Corporate
Action; No Impairment.

 

13.1                           No provision of this Warrant
and no right or option granted or conferred hereunder shall in any way limit,
affect or abridge the exercise by the Company of any of its corporate rights or
powers to recapitalize, amend its certificate of incorporation, reorganize,
consolidate or merge with or into another entity, or to transfer, all or any
part of its property or assets, or the exercise or any other of its corporate
rights and powers.

 

13.2                           The Company will not, by
amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed by the Company
under this Warrant, but will at all times in good faith assist in the carrying
out of all of the provisions of this Warrant and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holder under this Warrant against impairment.

 

14.                                 Restricted Securities.  This Warrant has not been registered under
the Act, or qualified under applicable state securities laws and has been
issued to the Holder for investment and not with a view to the distribution of
either the Warrant or the Shares. 
Neither this Warrant nor any of the Shares or any other security issued
or issuable upon exercise of this Warrant may be sold, transferred, pledged or
hypothecated in the absence of an effective registration statement under the
Act and qualification under applicable state securities laws relating to such
security or an available exemption from registration and qualification.  Each certificate for the Shares and any other
security issued or issuable upon exercise of this Warrant shall contain a
legend on the face thereof, in form and substance satisfactory to counsel for
the Company, setting forth the restrictions on transfer contained in this
Section.

 

6

 

15.                                 Notices.  All notices, requests, demands and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given (i) upon receipt, if delivered
personally, (ii) upon confirmation of receipt, if given by electronic facsimile
and (iii) (A) on the third business day following mailing, if mailed from a
United States address to a United States address or (B) on the tenth business day
following mailing, if mailed internationally, and in either case, postage
prepaid, certified mail, return receipt requested, to the following address (or
at such other address for a party as shall be specified by like notice):

 

(i)                                     if to the Company,
to:

 

Innovative Micro Technology, Inc.

75 Robin Hill Rd.

Santa Barbara, CA  93117

Facsimile:  805-967-2677

Attention:  John Foster, President

 

With a copy (which shall not constitute
notice) to:

 

Sheppard, Mullin, Richter & Hampton LLP

333 S. Hope Street, 48th Floor Los Angeles, CA 
90017

Facsimile:  (213) 620-1398

Attention:  James J. Slaby, Esq.

 

(ii)                                  if to the Holder, to:

 

Investor Growth Capital Limited

National Westminster House

Le Truchot, St. Peter Port

GY1 4PW, Guernsey

Channel Islands

Tel.: +44 1481 732 615

Facsimile: +44 1481 732 616

Attention: 
Wayne Tallowin

 

With a copy (which shall not

constitute notice) to:

Benjamin B. Quinones, Esq.

Pillsbury Winthrop LLP

2475 Hanover Street

Palo Alto, CA 
94304-1114

Facsimile: 
(650) 233-4545

 

16.                                 Supplements and Amendments;
Whole Agreement.  This
Warrant may be amended or supplemented only by an instrument in writing signed
by the Company and the Holder.  This
Warrant contains the full understanding of the Company and the Holder with
respect to the subject matter hereof and thereof and there are no
representations, warranties, agreements or understandings other than expressly
contained herein and therein.

 

7

 

17.                                 Governing Law.  This Warrant shall be deemed to be a contract
made under the laws of the State of California and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State, without
regard to its conflicts of laws rules.

 

18.                                 Descriptive Headings.  Descriptive headings of the several Sections
of this Warrant are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.

 

19.                                 No Fractional Shares.  No fractional Shares shall be issued upon
exercise of this Warrant.  In lieu of any
fractional Shares to which the Holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by the Warrant
Price.

 

20.                                 Waivers Strictly Construed.  With regard to any power, remedy or right
provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly contained in a
writing signed by the waiving party; and (ii) no alteration, modification
or impairment shall be implied by reason of any previous waiver, extension of
time, delay or omission in exercise, or other indulgence.

 

21.                                 Severability.  The validity, legality or enforceability of
the remainder of this Warrant shall not be affected even if one or more of its
provisions shall be held to be invalid, illegal or unenforceable in any
respect.

 

[Signature Page Follows]

 

8

 

IN WITNESS WHEREOF, the Company
has caused this Warrant to be signed by its duly authorized officer, as of January 25,
2005.

 

	
   

  	
  INNOVATIVE MICRO TECHNOLOGY, INC. 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ John Foster 

  	
   

  
	
   

  	
   

  	
  John Foster 

  
	
   

  	
   

  	
  President

  

 

9

 

EXHIBIT
A

 

Form of Performance Report

 

Innovative Micro Technology, Inc.

Performance Report

 

	
   

  	
   

  	
  Calendar

  Year

  2005

  	
   

  
	
  Contract
  Activity

  	
   

  	
  $

  	
   

  	
   

  
	
  Incurred
  Costs

  	
   

  	
   

  	
   

  
	
  Gross Profit

  	
   

  	
  $

  	
   

  	
   

  
	
  %GM

  	
   

  	
  %   .

  	
   

  
	
  R&D

  	
   

  	
  $

  	
   

  	
   

  
	
  S,G&A

  	
   

  	
   

  	
   

  
	
  Profit
  Sharing

  	
   

  	
   

  	
   

  
	
  Interest
  income

  	
   

  	
   

  	
   

  
	
  Interest expense

  	
   

  	
   

  	
   

  
	
  Other income
  (expense)

  	
   

  	
   

  	
   

  
	
  taxes

  	
   

  	
   

  	
   

  
	
  Net Income
  (Loss)

  	
   

  	
  $

  	
   

  	
   

  

 

10

 

EXHIBIT
B

 

Performance Targets

 

The “Performance Targets”
shall be as follows

 

	
  Contract
  Activity:

  	
   

  	
  $

  	
  19,814,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gross Profit:

  	
   

  	
  $

  	
  3,960,000

  	
   

  

 

Calculation of Shares Purchasable Pursuant to Warrant 

 

This Warrant shall be
exercisable for up to the number of Shares set forth below, based on the
information provided in the Performance Report, subject to adjustment as provided
in Section 4 of the Warrant.

 

	
  Performance, Calendar Year 2005

  	
   

  	
  Total Shares

  	
   

  
	
  Contract Activity

  	
   

  	
  Gross Profit

  	
   

  	
  Purchasable

  	
   

  
	
  0 -
  $17,481,999.99

  	
   

  	
  N/A

  	
   

  	
  164,706

  	
   

  
	
  $17,482,000
  - $19,813,999.99

  	
   

  	
  0 - $3,499,999

  	
   

  	
  164,706

  	
   

  
	
   

  	
   

  	
  $3,500,000 or more

  	
   

  	
  82,353

  	
   

  
	
  $19,814,000
  or more

  	
   

  	
  0-$3,959,999

  	
   

  	
  82,353

  	
   

  
	
   

  	
   

  	
  $3,960,000 or more

  	
   

  	
  0

  	
   

  

 

11

 

EXHIBIT
C

 

FORM OF NOTICE OF EXERCISE
OF WARRANT

 

The “Holder” designated
below, subject to the conditions set forth in that certain Warrant to Purchase
Common stock of Innovative Micro Technology, Inc. (the “Company”), dated as of January 25,
2005 (the “Warrant”), hereby elects to exercise the right, represented by the
Warrant, to purchase shares of the Common Stock of the Company and tenders
herewith payment as follows:

 

AGGREGATE WARRANT
PRICE:  $____________________ (Payment
shall be made by wire transfer in accordance with the wire transfer
instructions attached to the Warrant as Exhibit A.)

 

	
  Please deliver the stock
  certificate to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
				

 

The Holder hereby represents
and warrants to the Company as follows:

 

•                                          The Holder has
sufficient knowledge and experience in financial and business matters that it
is capable of evaluating the merits and risks of its prospective investment in
the shares of Common Stock of the Company.

 

•                                          The Holder
understands that it is purchasing the shares of Common Stock of the Company
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Act”) and without registration under the Act or
any state securities or Blue Sky laws.

 

•                                          The Holder is
an “accredited investor” as defined in Rule 501(a) of Regulation D under
the Act.

 

	
  Dated:

  	
   

  	
  , 

  	
  200

  	
   

  	
   

  
	
   

  
	
  “Holder”

  
	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
								

 

12

 

EXHIBIT
D

 

WIRE
INSTRUCTIONS

 

On the exercise of the
Warrant the aggregate Warrant Price shall be paid to the Company by wire
transfer to the following address:

 

13

 

THIS WARRANT AND THE
SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER
THE ACT, SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO AND ALL APPLICABLE
QUALIFICATIONS UNDER STATE SECURITIES LAWS SHALL HAVE BEEN OBTAINED WITH
RESPECT THERETO; (ii) A WRITTEN OPINION FROM COUNSEL FOR THE HOLDER
REASONABLY SATISFACTORY TO THE ISSUER HAS BEEN OBTAINED STATING THAT NO SUCH
REGISTRATION OR QUALIFICATION IS REQUIRED; OR (iii) SOLD PURSUANT TO RULE 144
UNDER SUCH ACT.

 

WARRANT TO PURCHASE COMMON STOCK OF

INNOVATIVE MICRO TECHNOLOGY, INC.

 

For good and valuable
consideration, the receipt of which is hereby acknowledged, Innovative Micro
Technology, Inc., a Delaware corporation (the “Company”), hereby grants to
MIRAMAR VENTURE PARTNERS, L.P., a limited partnership, its successors and
assigns (collectively, the “Holder”), an irrevocable warrant (the “Warrant”) to
purchase, subject to the satisfaction of the conditions set forth in Section 1
below and subject to the other terms hereof, the number of shares of Common
Stock, par value $0.0001 per share, of the Company (the “Shares”), if any,
determined in accordance with Section I hereto, at the Warrant Price, as
defined below, at any time beginning on March 15, 2006 (the “Determination
Date”) and ending on January 24, 2008 (the “Expiration Date” and such period
beginning on the Determination Date and ending on the Expiration Date, the “Exercise
Period”).

 

1.                                       Conditions to Exercise;
Number of Shares; Early Termination.  On or before March 15, 2006, the Company
shall deliver to the Holder a report in the form of Exhibit A
hereto (the “Performance Report”) setting forth the Company’s total Contract
Activity (as defined below) and gross profit for calendar year 2005.  If the Company’s performance described in the
Performance Report does not satisfy the Target Amounts set forth on Exhibit B
hereto, then this Warrant shall then become exercisable for the lesser of
eighty-eight thousand, two hundred thirty-five (88,235) shares of Common Stock
and the number of shares of Common Stock calculated as purchasable pursuant to Exhibit B
hereto, subject to adjustment as provided below.  For purposes of this Warrant, “Contract
Activity” shall mean total revenue, as adjusted by work-in-process inventory,
for the period measured.  For purposes of
this Warrant, the terms “revenue” and “work-in-process inventory” shall have
the meanings ascribed to them under U.S. Generally Accepted Accounting
Principles (“GAAP”).  “Gross profit”
shall have the same meaning as that used in the budgets of the Company provided
heretofore to the Investors, in which “gross profit” means gross profit, within
the meaning of GAAP, before any deduction for profit sharing.  If, on the Determination Date, the number of
Shares purchasable is zero (0), this Warrant shall terminate and be of no
further force or effect.

 

1

 

2.                                       Exercise; Issuance of
Certificates; Payment for Shares.

 

This Warrant may be
exercised by the Holder, in whole or in part, and on one or more occasions, by
written notice to the Company, in the form attached as Exhibit C hereto
(the “Notice”), at any time within the Exercise Period and by payment to the
Company by wire transfer (in accordance with the wire transfer instructions
attached hereto as Exhibit D) of the aggregate Warrant Price for the
number of Shares designated by the Holder (but not more than the number of
Shares for which this Warrant then remains subject and unexercised).  Consideration received by the Company under a
broker-assisted sale and remittance program acceptable to the Company may also
be used to exercise this Warrant. 
Certificates for the Shares so purchased will be delivered to the Holder
within a reasonable time, not exceeding fifteen (15) business days, after
this Warrant has been exercised, and, unless this Warrant has expired, it will
continue in effect with respect to the number of Shares, if any, as to which it
has not then been exercised and which remain covered by this Warrant as herein
provided.  Each exercise of this Warrant
shall be deemed to have been effected immediately prior to the close of
business on the business day on which the Notice is given to the Company.  At such time, the person or persons in whose
name or names any certificate for the Shares shall be issuable upon such
exercise shall be deemed to have become the holder or holders of record of the
Shares represented by such certificate or certificates, and to be entitled to
all rights of a Stockholder with respect to such Shares, including without
limitation voting rights.

 

3.                                       Shares to be Fully Paid;
Reservation of Shares.  The
Company covenants and agrees as follows:

 

3.1                                 All shares issued upon the
exercise of this Warrant will, upon issuance, be fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issuance
thereof.

 

3.2                                 During the period within
which this Warrant may be exercised, the Company will at all times have
authorized and reserved for the purpose of issuance or transfer upon exercise
of this Warrant a sufficient number of Shares to provide for the exercise of
this Warrant.

 

3.3                                 The Company will take all
actions necessary to assure that the Shares issuable upon the exercise of this
Warrant may be so issued without violation of any applicable law or regulation,
or of any requirements of any securities exchange upon which the shares of the
Company may then be listed.

 

4.                                       Warrant Price.

 

4.1                                 Initial Warrant Price;
Subsequent Adjustment of Price and Number of Purchasable Shares.  The initial Warrant Price (“Initial Warrant
Price”) will be $0.30 per Share, and will be adjusted from time to time as
provided below.  The Initial Warrant
Price or, if such price has been adjusted, the price per Share as last adjusted
pursuant to the terms hereof, is referred to as the “Warrant Price” herein.

 

4.2                                 Subdivision or Combination
of Shares.  If the
Company at any time while this Warrant, or any portion hereof, remains
outstanding and unexpired shall split, subdivide or

 

2

 

combine the securities as to
which purchase rights under this Warrant exist, into a different number of
securities of the same class, the number of Shares for which this Warrant may
be exercised shall be adjusted to represent the aggregate number of securities
that, if this Warrant had been exercised immediately prior to such event, the
Holder would have owned upon such dividend, distribution, subdivision,
combination or reclassification, and the Warrant Price for such securities
shall be proportionately decreased in the case of a split or subdivision or proportionately
increased in the case of a combination.

 

4.3                                 Reclassification.  If the Company, at any time while this
Warrant, or any portion hereof, remains outstanding and unexpired, by
reclassification of securities or otherwise shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant
shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with
respect to the securities that were subject to the purchase rights under this
Warrant immediately prior to such reclassification or other change and the
Warrant Price therefor shall be appropriately adjusted.

 

4.4                                 Adjustments for Dividends in
Stock or Other Securities or Property.  If while this Warrant, or any portion hereof,
remains outstanding and unexpired holders of the securities as to which
purchase rights under this Warrant exist at the time shall have received, or,
on or after the record date fixed for the determination of eligible
stockholders, shall have become entitled to receive, without payment therefor,
other or additional stock or other securities or property (other than cash) of
the Company by way of dividend, then and in each case, this Warrant shall
represent the right to acquire, in addition to the number of shares of the
security receivable upon exercise of this Warrant, and without payment of any
additional consideration therefor, the amount of such other or additional stock
or other securities or property (other than cash) of the Company that the
Holder would hold on the date of such exercise had it been holder of record of
the security receivable upon exercise of this Warrant on the date hereof and
had thereafter, during the period from the date hereof to and including the
date of such exercise, retained such shares and/or all other additional
securities available to it as aforesaid during such period, giving effect to
all adjustments called for during such period.

 

4.5                                 Reorganization,
Reclassification, Consolidation, Merger or Sale.  If, while this Warrant, or any portion
hereof, remains outstanding and unexpired, any capital reorganization or
reclassification of the stock of the Company, or any consolidation or merger of
the Company with another corporation or entity, or the sale of all or
substantially all of the Company’s assets to another corporation will be
effected in such a way that holders of the securities for which this Warrant is
exercisable will be entitled to receive shares, securities or assets with
respect to or in exchange for such securities, then, upon exercise of this
Warrant, the Holder will thereafter have the right to receive such shares,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding securities equal to the number of securities
purchasable and receivable upon the exercise of this Warrant immediately prior
to such event.  If a purchase, tender or
exchange offer is made to and accepted by holders of more than 50% of the
outstanding capital stock of the Company (on an as-converted to Common Stock
basis), the Company will not effect any consolidation, merger or sale with the
Person, as defined below, making such offer or with any Affiliate, as defined
below, of such Person, unless, before the consummation of such consolidation,
merger or sale, the Holder of this

 

3

 

Warrant is given at least
ten (10) business days’ notice prior to the scheduled closing date (the “Closing
Date”) of such transaction (which notice shall specify the material terms of
such transaction and the proposed Closing Date).  In the event the Holder elects to exercise
this Warrant or any portion thereof following such notice and such
consolidation, merger or sale is not consummated within ten (10) days of
the proposed Closing Date (or any subsequent proposed Closing Date), then the
Holder may rescind its exercise of this Warrant by providing written notice
thereof to the Company, the Company shall take all actions consistent therewith
(including without limitation the immediate return of the Warrant Price paid
with respect to such rescinded exercise) and this Warrant shall continue in
full force and effect.  As used in this
paragraph, the term “Person” includes an individual, a partnership, a
corporation, a trust, a joint venture, a limited liability company, an
unincorporated organization and a government or any department or agency
thereof, and an “Affiliate” of a Person means any Person directly or indirectly
controlling, controlled by or under direct or indirect common control with,
such other Person.  A Person will be
deemed to control a corporation or other business entity if such Person
possesses, directly or indirectly, the power to direct or cause the direction
of the management and policies of such corporation, whether through the
ownership of voting securities, by contract or otherwise.

 

4.6                                 Notice of Adjustment.  Upon any adjustment of the number of Shares
and/or the Warrant Price, the Company will give written notice thereof, by
first-class mail, postage prepaid, addressed to the Holder at the Holder’s
address as shown on the books of the Company, which notice will state
(i) the Warrant Price resulting from such adjustment and the increase or
decrease, if any, in the number of Shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based, and
(ii) whether, after giving effect to such adjustment, the maximum number
of Shares issuable upon the exercise of this Warrant will constitute more than
5% of the total number of the then issued and outstanding Shares (including in
such total number the maximum number of Shares issuable upon the exercise of
this Warrant).

 

4.7                                 Other Notices.  If at any time:

 

4.7.1                        the Company
declares a cash dividend on its Common Stock payable at a rate in excess of the
rate of the last cash dividend theretofore paid;

 

4.7.2                        the Company
declares a dividend on its Common Stock payable in securities or pays a special
dividend or other distribution (other than regular cash dividends) to holders
of its Shares;

 

4.7.3                        the Company
offers for subscription to holders of any of its Common Stock additional shares
of any class or other rights;

 

4.7.4                        there is a
reorganization, reclassification, consolidation or merger of the Company with,
or sale of all or substantially all of its assets to, another corporation or
other entity; or

 

4.7.5                        there is a
voluntary or involuntary dissolution, liquidation or winding up of the Company;

 

4

 

then the Company will give,
as provided in paragraph 15 below, to the Holder’s address as shown on the
books of the Company, (i) at least ten (10) business days’ prior
written notice of the date on which the books of the Company will close or
a record will be taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
ten (10) business days’ prior written notice of the date when the
same will take place.  Any notice
required by clause (i) will also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the Holder will
be entitled thereto, and any notice required by (ii) will also specify the
anticipated date on which the Holder will be entitled to exchange its Shares
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.

 

5.                                       Listing.  If any Shares required to be reserved for the
purpose of issuance upon the exercise of this Warrant require registration with
or approval of any governmental authority under any federal or state law (other
than the filing of a Registration Statement under the Securities Act of 1933,
as then in effect (the “Securities Act”), or any similar law then in effect),
or listing on any securities exchange, before such Shares may be issued upon
such exercise, the Company will, at its expense and as expeditiously as
possible, use its commercially reasonable efforts to cause such Shares to be
duly registered or approved or listed on the relevant securities exchange, as
the case may be.

 

6.                                       Closing of Books.  The Company will at no time close its
transfer books against the transfer of this Warrant or of any Shares issued or
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.

 

7.                                       Definition of Common Stock.  As used in this Warrant the term “Common
Stock” includes the Company’s authorized Common Stock, par value $0.0001 per
share, as constituted on the date hereof and also includes any shares of any
class of stock or other equity securities of the Company thereafter authorized
which will not be limited to a fixed sum or percentage of par value in respect
of the rights of holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company.

 

8.                                       Definition of Shares.  Except as provided in paragraph 4.5, the
Shares purchasable pursuant to this Warrant will include only Shares designated
as “common stock” of the Company or, in the case of any reclassification of the
outstanding Shares, the Shares, securities or assets provided for in
paragraph 4.5.

 

9.                                       No Voting Rights.  This Warrant will not entitle the Holder to
any voting rights or other rights as a stockholder of the Company.

 

10.                                 Warrant Transferable.  This Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder, by written
notice to the Company at the address referred to in paragraph 15 below by
the Holder, in person or by duly authorized attorney; provided that either
(i) a written opinion of counsel for the Holder reasonably satisfactory to
the Company has been obtained stating that such transfer will not violate the
registration

 

5

 

requirements of the
Securities Act or any applicable state securities laws, and (ii) the transferee
has delivered to the Company a written agreement to be bound by the terms and
conditions hereof.  The Holder agrees that
after such notice, the Holder may be treated by the Company and all other
persons dealing with this Warrant as the absolute owner hereof for any purpose
and as the person entitled to exercise the rights represented by this Warrant,
or to further assign this Warrant, any notice to the contrary notwithstanding;
but until receipt of any such notice of assignment, the Company may treat the
Holder as shown on its records as the owner for all purposes.  Nothing in this paragraph 10 shall be
deemed to limit the effect of any agreement among the Holder, the Company and
other security holders of the Company restricting the transfer of this Warrant
or the Shares.

 

11.                                 Mutilation or Loss of
Warrant.  Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction)
receipt of reasonably satisfactory indemnification, and (in the case of
mutilation) upon surrender and cancellation of this Warrant, the Company will
execute and deliver a new Warrant of like tenor and date and any such lost,
stolen, destroyed or mutilated Warrant shall thereupon become void.

 

12.                                 Taxes.  The Company shall not be required to pay any
tax or taxes attributable to the issuance of this Warrant or of the Warrant
Shares.

 

13.                                 No Limitation on Corporate
Action; No Impairment.

 

13.1                           No provision of this Warrant
and no right or option granted or conferred hereunder shall in any way limit,
affect or abridge the exercise by the Company of any of its corporate rights or
powers to recapitalize, amend its certificate of incorporation, reorganize,
consolidate or merge with or into another entity, or to transfer, all or any
part of its property or assets, or the exercise or any other of its corporate
rights and powers.

 

13.2                           The Company will not, by
amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed by the Company
under this Warrant, but will at all times in good faith assist in the carrying
out of all of the provisions of this Warrant and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holder under this Warrant against impairment.

 

14.                                 Restricted Securities.  This Warrant has not been registered under
the Act, or qualified under applicable state securities laws and has been
issued to the Holder for investment and not with a view to the distribution of
either the Warrant or the Shares. 
Neither this Warrant nor any of the Shares or any other security issued
or issuable upon exercise of this Warrant may be sold, transferred, pledged or
hypothecated in the absence of an effective registration statement under the
Act and qualification under applicable state securities laws relating to such
security or an available exemption from registration and qualification.  Each certificate for the Shares and any other
security issued or issuable upon exercise of this Warrant shall contain a
legend on the face thereof, in form and substance satisfactory to counsel for
the Company, setting forth the restrictions on transfer contained in this
Section.

 

6

 

15.                                 Notices.  All notices, requests, demands and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given (i) upon receipt, if delivered
personally, (ii) upon confirmation of receipt, if given by electronic facsimile
and (iii) (A) on the third business day following mailing, if mailed from a
United States address to a United States address or (B) on the tenth business
day following mailing, if mailed internationally, and in either case, postage
prepaid, certified mail, return receipt requested, to the following address (or
at such other address for a party as shall be specified by like notice):

 

(i)                                     if to the Company,
to:

 

Innovative Micro Technology, Inc.

75 Robin Hill Rd.

Santa Barbara, CA  93117

Facsimile:  805-967-2677

Attention:  John Foster, President

 

With a copy (which shall not constitute
notice) to:

 

Sheppard, Mullin, Richter & Hampton LLP

333 S. Hope Street, 48th Floor Los Angeles, CA 
90017

Facsimile:  (213) 620-1398

Attention:  James J. Slaby, Esq.

 

(ii)                                  if to the Holder, to:

 

Miramar Venture Partners, L.P.

2101 East Coast Hwy., Ste. 300

Corona del Mar, CA 92625

Facsimile: 
(949) 760-4451

Attention: 
                           

 

16.                                 Supplements and Amendments;
Whole Agreement.  This
Warrant may be amended or supplemented only by an instrument in writing signed
by the Company and the Holder.  This
Warrant contains the full understanding of the Company and the Holder with
respect to the subject matter hereof and thereof and there are no
representations, warranties, agreements or understandings other than expressly
contained herein and therein.

 

17.                                 Governing Law.  This Warrant shall be deemed to be a contract
made under the laws of the State of California and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State, without
regard to its conflicts of laws rules.

 

18.                                 Descriptive Headings.  Descriptive headings of the several Sections
of this Warrant are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.

 

7

 

19.                                 No Fractional Shares.  No fractional Shares shall be issued upon
exercise of this Warrant.  In lieu of any
fractional Shares to which the Holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by the Warrant
Price.

 

20.                                 Waivers Strictly Construed.  With regard to any power, remedy or right
provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly contained in a
writing signed by the waiving party; and (ii) no alteration, modification
or impairment shall be implied by reason of any previous waiver, extension of
time, delay or omission in exercise, or other indulgence.

 

21.                                 Severability.  The validity, legality or enforceability of
the remainder of this Warrant shall not be affected even if one or more of its
provisions shall be held to be invalid, illegal or unenforceable in any
respect.

 

[Signature Page Follows]

 

8

 

IN WITNESS WHEREOF, the Company
has caused this Warrant to be signed by its duly authorized officer, as of January 25,
2005.

 

	
   

  	
  INNOVATIVE MICRO TECHNOLOGY, INC. 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ John Foster

  	
   

  
	
   

  	
   

  	
  John Foster 

  
	
   

  	
   

  	
  President

  

 

9

 

EXHIBIT
A

 

Form of Performance Report

 

Innovative Micro Technology, Inc.

Performance
Report

 

	
   

  	
   

  	
  Calendar

  Year

  2005

  	
   

  
	
  Contract
  Activity

  	
   

  	
  $

  	
   

  	
   

  
	
  Incurred
  Costs

  	
   

  	
   

  	
   

  
	
  Gross Profit

  	
   

  	
  $

  	
   

  	
   

  
	
  %GM

  	
   

  	
  %   .

  	
   

  
	
  R&D

  	
   

  	
  $

  	
   

  	
   

  
	
  S,G&A

  	
   

  	
   

  	
   

  
	
  Profit
  Sharing

  	
   

  	
   

  	
   

  
	
  Interest
  income

  	
   

  	
   

  	
   

  
	
  Interest expense

  	
   

  	
   

  	
   

  
	
  Other income
  (expense)

  	
   

  	
   

  	
   

  
	
  taxes

  	
   

  	
   

  	
   

  
	
  Net Income
  (Loss)

  	
   

  	
  $

  	
   

  	
   

  

 

10

 

EXHIBIT
B

 

Performance Targets

 

The “Performance Targets”
shall be as follows

 

	
  Contract
  Activity:

  	
   

  	
  $

  	
  19,814,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gross Profit:

  	
   

  	
  $

  	
  3,960,000

  	
   

  

 

Calculation of Shares Purchasable Pursuant to Warrant 

 

This Warrant shall be
exercisable for up to the number of Shares set forth below, based on the
information provided in the Performance Report, subject to adjustment as
provided in Section 4 of the Warrant. 

 

	
  Performance, Calendar Year 2005

  	
   

  	
  Total Shares

  	
   

  
	
  Contract Activity

  	
   

  	
  Gross Profit

  	
   

  	
  Purchasable

  	
   

  
	
  0 -
  $17,481,999.99

  	
   

  	
  N/A

  	
   

  	
  88,235

  	
   

  
	
  $17,482,000
  - $19,813,999.99

  	
   

  	
  0 - $3,499,999

  	
   

  	
  88,235

  	
   

  
	
   

  	
   

  	
  $3,500,000 or more

  	
   

  	
  44,118

  	
   

  
	
  $19,814,000
  or more

  	
   

  	
  0-$3,959,999

  	
   

  	
  44,118

  	
   

  
	
   

  	
   

  	
  $3,960,000 or more

  	
   

  	
  0

  	
   

  

 

11

 

EXHIBIT
C

 

FORM OF NOTICE OF EXERCISE
OF WARRANT

 

The “Holder” designated
below, subject to the conditions set forth in that certain Warrant to Purchase
Common stock of Innovative Micro Technology, Inc. (the “Company”), dated as of January 25,
2005 (the “Warrant”), hereby elects to exercise the right, represented by the
Warrant, to purchase shares of the Common Stock of the Company and tenders
herewith payment as follows:

 

AGGREGATE WARRANT
PRICE:  $____________________ (Payment
shall be made by wire transfer in accordance with the wire transfer
instructions attached to the Warrant as Exhibit A.)

 

	
  Please deliver the stock
  certificate to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
				

 

The Holder hereby represents
and warrants to the Company as follows:

 

•                                          The Holder has
sufficient knowledge and experience in financial and business matters that it
is capable of evaluating the merits and risks of its prospective investment in the
shares of Common Stock of the Company.

 

•                                          The Holder
understands that it is purchasing the shares of Common Stock of the Company
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Act”) and without registration under the Act or
any state securities or Blue Sky laws.

 

•                                          The Holder is
an “accredited investor” as defined in Rule 501(a) of Regulation D under
the Act.

 

	
  Dated:

  	
   

  	
  , 

  	
  200

  	
   

  	
   

  
	
   

  
	
  “Holder”

  
	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
								

 

12

 

EXHIBIT
D

 

WIRE
INSTRUCTIONS

 

On the exercise of the
Warrant the aggregate Warrant Price shall be paid to the Company by wire
transfer to the following address:

 

13

 

THIS WARRANT AND THE
SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER
THE ACT, SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO AND ALL APPLICABLE
QUALIFICATIONS UNDER STATE SECURITIES LAWS SHALL HAVE BEEN OBTAINED WITH
RESPECT THERETO; (ii) A WRITTEN OPINION FROM COUNSEL FOR THE HOLDER
REASONABLY SATISFACTORY TO THE ISSUER HAS BEEN OBTAINED STATING THAT NO SUCH
REGISTRATION OR QUALIFICATION IS REQUIRED; OR (iii) SOLD PURSUANT TO RULE 144
UNDER SUCH ACT.

 

WARRANT TO PURCHASE COMMON STOCK OF

INNOVATIVE MICRO TECHNOLOGY, INC.

 

For good and valuable
consideration, the receipt of which is hereby acknowledged, Innovative Micro
Technology, Inc., a Delaware corporation (the “Company”), hereby grants to INVESTOR
GROUP L.P., a limited partnership, its successors and assigns (collectively,
the “Holder”), an irrevocable warrant (the “Warrant”) to purchase, subject to
the satisfaction of the conditions set forth in Section 1 below and
subject to the other terms hereof, the number of shares of Common Stock, par
value $0.0001 per share, of the Company (the “Shares”), if any, determined in
accordance with Section I hereto, at the Warrant Price, as defined below,
at any time beginning on March 15, 2006 (the “Determination Date”) and
ending on January 24, 2008 (the “Expiration Date” and such period beginning
on the Determination Date and ending on the Expiration Date, the “Exercise
Period”).

 

1.                                       Conditions to Exercise;
Number of Shares; Early Termination.  On or before March 15, 2006, the Company
shall deliver to the Holder a report in the form of Exhibit A
hereto (the “Performance Report”) setting forth the Company’s total Contract
Activity (as defined below) and gross profit for calendar year 2005.  If the Company’s performance described in the
Performance Report does not satisfy the Target Amounts set forth on Exhibit B
hereto, then this Warrant shall then become exercisable for the lesser of seventy
thousand, five hundred eighty-eight (70,588) shares of Common Stock and the
number of shares of Common Stock calculated as purchasable pursuant to Exhibit B
hereto, subject to adjustment as provided below.  For purposes of this Warrant, “Contract
Activity” shall mean total revenue, as adjusted by work-in-process inventory,
for the period measured.  For purposes of
this Warrant, the terms “revenue” and “work-in-process inventory” shall have
the meanings ascribed to them under U.S. Generally Accepted Accounting
Principles (“GAAP”).  “Gross profit”
shall have the same meaning as that used in the budgets of the Company provided
heretofore to the Investors, in which “gross profit” means gross profit, within
the meaning of GAAP, before any deduction for profit sharing.  If, on the Determination Date, the number of
Shares purchasable is zero (0), this Warrant shall terminate and be of no further
force or effect.

 

1

 

2.                                       Exercise; Issuance of
Certificates; Payment for Shares.

 

This Warrant may be
exercised by the Holder, in whole or in part, and on one or more occasions, by
written notice to the Company, in the form attached as Exhibit C hereto
(the “Notice”), at any time within the Exercise Period and by payment to the
Company by wire transfer (in accordance with the wire transfer instructions
attached hereto as Exhibit D) of the aggregate Warrant Price for the
number of Shares designated by the Holder (but not more than the number of
Shares for which this Warrant then remains subject and unexercised).  Consideration received by the Company under a
broker-assisted sale and remittance program acceptable to the Company may also
be used to exercise this Warrant. 
Certificates for the Shares so purchased will be delivered to the Holder
within a reasonable time, not exceeding fifteen (15) business days, after
this Warrant has been exercised, and, unless this Warrant has expired, it will
continue in effect with respect to the number of Shares, if any, as to which it
has not then been exercised and which remain covered by this Warrant as herein
provided.  Each exercise of this Warrant
shall be deemed to have been effected immediately prior to the close of
business on the business day on which the Notice is given to the Company.  At such time, the person or persons in whose
name or names any certificate for the Shares shall be issuable upon such
exercise shall be deemed to have become the holder or holders of record of the
Shares represented by such certificate or certificates, and to be entitled to
all rights of a Stockholder with respect to such Shares, including without
limitation voting rights.

 

3.                                       Shares to be Fully Paid;
Reservation of Shares.  The
Company covenants and agrees as follows:

 

3.1                                 All shares issued upon the
exercise of this Warrant will, upon issuance, be fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issuance
thereof.

 

3.2                                 During the period within
which this Warrant may be exercised, the Company will at all times have
authorized and reserved for the purpose of issuance or transfer upon exercise
of this Warrant a sufficient number of Shares to provide for the exercise of
this Warrant.

 

3.3                                 The Company will take all
actions necessary to assure that the Shares issuable upon the exercise of this
Warrant may be so issued without violation of any applicable law or regulation,
or of any requirements of any securities exchange upon which the shares of the
Company may then be listed.

 

4.                                       Warrant Price.

 

4.1                                 Initial Warrant Price;
Subsequent Adjustment of Price and Number of Purchasable Shares.  The initial Warrant Price (“Initial Warrant
Price”) will be $0.30 per Share, and will be adjusted from time to time as
provided below.  The Initial Warrant
Price or, if such price has been adjusted, the price per Share as last adjusted
pursuant to the terms hereof, is referred to as the “Warrant Price” herein.

 

4.2                                 Subdivision or Combination
of Shares.  If the
Company at any time while this Warrant, or any portion hereof, remains
outstanding and unexpired shall split, subdivide or

 

2

 

combine the securities as to
which purchase rights under this Warrant exist, into a different number of
securities of the same class, the number of Shares for which this Warrant may
be exercised shall be adjusted to represent the aggregate number of securities
that, if this Warrant had been exercised immediately prior to such event, the
Holder would have owned upon such dividend, distribution, subdivision,
combination or reclassification, and the Warrant Price for such securities
shall be proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination.

 

4.3                                 Reclassification.  If the Company, at any time while this
Warrant, or any portion hereof, remains outstanding and unexpired, by
reclassification of securities or otherwise shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant
shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with
respect to the securities that were subject to the purchase rights under this
Warrant immediately prior to such reclassification or other change and the
Warrant Price therefor shall be appropriately adjusted.

 

4.4                                 Adjustments for Dividends in
Stock or Other Securities or Property.  If while this Warrant, or any portion hereof,
remains outstanding and unexpired holders of the securities as to which
purchase rights under this Warrant exist at the time shall have received, or,
on or after the record date fixed for the determination of eligible
stockholders, shall have become entitled to receive, without payment therefor,
other or additional stock or other securities or property (other than cash) of
the Company by way of dividend, then and in each case, this Warrant shall
represent the right to acquire, in addition to the number of shares of the
security receivable upon exercise of this Warrant, and without payment of any
additional consideration therefor, the amount of such other or additional stock
or other securities or property (other than cash) of the Company that the
Holder would hold on the date of such exercise had it been holder of record of
the security receivable upon exercise of this Warrant on the date hereof and
had thereafter, during the period from the date hereof to and including the
date of such exercise, retained such shares and/or all other additional
securities available to it as aforesaid during such period, giving effect to
all adjustments called for during such period.

 

4.5                                 Reorganization,
Reclassification, Consolidation, Merger or Sale.  If, while this Warrant, or any portion
hereof, remains outstanding and unexpired, any capital reorganization or
reclassification of the stock of the Company, or any consolidation or merger of
the Company with another corporation or entity, or the sale of all or
substantially all of the Company’s assets to another corporation will be
effected in such a way that holders of the securities for which this Warrant is
exercisable will be entitled to receive shares, securities or assets with
respect to or in exchange for such securities, then, upon exercise of this
Warrant, the Holder will thereafter have the right to receive such shares,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding securities equal to the number of securities
purchasable and receivable upon the exercise of this Warrant immediately prior
to such event.  If a purchase, tender or
exchange offer is made to and accepted by holders of more than 50% of the
outstanding capital stock of the Company (on an as-converted to Common Stock
basis), the Company will not effect any consolidation, merger or sale with the
Person, as defined below, making such offer or with any Affiliate, as defined
below, of such Person, unless, before the consummation of such consolidation,
merger or sale, the Holder of this

 

3

 

Warrant is given at least
ten (10) business days’ notice prior to the scheduled closing date (the “Closing
Date”) of such transaction (which notice shall specify the material terms of
such transaction and the proposed Closing Date).  In the event the Holder elects to exercise
this Warrant or any portion thereof following such notice and such
consolidation, merger or sale is not consummated within ten (10) days of
the proposed Closing Date (or any subsequent proposed Closing Date), then the
Holder may rescind its exercise of this Warrant by providing
written notice thereof to the Company, the Company shall take all actions
consistent therewith (including without limitation the immediate return of the
Warrant Price paid with respect to such rescinded exercise) and this Warrant
shall continue in full force and effect. 
As used in this paragraph, the term “Person” includes an individual, a
partnership, a corporation, a trust, a joint venture, a limited liability
company, an unincorporated organization and a government or any department or
agency thereof, and an “Affiliate” of a Person means any Person directly or
indirectly controlling, controlled by or under direct or indirect common
control with, such other Person.  A
Person will be deemed to control a corporation or other business entity if such
Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise.

 

4.6                                 Notice of Adjustment.  Upon any adjustment of the number of Shares
and/or the Warrant Price, the Company will give written notice thereof, by
first-class mail, postage prepaid, addressed to the Holder at the Holder’s
address as shown on the books of the Company, which notice will state
(i) the Warrant Price resulting from such adjustment and the increase or
decrease, if any, in the number of Shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based, and
(ii) whether, after giving effect to such adjustment, the maximum number
of Shares issuable upon the exercise of this Warrant will constitute more than
5% of the total number of the then issued and outstanding Shares (including in such
total number the maximum number of Shares issuable upon the exercise of this
Warrant).

 

4.7                                 Other Notices.  If at any time:

 

4.7.1                        the Company
declares a cash dividend on its Common Stock payable at a rate in excess of the
rate of the last cash dividend theretofore paid;

 

4.7.2                        the Company
declares a dividend on its Common Stock payable in securities or pays a special
dividend or other distribution (other than regular cash dividends) to holders
of its Shares;

 

4.7.3                        the Company
offers for subscription to holders of any of its Common Stock additional shares
of any class or other rights;

 

4.7.4                        there is a
reorganization, reclassification, consolidation or merger of the Company with,
or sale of all or substantially all of its assets to, another corporation or
other entity; or

 

4.7.5                        there is a
voluntary or involuntary dissolution, liquidation or winding up of the Company;

 

4

 

then the Company will give,
as provided in paragraph 15 below, to the Holder’s address as shown on the
books of the Company, (i) at least ten (10) business days’ prior
written notice of the date on which the books of the Company will close or
a record will be taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
ten (10) business days’ prior written notice of the date when the
same will take place.  Any notice
required by clause (i) will also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the Holder
will be entitled thereto, and any notice required by (ii) will also specify the
anticipated date on which the Holder will be entitled to exchange its Shares
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.

 

5.                                       Listing.  If any Shares required to be reserved for the
purpose of issuance upon the exercise of this Warrant require registration with
or approval of any governmental authority under any federal or state law (other
than the filing of a Registration Statement under the Securities Act of 1933,
as then in effect (the “Securities Act”), or any similar law then in effect),
or listing on any securities exchange, before such Shares may be issued upon
such exercise, the Company will, at its expense and as expeditiously as
possible, use its commercially reasonable efforts to cause such Shares to be
duly registered or approved or listed on the relevant securities exchange, as
the case may be.

 

6.                                       Closing of Books.  The Company will at no time close its
transfer books against the transfer of this Warrant or of any Shares issued or
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.

 

7.                                       Definition of Common Stock.  As used in this Warrant the term “Common
Stock” includes the Company’s authorized Common Stock, par value $0.0001 per
share, as constituted on the date hereof and also includes any shares of any
class of stock or other equity securities of the Company thereafter authorized
which will not be limited to a fixed sum or percentage of par value in respect
of the rights of holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company.

 

8.                                       Definition of Shares.  Except as provided in paragraph 4.5, the
Shares purchasable pursuant to this Warrant will include only Shares designated
as “common stock” of the Company or, in the case of any reclassification of the
outstanding Shares, the Shares, securities or assets provided for in
paragraph 4.5.

 

9.                                       No Voting Rights.  This Warrant will not entitle the Holder to
any voting rights or other rights as a stockholder of the Company.

 

10.                                 Warrant Transferable.  This Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder, by written
notice to the Company at the address referred to in paragraph 15 below by
the Holder, in person or by duly authorized attorney; provided that either (i) a
written opinion of counsel for the Holder reasonably satisfactory to the
Company has been obtained stating that such transfer will not violate the
registration

 

5

 

requirements of the
Securities Act or any applicable state securities laws, and (ii) the transferee
has delivered to the Company a written agreement to be bound by the terms and
conditions hereof.  The Holder agrees
that after such notice, the Holder may be treated by the Company and all other
persons dealing with this Warrant as the absolute owner hereof for any purpose
and as the person entitled to exercise the rights represented by this Warrant,
or to further assign this Warrant, any notice to the contrary notwithstanding;
but until receipt of any such notice of assignment, the Company may treat the
Holder as shown on its records as the owner for all purposes.  Nothing in this paragraph 10 shall be deemed
to limit the effect of any agreement among the Holder, the Company and other
security holders of the Company restricting the transfer of this Warrant or the
Shares.

 

11.                                 Mutilation or Loss of
Warrant.  Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction)
receipt of reasonably satisfactory indemnification, and (in the case of
mutilation) upon surrender and cancellation of this Warrant, the Company will
execute and deliver a new Warrant of like tenor and date and any such lost,
stolen, destroyed or mutilated Warrant shall thereupon become void.

 

12.                                 Taxes.  The Company shall not be required to pay any
tax or taxes attributable to the issuance of this Warrant or of the Warrant
Shares.

 

13.                                 No Limitation on Corporate
Action; No Impairment.

 

13.1                           No provision of this Warrant
and no right or option granted or conferred hereunder shall in any way limit,
affect or abridge the exercise by the Company of any of its corporate rights or
powers to recapitalize, amend its certificate of incorporation, reorganize,
consolidate or merge with or into another entity, or to transfer, all or any
part of its property or assets, or the exercise or any other of its corporate
rights and powers.

 

13.2                           The Company will not, by
amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed by the Company under this
Warrant, but will at all times in good faith assist in the carrying out of all
of the provisions of this Warrant and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the Holder under
this Warrant against impairment.

 

14.                                 Restricted Securities.  This Warrant has not been registered under
the Act, or qualified under applicable state securities laws and has been
issued to the Holder for investment and not with a view to the distribution of
either the Warrant or the Shares. 
Neither this Warrant nor any of the Shares or any other security issued
or issuable upon exercise of this Warrant may be sold, transferred, pledged or
hypothecated in the absence of an effective registration statement under the
Act and qualification under applicable state securities laws relating to such
security or an available exemption from registration and qualification.  Each certificate for the Shares and any other
security issued or issuable upon exercise of this Warrant shall contain a
legend on the face thereof, in form and substance satisfactory to counsel for
the Company, setting forth the restrictions on transfer contained in this
Section.

 

6

 

15.                                 Notices.  All notices, requests, demands and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given (i) upon receipt, if delivered personally,
(ii) upon confirmation of receipt, if given by electronic facsimile and (iii)
(A) on the third business day following mailing, if mailed from a United States
address to a United States address or (B) on the tenth business day following
mailing, if mailed internationally, and in either case, postage prepaid,
certified mail, return receipt requested, to the following address (or at such
other address for a party as shall be specified by like notice):

 

(i)                                     if to the Company,
to:

 

Innovative Micro Technology, Inc.

75 Robin Hill Rd.

Santa Barbara, CA  93117

Facsimile:  805-967-2677

Attention:  John Foster, President

 

With a copy (which shall not constitute
notice) to:

 

Sheppard, Mullin, Richter & Hampton LLP

333 S. Hope Street, 48th Floor Los Angeles, CA  90017

Facsimile:  (213) 620-1398

Attention:  James J. Slaby, Esq.

 

(ii)                                  if to the Holder, to:

 

Investor Group L.P.

National
Westminster House

Le Truchot,
St. Peter Port

GY1 4PW,
Guernsey

Channel
Islands

Tel.: +44
1481 732 615

Facsimile:
+44 1481 732 616

Attention:  Wayne Tallowin

 

With a copy (which shall not constitute notice) to:

 

Benjamin B. Quinones

Pillsbury Winthrop LLP

2475 Hanover Street

Palo Alto, CA  94304-1114

Facsimile:  (650) 233-4545

 

16.                                 Supplements and Amendments;
Whole Agreement.  This Warrant
may be amended or supplemented only by an instrument in writing signed by the
Company and the Holder.  This Warrant
contains the full understanding of the Company and the Holder with

 

7

 

respect to the subject
matter hereof and thereof and there are no representations, warranties,
agreements or understandings other than expressly contained herein and therein.

 

17.                                 Governing Law.  This Warrant shall be deemed to be a contract
made under the laws of the State of California and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State, without
regard to its conflicts of laws rules.

 

18.                                 Descriptive Headings.  Descriptive headings of the several Sections
of this Warrant are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.

 

19.                                 No Fractional Shares.  No fractional Shares shall be issued upon
exercise of this Warrant.  In lieu of any
fractional Shares to which the Holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by the Warrant
Price.

 

20.                                 Waivers Strictly Construed.  With regard to any power, remedy or right
provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly contained in a
writing signed by the waiving party; and (ii) no alteration, modification
or impairment shall be implied by reason of any previous waiver, extension of
time, delay or omission in exercise, or other indulgence.

 

21.                                 Severability.  The validity, legality or enforceability of
the remainder of this Warrant shall not be affected even if one or more of its
provisions shall be held to be invalid, illegal or unenforceable in any
respect.

 

[Signature Page Follows]

 

8

 

IN WITNESS WHEREOF, the
Company has caused this Warrant to be signed by its duly authorized officer, as
of January 25, 2005.

 

	
   

  	
  INNOVATIVE MICRO TECHNOLOGY, INC. 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ John Foster

  	
   

  
	
   

  	
   

  	
  John Foster 

  
	
   

  	
   

  	
  President

  

 

9

 

EXHIBIT
A

 

Form of Performance Report

 

Innovative Micro Technology, Inc.

Performance
Report

 

	
   

  	
   

  	
  Calendar

  Year

  2005

  	
   

  
	
  Contract
  Activity

  	
   

  	
  $

  	
   

  	
   

  
	
  Incurred
  Costs

  	
   

  	
   

  	
   

  
	
  Gross Profit

  	
   

  	
  $

  	
   

  	
   

  
	
  %GM

  	
   

  	
  %   .

  	
   

  
	
  R&D

  	
   

  	
  $

  	
   

  	
   

  
	
  S,G&A

  	
   

  	
   

  	
   

  
	
  Profit
  Sharing

  	
   

  	
   

  	
   

  
	
  Interest
  income

  	
   

  	
   

  	
   

  
	
  Interest
  expense

  	
   

  	
   

  	
   

  
	
  Other income
  (expense)

  	
   

  	
   

  	
   

  
	
  taxes

  	
   

  	
   

  	
   

  
	
  Net Income
  (Loss)

  	
   

  	
  $

  	
   

  	
   

  

 

10

 

EXHIBIT
B

 

Performance Targets

 

The “Performance Targets”
shall be as follows

 

	
  Contract
  Activity:

  	
   

  	
  $

  	
  19,814,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gross
  Profit:

  	
   

  	
  $

  	
  3,960,000

  	
   

  

 

Calculation of Shares Purchasable Pursuant to Warrant 

 

This Warrant shall be
exercisable for up to the number of Shares set forth below, based on the
information provided in the Performance Report, subject to adjustment as provided
in Section 4 of the Warrant.

 

	
  Performance, Calendar Year 2005

  	
   

  	
  Total Shares

  	
   

  
	
  Contract Activity

  	
   

  	
  Gross Profit

  	
   

  	
  Purchasable

  	
   

  
	
  0 -
  $17,481,999.99

  	
   

  	
  N/A

  	
   

  	
  70,588

  	
   

  
	
  $17,482,000
  - $19,813,999.99

  	
   

  	
  0 - $3,499,999

  	
   

  	
  70,588

  	
   

  
	
   

  	
   

  	
  $3,500,000 or more

  	
   

  	
  35,294

  	
   

  
	
  $19,814,000
  or more

  	
   

  	
  0-$3,959,999

  	
   

  	
  35,294

  	
   

  
	
   

  	
   

  	
  $3,960,000 or more

  	
   

  	
  0

  	
   

  

 

11

 

EXHIBIT
C

 

FORM OF NOTICE OF EXERCISE
OF WARRANT

 

The “Holder” designated
below, subject to the conditions set forth in that certain Warrant to Purchase
Common stock of Innovative Micro Technology, Inc. (the “Company”), dated as of January 25,
2005 (the “Warrant”), hereby elects to exercise the right, represented by the
Warrant, to purchase shares of the Common Stock of the Company  and tenders herewith payment as follows:

 

AGGREGATE WARRANT
PRICE:  $____________________ (Payment
shall be made by wire transfer in accordance with the wire transfer
instructions attached to the Warrant as Exhibit A.)

 

	
  Please deliver the stock
  certificate to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
				

 

The Holder hereby represents
and warrants to the Company as follows:

 

•                                          The Holder has
sufficient knowledge and experience in financial and business matters that it
is capable of evaluating the merits and risks of its prospective investment in
the shares of Common Stock of the Company.

 

•                                          The Holder
understands that it is purchasing the shares of Common Stock of the Company
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Act”) and without registration under the Act or
any state securities or Blue Sky laws.

 

•                                          The Holder is
an “accredited investor” as defined in Rule 501(a) of Regulation D under
the Act.

 

	
  Dated:

  	
   

  	
  , 

  	
  200

  	
   

  	
   

  
	
   

  
	
  “Holder”

  
	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
								

 

12

 

EXHIBIT
D

 

WIRE
INSTRUCTIONS

 

On the exercise of the
Warrant the aggregate Warrant Price shall be paid to the Company by wire
transfer to the following address:

 

13

 

THIS WARRANT AND THE
SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER
THE ACT, SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO AND ALL APPLICABLE
QUALIFICATIONS UNDER STATE SECURITIES LAWS SHALL HAVE BEEN OBTAINED WITH
RESPECT THERETO; (ii) A WRITTEN OPINION FROM COUNSEL FOR THE HOLDER
REASONABLY SATISFACTORY TO THE ISSUER HAS BEEN OBTAINED STATING THAT NO SUCH
REGISTRATION OR QUALIFICATION IS REQUIRED; OR (iii) SOLD PURSUANT TO RULE 144
UNDER SUCH ACT.

 

WARRANT TO PURCHASE COMMON STOCK OF

INNOVATIVE MICRO TECHNOLOGY, INC.

 

For good and valuable
consideration, the receipt of which is hereby acknowledged, Innovative Micro
Technology, Inc., a Delaware corporation (the “Company”), hereby grants to BAVP
VII, L.P., a limited partnership, its successors and assigns (collectively, the
“Holder”), an irrevocable warrant (the “Warrant”) to purchase, subject to the
satisfaction of the conditions set forth in Section 1 below and subject to
the other terms hereof, the number of shares of Common Stock, par value $0.0001
per share, of the Company (the “Shares”), if any, determined in accordance with
Section I hereto, at the Warrant Price, as defined below, at any time
beginning on March 15, 2006 (the “Determination Date”) and ending on
January 24, 2008 (the “Expiration Date” and such period beginning on the
Determination Date and ending on the Expiration Date, the “Exercise Period”).

 

1.                                       Conditions to Exercise;
Number of Shares; Early Termination.  On or before March 15, 2006, the Company
shall deliver to the Holder a report in the form of Exhibit A
hereto (the “Performance Report”) setting forth the Company’s total Contract
Activity (as defined below) and gross profit for calendar year 2005.  If the Company’s performance described in the
Performance Report does not satisfy the Target Amounts set forth on Exhibit B
hereto, then this Warrant shall then become exercisable for the lesser of one
hundred seventy-six thousand, four hundred seventy-one (176,471) shares of
Common Stock and the number of shares of Common Stock calculated as purchasable
pursuant to Exhibit B hereto, subject to adjustment as provided
below.  For purposes of this Warrant,
“Contract Activity” shall mean total revenue, as adjusted by work-in-process
inventory, for the period measured.  For
purposes of this Warrant, the terms “revenue” and “work-in-process inventory”
shall have the meanings ascribed to them under U.S. Generally Accepted
Accounting Principles (“GAAP”).  “Gross
profit” shall have the same meaning as that used in the budgets of the Company
provided heretofore to the Investors, in which “gross profit” means gross profit,
within the meaning of GAAP, before any deduction for profit sharing.  If, on the Determination Date, the number of
Shares purchasable is zero (0), this Warrant shall terminate and be of no
further force or effect.

 

1

 

2.                                       Exercise; Issuance of
Certificates; Payment for Shares.

 

This Warrant may be
exercised by the Holder, in whole or in part, and on one or more occasions, by
written notice to the Company, in the form attached as Exhibit C hereto
(the “Notice”), at any time within the Exercise Period and by payment to the
Company by wire transfer (in accordance with the wire transfer instructions
attached hereto as Exhibit D) of the aggregate Warrant Price for the
number of Shares designated by the Holder (but not more than the number of
Shares for which this Warrant then remains subject and unexercised).  Consideration received by the Company under a
broker-assisted sale and remittance program acceptable to the Company may also
be used to exercise this Warrant. 
Certificates for the Shares so purchased will be delivered to the Holder
within a reasonable time, not exceeding fifteen (15) business days, after
this Warrant has been exercised, and, unless this Warrant has expired, it will
continue in effect with respect to the number of Shares, if any, as to which it
has not then been exercised and which remain covered by this Warrant as herein
provided.  Each exercise of this Warrant
shall be deemed to have been effected immediately prior to the close of business
on the business day on which the Notice is given to the Company.  At such time, the person or persons in whose
name or names any certificate for the Shares shall be issuable upon such
exercise shall be deemed to have become the holder or holders of record of the
Shares represented by such certificate or certificates, and to be entitled to
all rights of a Stockholder with respect to such Shares, including without
limitation voting rights.

 

3.                                       Shares to be Fully Paid;
Reservation of Shares.  The
Company covenants and agrees as follows:

 

3.1                                 All shares issued upon the
exercise of this Warrant will, upon issuance, be fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issuance
thereof.

 

3.2                                 During the period within which
this Warrant may be exercised, the Company will at all times have authorized
and reserved for the purpose of issuance or transfer upon exercise of this
Warrant a sufficient number of Shares to provide for the exercise of this
Warrant.

 

3.3                                 The Company will take all
actions necessary to assure that the Shares issuable upon the exercise of this
Warrant may be so issued without violation of any applicable law or regulation,
or of any requirements of any securities exchange upon which the shares of the
Company may then be listed.

 

4.                                       Warrant Price.

 

4.1                                 Initial Warrant Price;
Subsequent Adjustment of Price and Number of Purchasable Shares.  The initial Warrant Price (“Initial Warrant
Price”) will be $0.30 per Share, and will be adjusted from time to time as provided
below.  The Initial Warrant Price or, if
such price has been adjusted, the price per Share as last adjusted pursuant to
the terms hereof, is referred to as the “Warrant Price” herein.

 

4.2                                 Subdivision or Combination
of Shares.  If the
Company at any time while this Warrant, or any portion hereof, remains
outstanding and unexpired shall split, subdivide or

 

2

 

combine the securities as to
which purchase rights under this Warrant exist, into a different number of
securities of the same class, the number of Shares for which this Warrant may
be exercised shall be adjusted to represent the aggregate number of securities
that, if this Warrant had been exercised immediately prior to such event, the
Holder would have owned upon such dividend, distribution, subdivision,
combination or reclassification, and the Warrant Price for such securities
shall be proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination.

 

4.3                                 Reclassification.  If the Company, at any time while this
Warrant, or any portion hereof, remains outstanding and unexpired, by
reclassification of securities or otherwise shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant
shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with
respect to the securities that were subject to the purchase rights under this
Warrant immediately prior to such reclassification or other change and the
Warrant Price therefor shall be appropriately adjusted.

 

4.4                                 Adjustments for Dividends in
Stock or Other Securities or Property.  If while this Warrant, or any portion hereof,
remains outstanding and unexpired holders of the securities as to which
purchase rights under this Warrant exist at the time shall have received, or,
on or after the record date fixed for the determination of eligible
stockholders, shall have become entitled to receive, without payment therefor,
other or additional stock or other securities or property (other than cash) of
the Company by way of dividend, then and in each case, this Warrant shall
represent the right to acquire, in addition to the number of shares of the
security receivable upon exercise of this Warrant, and without payment of any
additional consideration therefor, the amount of such other or additional stock
or other securities or property (other than cash) of the Company that the
Holder would hold on the date of such exercise had it been holder of record of
the security receivable upon exercise of this Warrant on the date hereof and
had thereafter, during the period from the date hereof to and including the
date of such exercise, retained such shares and/or all other additional
securities available to it as aforesaid during such period, giving effect to
all adjustments called for during such period.

 

4.5                                 Reorganization,
Reclassification, Consolidation, Merger or Sale.  If, while this Warrant, or any portion
hereof, remains outstanding and unexpired, any capital reorganization or
reclassification of the stock of the Company, or any consolidation or merger of
the Company with another corporation or entity, or the sale of all or
substantially all of the Company’s assets to another corporation will be
effected in such a way that holders of the securities for which this Warrant is
exercisable will be entitled to receive shares, securities or assets with
respect to or in exchange for such securities, then, upon exercise of this
Warrant, the Holder will thereafter have the right to receive such shares,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding securities equal to the number of securities
purchasable and receivable upon the exercise of this Warrant immediately prior
to such event.  If a purchase, tender or
exchange offer is made to and accepted by holders of more than 50% of the
outstanding capital stock of the Company (on an as-converted to Common Stock
basis), the Company will not effect any consolidation, merger or sale with the
Person, as defined below, making such offer or with any Affiliate, as defined
below, of such Person, unless, before the consummation of such consolidation,
merger or sale, the Holder of this

 

3

 

Warrant is given at least
ten (10) business days’ notice prior to the scheduled closing date (the “Closing
Date”) of such transaction (which notice shall specify the material terms of
such transaction and the proposed Closing Date).  In the event the Holder elects to exercise
this Warrant or any portion thereof following such notice and such consolidation,
merger or sale is not consummated within ten (10) days of the proposed
Closing Date (or any subsequent proposed Closing Date), then the Holder may
rescind its exercise of this Warrant by providing written notice thereof
to the Company, the Company shall take all actions consistent therewith
(including without limitation the immediate return of the Warrant Price paid
with respect to such rescinded exercise) and this Warrant shall continue in
full force and effect.  As used in this
paragraph, the term “Person” includes an individual, a partnership, a
corporation, a trust, a joint venture, a limited liability company, an
unincorporated organization and a government or any department or agency
thereof, and an “Affiliate” of a Person means any Person directly or indirectly
controlling, controlled by or under direct or indirect common control with,
such other Person.  A Person will be
deemed to control a corporation or other business entity if such Person
possesses, directly or indirectly, the power to direct or cause the direction
of the management and policies of such corporation, whether through the
ownership of voting securities, by contract or otherwise.

 

4.6                                 Notice of Adjustment.  Upon any adjustment of the number of Shares
and/or the Warrant Price, the Company will give written notice thereof, by
first-class mail, postage prepaid, addressed to the Holder at the Holder’s
address as shown on the books of the Company, which notice will state
(i) the Warrant Price resulting from such adjustment and the increase or
decrease, if any, in the number of Shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based, and
(ii) whether, after giving effect to such adjustment, the maximum number
of Shares issuable upon the exercise of this Warrant will constitute more than
5% of the total number of the then issued and outstanding Shares (including in
such total number the maximum number of Shares issuable upon the exercise of
this Warrant).

 

4.7                                 Other Notices.  If at any time:

 

4.7.1                        the Company
declares a cash dividend on its Common Stock payable at a rate in excess of the
rate of the last cash dividend theretofore paid;

 

4.7.2                        the Company
declares a dividend on its Common Stock payable in securities or pays a special
dividend or other distribution (other than regular cash dividends) to holders
of its Shares;

 

4.7.3                        the Company
offers for subscription to holders of any of its Common Stock additional shares
of any class or other rights;

 

4.7.4                        there is a
reorganization, reclassification, consolidation or merger of the Company with,
or sale of all or substantially all of its assets to, another corporation or
other entity; or

 

4.7.5                        there is a
voluntary or involuntary dissolution, liquidation or winding up of the Company;

 

4

 

then the Company will give,
as provided in paragraph 15 below, to the Holder’s address as shown on the
books of the Company, (i) at least ten (10) business days’ prior
written notice of the date on which the books of the Company will close or
a record will be taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, and
(ii) in the case of such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, at least ten (10)
business days’ prior written notice of the date when the same will take
place.  Any notice required by
clause (i) will also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the Holder will be
entitled thereto, and any notice required by (ii) will also specify the
anticipated date on which the Holder will be entitled to exchange its Shares
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.

 

5.                                       Listing.  If any Shares required to be reserved for the
purpose of issuance upon the exercise of this Warrant require registration with
or approval of any governmental authority under any federal or state law (other
than the filing of a Registration Statement under the Securities Act of 1933,
as then in effect (the “Securities Act”), or any similar law then in effect),
or listing on any securities exchange, before such Shares may be issued upon
such exercise, the Company will, at its expense and as expeditiously as
possible, use its commercially reasonable efforts to cause such Shares to be
duly registered or approved or listed on the relevant securities exchange, as
the case may be.

 

6.                                       Closing of Books.  The Company will at no time close its
transfer books against the transfer of this Warrant or of any Shares issued or
issuable upon the exercise of this Warrant in any manner which interferes with
the timely exercise of this Warrant.

 

7.                                       Definition of Common Stock.  As used in this Warrant the term “Common
Stock” includes the Company’s authorized Common Stock, par value $0.0001 per
share, as constituted on the date hereof and also includes any shares of any
class of stock or other equity securities of the Company thereafter authorized
which will not be limited to a fixed sum or percentage of par value in respect
of the rights of holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company.

 

8.                                       Definition of Shares.  Except as provided in paragraph 4.5, the
Shares purchasable pursuant to this Warrant will include only Shares designated
as “common stock” of the Company or, in the case of any reclassification of the
outstanding Shares, the Shares, securities or assets provided for in
paragraph 4.5.

 

9.                                       No Voting Rights.  This Warrant will not entitle the Holder to
any voting rights or other rights as a stockholder of the Company.

 

10.                                 Warrant Transferable.  This Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder, by written
notice to the Company at the address referred to in paragraph 15 below by
the Holder, in person or by duly authorized attorney; provided that either
(i) a written opinion of counsel for the Holder reasonably satisfactory to
the Company has been obtained stating that such transfer will not violate the
registration

 

5

 

requirements of the
Securities Act or any applicable state securities laws, and (ii) the transferee
has delivered to the Company a written agreement to be bound by the terms and
conditions hereof.  The Holder agrees
that after such notice, the Holder may be treated by the Company and all other
persons dealing with this Warrant as the absolute owner hereof for any purpose
and as the person entitled to exercise the rights represented by this Warrant,
or to further assign this Warrant, any notice to the contrary notwithstanding;
but until receipt of any such notice of assignment, the Company may treat the
Holder as shown on its records as the owner for all purposes.  Nothing in this paragraph 10 shall be
deemed to limit the effect of any agreement among the Holder, the Company and
other security holders of the Company restricting the transfer of this Warrant
or the Shares.

 

11.                                 Mutilation or Loss of
Warrant.  Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction)
receipt of reasonably satisfactory indemnification, and (in the case of
mutilation) upon surrender and cancellation of this Warrant, the Company will
execute and deliver a new Warrant of like tenor and date and any such lost,
stolen, destroyed or mutilated Warrant shall thereupon become void.

 

12.                                 Taxes.  The Company shall not be required to pay any
tax or taxes attributable to the issuance of this Warrant or of the Warrant
Shares.

 

13.                                 No Limitation on Corporate
Action; No Impairment.

 

13.1                           No provision of this Warrant
and no right or option granted or conferred hereunder shall in any way limit,
affect or abridge the exercise by the Company of any of its corporate rights or
powers to recapitalize, amend its certificate of incorporation, reorganize,
consolidate or merge with or into another entity, or to transfer, all or any
part of its property or assets, or the exercise or any other of its corporate
rights and powers.

 

13.2                           The Company will not, by
amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed by the Company
under this Warrant, but will at all times in good faith assist in the carrying
out of all of the provisions of this Warrant and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holder under this Warrant against impairment.

 

14.                                 Restricted Securities.  This Warrant has not been registered under
the Act, or qualified under applicable state securities laws and has been
issued to the Holder for investment and not with a view to the distribution of
either the Warrant or the Shares. 
Neither this Warrant nor any of the Shares or any other security issued
or issuable upon exercise of this Warrant may be sold, transferred, pledged or
hypothecated in the absence of an effective registration statement under the
Act and qualification under applicable state securities laws relating to such
security or an available exemption from registration and qualification.  Each certificate for the Shares and any other
security issued or issuable upon exercise of this Warrant shall contain a
legend on the face thereof, in form and substance satisfactory to counsel for
the Company, setting forth the restrictions on transfer contained in this
Section.

 

6

 

15.                                 Notices.  All notices, requests, demands and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given (i) upon receipt, if delivered
personally, (ii) upon confirmation of receipt, if given by electronic facsimile
and (iii) (A) on the third business day following mailing, if mailed from a
United States address to a United States address or (B) on the tenth business
day following mailing, if mailed internationally, and in either case, postage prepaid,
certified mail, return receipt requested, to the following address (or at such
other address for a party as shall be specified by like notice):

 

(i)                                     if to the Company,
to:

 

Innovative Micro Technology, Inc.

75 Robin Hill Rd.

Santa Barbara, CA  93117

Facsimile:  805-967-2677

Attention:  John Foster, President

 

With a copy (which shall not constitute
notice) to:

 

Sheppard, Mullin, Richter & Hampton LLP

333 S. Hope Street, 48th Floor Los Angeles, CA 
90017

Facsimile:  (213) 620-1398

Attention:  James J. Slaby, Esq.

 

(ii)                                  if to the Holder, to:

 

BAVP VII, L.P.

950 Tower Lane, Suite 700

Foster City, CA. 94404

Facsimile: 
                      

Attention: 
                      

 

16.                                 Supplements and Amendments;
Whole Agreement.  This
Warrant may be amended or supplemented only by an instrument in writing signed
by the Company and the Holder.  This
Warrant contains the full understanding of the Company and the Holder with
respect to the subject matter hereof and thereof and there are no
representations, warranties, agreements or understandings other than expressly
contained herein and therein.

 

17.                                 Governing Law.  This Warrant shall be deemed to be a contract
made under the laws of the State of California and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State, without
regard to its conflicts of laws rules.

 

18.                                 Descriptive Headings.  Descriptive headings of the several Sections
of this Warrant are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.

 

7

 

19.                                 No Fractional Shares.  No fractional Shares shall be issued upon
exercise of this Warrant.  In lieu of any
fractional Shares to which the Holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by the Warrant
Price.

 

20.                                 Waivers Strictly Construed.  With regard to any power, remedy or right
provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly contained in a
writing signed by the waiving party; and (ii) no alteration, modification
or impairment shall be implied by reason of any previous waiver, extension of
time, delay or omission in exercise, or other indulgence.

 

21.                                 Severability.  The validity, legality or enforceability of
the remainder of this Warrant shall not be affected even if one or more of its
provisions shall be held to be invalid, illegal or unenforceable in any
respect.

 

[Signature Page Follows]

 

8

 

IN WITNESS WHEREOF, the
Company has caused this Warrant to be signed by its duly authorized officer, as
of January 25, 2005.

 

	
   

  	
  INNOVATIVE MICRO TECHNOLOGY, INC. 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ John Foster

  	
   

  
	
   

  	
   

  	
  John Foster 

  
	
   

  	
   

  	
  President

  

 

9

 

EXHIBIT
A

 

Form of Performance Report

 

Innovative Micro Technology, Inc.

Performance
Report

 

	
   

  	
   

  	
  Calendar

  Year

  2005

  	
   

  
	
  Contract
  Activity

  	
   

  	
  $

  	
   

  	
   

  
	
  Incurred
  Costs

  	
   

  	
   

  	
   

  
	
  Gross Profit

  	
   

  	
  $

  	
   

  	
   

  
	
  %GM

  	
   

  	
  %   .

  	
   

  
	
  R&D

  	
   

  	
  $

  	
   

  	
   

  
	
  S,G&A

  	
   

  	
   

  	
   

  
	
  Profit
  Sharing

  	
   

  	
   

  	
   

  
	
  Interest
  income

  	
   

  	
   

  	
   

  
	
  Interest
  expense

  	
   

  	
   

  	
   

  
	
  Other income
  (expense)

  	
   

  	
   

  	
   

  
	
  taxes

  	
   

  	
   

  	
   

  
	
  Net Income
  (Loss)

  	
   

  	
  $

  	
   

  	
   

  

 

10

 

EXHIBIT
B

 

Performance Targets

 

The “Performance Targets”
shall be as follows

 

	
  Contract
  Activity:

  	
   

  	
  $

  	
  19,814,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gross
  Profit:

  	
   

  	
  $

  	
  3,960,000

  	
   

  

 

Calculation of Shares Purchasable Pursuant to Warrant 

 

This Warrant shall be
exercisable for up to the number of Shares set forth below, based on the
information provided in the Performance Report, subject to adjustment as
provided in Section 4 of the Warrant. 

 

	
  Performance, Calendar Year 2005

  	
   

  	
  Total Shares

  	
   

  
	
  Contract Activity

  	
   

  	
  Gross Profit

  	
   

  	
  Purchasable

  	
   

  
	
  0 -
  $17,481,999.99

  	
   

  	
  N/A

  	
   

  	
  176,471

  	
   

  
	
  $17,482,000
  - $19,813,999.99

  	
   

  	
  0 - $3,499,999

  	
   

  	
  176,471

  	
   

  
	
   

  	
   

  	
  $3,500,000 or more

  	
   

  	
  88,235

  	
   

  
	
  $19,814,000
  or more

  	
   

  	
  0-$3,959,999

  	
   

  	
  88,235

  	
   

  
	
   

  	
   

  	
  $3,960,000 or more

  	
   

  	
  0

  	
   

  

 

 

B-1

 

EXHIBIT
C

 

FORM OF NOTICE OF EXERCISE
OF WARRANT

 

The “Holder” designated
below, subject to the conditions set forth in that certain Warrant to Purchase
Common stock of Innovative Micro Technology, Inc. (the “Company”), dated as of
January 25, 2005 (the “Warrant”), hereby elects to exercise the right,
represented by the Warrant, to purchase shares of the Common Stock of the
Company  and tenders herewith payment as
follows:

 

AGGREGATE WARRANT
PRICE:  $________________________
(Payment shall be made by wire transfer in accordance with the wire transfer
instructions attached to the Warrant as Exhibit A.)

 

	
  Please deliver the stock
  certificate to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
				

 

The Holder hereby represents
and warrants to the Company as follows:

 

•                                          The Holder has
sufficient knowledge and experience in financial and business matters that it
is capable of evaluating the merits and risks of its prospective investment in
the shares of Common Stock of the Company.

 

•                                          The Holder
understands that it is purchasing the shares of Common Stock of the Company
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Act”) and without registration under the Act or
any state securities or Blue Sky laws.

 

•                                          The Holder is
an “accredited investor” as defined in Rule 501(a) of Regulation D under
the Act.

 

	
  Dated:

  	
   

  	
  , 

  	
  200

  	
   

  	
   

  
	
   

  
	
  “Holder”

  
	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
								

 

C-1

 

EXHIBIT
D

 

WIRE
INSTRUCTIONS

 

On the exercise of the
Warrant the aggregate Warrant Price shall be paid to the Company by wire
transfer to the following address:

 

D-1

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00077-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00077-of-00352.parquet"}]]