Memorandum of
Understanding
for Settlement and Debt
Conversion Agreement
This Memorandum of
Understanding (“ Agreement ”) is entered
into by and among Irvine Sensors Corporation (the “
Company ”), Optex Systems, Inc. (“
Optex- Texas ”) and Longview Fund, LP and Alpha
Capital Anstalt (collectively, “Lenders
”) as of September 19, 2008.
1. Global
Settlement . The
Parties are entering into this Agreement to effect a global
settlement and restructuring of the Obligations (as described
below), with the intent that a portion of the Obligations shall be
extinguished by the Lenders as a result of a public foreclosure
sale of the assets of Optex-Texas at which the Lenders shall make
an agreed minimum credit bid as set forth in Section 4.3 below
and the remaining portion of the Obligations shall be converted
into a new class of convertible preferred stock (“
Convertible Preferred Stock ”) of the Company
as set forth in Section 5 below as soon as the Company is
permitted to issue such securities in compliance with the listing
requirements of Nasdaq. The Convertible Preferred Stock shall be
substantially the same as the Company’s Series A-1,
except that the conversion rate shall be as set forth in
Section 5.2 below. The parties intend that this Agreement be
legally binding, but that the parties shall promptly negotiate in
good faith a definitive Settlement and Debt Conversion Agreement
(“ Settlement Agreement ”) that will
supersede this Agreement. The Parties intend to execute the
Settlement Agreement on or before September 26,
2008.
2.1 The
Obligation Amount and Security. The total of the principal,
interest and related amounts owed by the Company to the Lenders as
of August 24, 2008, is $18,357,844 (collectively, the “
Obligations ”). The Obligations do not include
the contingent notes payable to Lenders in the original principal
amount of $1.15 million, which notes will be cancelled in
accordance with their terms upon discharge of the Obligations as
set forth herein. The Company acknowledges that the amount of the
Obligations shall be increased to include all interest after
August 24, 2008. The amount of accrued interest only shall
increase the Obligations and shall be added to the Second
Conversion Amount (as defined below). The Obligations including any
accrued interest thereon have been guaranteed by Optex-Texas (the
“ Optex-Texas Guaranty ”), and the
Optex-Texas Guaranty is secured by the assets of Optex-Texas as
described below. As used herein the term “ Loan
Documents ” shall include all the existing loan
documents evidencing or relating to the Obligations, any security
agreement relating thereto, or any guaranty thereof
.
2.2
Surviving Obligations . The Company acknowledges
that the Obligations do not include (i) any amounts currently
owed to the Lenders pursuant to the Loan Documents arising under
the Company’s indemnification obligations under the Loan
Documents, or (ii) any amounts for expenses, including
attorneys fees, incurred or to be incurred by the Lenders in
connection with this MOU or the implementation of any of the
restructuring transactions or enforcement actions contemplated
hereby. Any liabilities of the Company to the Lenders for expense
reimbursement or indemnification shall be accrued as an expense on
the Company’s balance sheet and paid pursuant to terms to be
agreed upon in the Settlement Agreement. The Company further
acknowledges that it has a continuing obligation and
duty to indemnify, hold harmless and defend the Lenders
and to pay any amounts or liability incurred by
Lenders as provided in the existing indemnification
provisions in the Loan Documents which shall survive this
Agreement, including, but not limited to, any indemnification
obligations related to the duty to defend any litigation or other
matters involving Timothy Looney or TWL Group L.P. Notwithstanding
the foregoing upon, the completion of the conversion into the
Convertible Preferred Stock of the Second Conversion Amount, the
indemnification obligations under the Loan Documents shall be
discharged and
replaced with
comparable indemnification obligations in the Settlement Agreement,
which shall be retroactive to include the dates covered by the
indemnification obligations in the Loan Documents.
3. Events
of Defaults and Forbearance .
3.1 Events
of Default . The Company may be in default under certain of
the covenants and provisions of the Loan Documents, pursuant to
which the Lenders may have the right to accelerate its Obligations
under the Loan Documents . The Lenders intend to deliver to
the Company and Optex-Texas a notice of the occurrence of an event
of default and acceleration under the Loan Documents and the notice
of the exercise of remedies described in Section 4.3
below.
3.2
Forbearance . The Lenders hereby agree from and after
the date of execution of this Agreement until the conversion into
equity of the Second Conversion Amount to forbear in the exercise
of any rights or remedies, whether granted in the Loan Documents or
under law, with respect to the Company or any of its assets (the
“ Forbearance Period ”), other than the
exercise of the Permitted Remedies. As used herein, the “
Permitted Remedies ” shall be limited solely to
(i) the exercise of the Lenders rights and remedies under
applicable law to conduct a public foreclosure sale as to all
collateral securing the Optex-Texas Guaranty pursuant to the terms
of Section 4.5 below and (ii) to enforce the terms of
this Agreement and (iii) to obtain the benefits of the
continuing indemnification obligations of the Company to Lenders as
described in Section 2.2. The Forbearance Period shall
terminate automatically upon the occurrence of any of the following
events: (i) the commencement by the Company or Optex-Texas of
a voluntary proceeding seeking relief with respect to itself or its
debts under any bankruptcy, insolvency or similar law, or seeking
appointment of a trustee, receiver, liquidator or other similar
official for it or any substantial part of its assets; or its
consent to any of the foregoing in any involuntary proceeding
against it; or makes an assignment for the benefit of, or the
offering to or entering into by. the Company or Optex-Texas of any
reorganization with its creditors, (ii) commencement of an
involuntary proceeding against the Company or Optex-Texas of the
kind described in clause (i) above; (iii) the Company or
Optex-Texas makes any payment on account of the obligations owed to
Looney on TWL Group, L.P., (iv) Looney or TWL Group, L.P. take
any judicial actions to impede the foreclosure against the Optex
Texas Collateral described in Section 4.3 below, or
(v) 180 days after the date hereof
.
4 .
Foreclosure on Assets of Optex-Texas .
4.1 Senior
Security Interest . The Optex-Texas Guaranty is secured by
a first priority, perfected security interest in the assets of
Optex-Texas (“ Optex-Texas Collateral ”),
which is senior to the claims of other creditors, including the TWL
Group, L.P. loan of $2,000,000 (the “TWL Loan
”), which has been subordinated to the Obligations pursuant
to a Subordination Agreement dated as of January 17, 2007 and
for which a payment blockage notice has been sent by the
Lenders.
4.2
Limitations on Use of Optex-Texas Collateral . Pursuant
to the terms of the Loan Documents, the Lenders have the right to
seize or obtain control of, and to use, operate, consume and sell
the Optex-Texas Collateral in its possession as appropriate. During
the Forbearance Period and pending the exercise of the remedies
described in Section 4.3 belo
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