Exhibit 10.8
NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH
THIS NOTE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE
IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE
WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS AS EVIDENCED
BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.
NOTWITHSTANDING THE FOREGOING, THIS NOTE AND THE SECURITIES
ISSUABLE UPON CONVERSION OF THIS NOTE MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH
SECURITIES.
THIS SENIOR SUBORDINATED SECURED CONVERTIBLE
NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY ARE SUBORDINATED IN
RIGHT OF PAYMENT TO THE EXTENT AND IN THE MANNER SET FORTH IN THAT
CERTAIN SUBORDINATION AGREEMENT DATED AS OF DECEMBER 30, 2005
BY AND AMONG SQUARE 1 BANK, PEQUOT PRIVATE EQUITY FUND III, L.P.
AND PEQUOT OFFSHORE PRIVATE EQUITY PARTNERS III, L.P., TO THE PRIOR
PAYMENT IN FULL OF ALL SENIOR DEBT (AS DEFINED THEREIN).
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No. [NOTE NO.]
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$[PRINCIPAL AMOUNT]
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Date: December 30, 2005
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IRVINE SENSORS
CORPORATION
SERIES 2 SENIOR SUBORDINATED
SECURED CONVERTIBLE NOTE DUE
December 30,
2007
THIS NOTE is one of a series of duly
authorized and issued senior secured promissory notes of Irvine
Sensors Corporation, a Delaware corporation (the “
Company ”), designated as its Series 2 Senior
Subordinated Secured Convertible Notes due December 30, 2007,
in the aggregate principal amount of $2,554,507.00 (collectively,
the “ Series 2 Notes ”).
FOR VALUE RECEIVED, the Company
promises to pay to the order of [HOLDER] or its registered assigns
(the “ Holder ”), the principal sum of
[PRINCIPAL AMOUNT] Dollars $([PRINCIPAL AMOUNT]), on
December 30, 2007 (the “ Maturity Date ”),
or such other date as the Notes are required or permitted to be
repaid as provided hereunder, and to pay interest to the Holder on
the then outstanding principal amount of this Note in accordance
with the provisions hereof. In addition, the Company shall pay to
the order of the Holder interest on any principal or interest
payable hereunder that is not paid in full when due, whether at the
time of any stated interest payment date or maturity or by
prepayment, acceleration or declaration or otherwise, for the
period from and including the due date of such payment to but
excluding the
date the same is paid in full, at a rate of
18% per annum (but in no event in excess of the maximum rate
permitted under applicable law).
Interest payable under this Note
shall be computed on the basis of a year of 360 days and actual
days elapsed (including the first day but excluding the last day)
occurring in the period for which interest is payable.
Payments of principal and interest
shall be made in lawful money of the United States of America to
the Holder at its address as provided in Section 12 or
by wire transfer to such account specified from time to time by the
Holder hereof for such purpose as provided in
Section 12 .
The Holder is entitled to the
benefits of the Security Agreements and the Guaranty.
1. Definitions . In addition
to the terms defined elsewhere in this Note, (a) capitalized
terms that are not otherwise defined herein have the meanings given
to such terms in the Securities Purchase Agreement, dated as of
December 30, 2005, among the Company and the Purchasers
identified therein (the “ Purchase Agreement ”),
and (b) the following terms have the meanings
indicated:
“ Conversion Date
” means the date a Conversion Notice is delivered to the
Company (as determined in accordance with the notice provisions
hereof) together with a Conversion Schedule pursuant to
Section 6(a) .
“ Conversion Notice
” means a written notice in the form attached hereto as
Schedule 1 .
“ Conversion Price
” means $2.60, subject to adjustment from time to time
pursuant to Section 10 .
“ Current Market Price
” means, on any calculation date, the arithmetic average of
the VWAPs for each of the 20 consecutive Trading Days immediately
preceding the applicable date.
“ Daily Trading Volume
” means on any given Trading Day the total volume of Common
Stock traded on an Eligible Market as reported by Bloomberg
L.P.
“ Equity Conditions
” means, with respect to Common Stock issuable pursuant to
the Transaction Documents (including, without limitation, upon
conversion or exercise in full of the Notes and Warrants), that
each of the following conditions is satisfied: (i) the number
of authorized but unissued and otherwise unreserved shares of
Common Stock is sufficient for such issuance; (ii) such shares
of Common Stock are registered for resale by the Holder and may be
sold by the Holder pursuant to an effective Registration Statement
covering the Underlying Shares or all such shares may be sold
without volume restrictions pursuant to Rule 144 under the
Securities Act or are eligible for sale under Rule 144(k) under the
Securities Act; (iii) the Common Stock is listed or quoted
(and is not suspended from trading) on an Eligible Market and such
shares of Common Stock are approved for listing upon issuance;
(iv) such issuance would be permitted in full without
violating Section 6(b) hereof or the rules or
regulations of any Trading Market; (v) no
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Event of Default nor any event or
circumstance that with the passage of time and without being cured
would constitute an Event of Default has occurred and not been
cured; (vi) neither the Company nor any Subsidiary is in
default or has breached any material obligation under any
Transaction Document; and (vii) no public announcement of a
pending or proposed Change of Control transaction has occurred that
has not been consummated.
“ Event Equity Value
” means 125% of the average of the Closing Prices for the
five Trading Days preceding the date of delivery of the notice
requiring payment of the Event Equity Value, provided that
if the Company does not make such required payment (together with
any other payments, expenses and liquidated damages then due and
payable under the Transaction Documents) when due or, in the event
the Company disputes in good faith the occurrence of the event
pursuant to which such notice relates, does not instead deposit
such required payment (together with such other payments, expenses
and liquidated damages then due) in escrow with an independent
third-party escrow agent within five Trading Days of the date such
required payment is due, then the Event Equity Value shall be 125%
of the greater of (a) the average of the Closing Prices for
the five Trading Days preceding the date of delivery of the notice
requiring payment of the Event Equity Value and (b) the
average of the Closing Prices for the five Trading Days preceding
the date on which such required payment (together with such other
payments, expenses and liquidated damages) is paid in
full.
“ Factor ” means
1.25, increased by 0.25 for each Interest Rate Adjustment Event
occurring after the original issue of this Note.
“ Interest Rate ”
has the meaning set forth in Section 2(a)
herein.
“ Interest Rate Adjustment
Event ” means any Interest Payment Date on which the
Current Market Price exceeds the product of the Conversion Price
and the Factor.
“ Majority Holders
” means Holders of a majority of the outstanding principal
amount of all Notes.
“ Original Issue Date
” means December 30, 2005, regardless of the number of
transfers of any particular Note and regardless of the number of
New Notes that may be issued in respect of such
transfers.
“ Triggering Event
” means any of the following events: (a) the Common
Stock is not listed or quoted, or is suspended from trading, on an
Eligible Market for a period of five or more Trading Days (which
need not be consecutive Trading Days) in any 180 Trading Day
period; (b) the exercise or conversion rights of the Holders
pursuant to any Transaction Document are suspended for any reason
other than pursuant to Section 6(b) of the Notes and
Section 11 of the Warrants; (c) the Company fails
to have available a sufficient number of authorized but unissued
and otherwise unreserved shares of Common Stock available to issue
Underlying Shares upon any exercise of the Notes and Warrants or
fails to have full authority, including under all laws, rules and
regulations of any Trading Market, to issue such Underlying Shares
(other than stockholder approval);
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(d) at any time after the Closing
Date, any Common Stock issuable pursuant to the Transaction
Documents is not listed on an Eligible Market; (e) after the
effectiveness of the Registration Statement, the Equity Conditions
fail to be satisfied for five or more Trading Days (which need not
be consecutive Trading Days) in any 180 Trading Day period;
(f) the Company or any Subsidiary fails to make any cash
payment required under any Transaction Document to which it is a
party and such failure is not cured within five days after notice
of such default is first given to the Company by a Holder;
(g) the Company or any Subsidiary defaults in the timely
performance of any other material obligation under any Transaction
Document to which it is a party and such default continues uncured
for a period of fifteen days after the date on which notice of such
default is first given to the Company by a Holder (it being
understood that no prior notice need be given in the case of a
default that cannot reasonably be cured within fifteen days);
(h) the Company or any Subsidiary breaches in any material
respect any of its representations or warranties under any
Transaction Document to which it is a party; or (i) any
change, event or circumstance that has had or could reasonably be
expected to result in a Material Adverse Effect.
2. Principal and Interest
.
(a) The Company shall pay interest
to the Holder on the then outstanding principal amount of this Note
at a rate of 3.5% per annum, as the same may be adjusted from
time to time pursuant to the terms hereof (the “ Interest
Rate ”). The Interest Rate shall be reduced from time to
time by 50 basis points (0.5%) for each Interest Rate Adjustment
Event (if any), as of the date of that Interest Rate Adjustment
Event, but in no event below zero, provided that the Equity
Conditions are satisfied on, and at all times during the sixty day
period preceding, the applicable Interest Payment Date. Once
reduced the Interest Rate shall not be subsequently increased as a
result of an Interest Rate Adjustment Event. Interest shall be
payable quarterly in arrears in cash on each of
March 31, June 30, September 30 and
December 31, except if such date is not a Trading Day in which
case such interest shall be payable on the next succeeding Trading
Day (each, an “ Interest Payment Date ”). The
first Interest Payment Date shall be March 31, 2006. Subject
to the limitations set forth in Section 6(b) below, the
Holder may, upon written notice to the Company not less than 10
Trading Days prior to an Interest Payment Date, require the Company
to pay such interest payable on such Interest Payment Date in
shares of Common Stock in accordance with Section 2(c)
below.
(b) The Company shall pay the
principal balance of this Note to the Holder on the Maturity Date
(or such later date or dates (or schedule) as the Holder may, in
its sole discretion, determine by written notice to the Company,
but not later than December 30, 2009) (the “
Principal Payment Date(s) ”) in cash. Subject to the
limitations set forth in Sections 2(c), 2(d) and 6(b) below,
the Company may, upon written notice to the Holder not less than 10
Trading Days prior to a Principal Payment Date, pay the principal
due on such Principal Payment Date in shares of Common Stock in
accordance with Sections 2(c) and 2(d) below.
(c) In the event that principal or
interest is to be paid in shares of Common Stock (subject to the
limitations set forth in Section 6(b) below), the number of
shares of Common Stock to be issued to the Holder as payment for
such interest or principal shall be (i) with respect to
interest, determined by dividing the aggregate amount of interest
payable to the Holder by the
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Market Price (as defined below) as of the
applicable Interest Payment Date, and rounding up to the nearest
whole share, (ii) with respect to principal, determined by
dividing the principal balance by the Conversion Price (as adjusted
in accordance herewith) and rounding up to the nearest whole share,
and paid to the Holder in accordance with Section 2(e)
below. The term “ Market Price ” shall mean 93%
of the arithmetic average of the VWAP for each of the 20
consecutive Trading Days prior to the applicable Principal Payment
Date (not including such date).
(d) The Company may make payments of
the principal amount of this Note on a Principal Payment Date in
shares of Common Stock pursuant to Section 2(b) if, and only
if, (i) all of the Equity Conditions are satisfied on and at
all times during the sixty days preceding such Principal Payment
Date (or the Holder otherwise waives in writing the Equity
Conditions), and (ii) the arithmetic average of the VWAP for
each of the 15 consecutive Trading Days prior to such Principal
Payment Date is greater than $2.86 (as adjusted for any stock
splits, stock combinations and similar events); and in each case
only to the extent that (unless and to the extent waived by the
Holder) the aggregate number of shares issuable by the Company to
the Holder as payment in respect of such Principal Payment Date
does not exceed 25% of the arithmetic average of the Daily Trading
Volume for each of the 20 consecutive Trading Days preceding such
Principal Payment Date. Any payment of principal (or portion
thereof) that is not permitted to be paid in Common Stock pursuant
to this Section 2(d) shall be paid in cash by the Company on
the applicable Principal Payment Date.
(e) In the event that any interest
is paid in Common Stock, the Company shall on such Interest Payment
Date or Principal Payment Date, as applicable, (i) issue (or
cause to be issued) and deliver (or cause to be delivered) to the
Holder a certificate, bearing the restrictive legends set forth
herein, registered in the name of the Holder, for the number of
shares of Common Stock to which the Holder shall be entitled, or
(ii) at all times after (x) the Company is eligible to
deliver its Common Stock electronically through The Depository
Trust Company (the “ DTC ”) in connection with a
resale by the Holder of such shares pursuant to the Registration
Statement and (y) the Holder has notified the Company that
this clause (ii) shall apply, credit the number of shares of
Common Stock to which the Holder shall be entitled to the
Holder’s or its designee’s balance account with the DTC
through its Deposit Withdrawal Agent Commission System.
(f) Notwithstanding the foregoing,
the Holder may elect to defer (i) any principal payment prior
to the Principal Payment Date and/or (ii) any interest payment
prior to its Interest Payment Date. If the Holder elects to defer
an interest payment, the Company shall pay such deferred interest
payment (together with all other amounts that may be due and
payable by the Company) on the Maturity Date or such earlier date
as the Holder may otherwise elect in writing (but not prior to the
applicable Interest Payment Date when it was otherwise due). If the
Holder elects to defer an interest payment, no interest shall
accrue on any such deferred amounts.
(g) This Note may not be prepaid in
whole or in part absent the consent of the Majority
Holders.
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3. Ranking and Covenants
.
(a) Except as permitted in
Section 4.10(a) of the Purchase Agreement, (i) no
Indebtedness of the Company is senior to or on a parity with this
Note in right of payment, whether with respect to interest, damages
or upon liquidation or dissolution or otherwise, and (ii) the
Company will not, and will not permit any Subsidiary to, directly
or indirectly, enter into, create, incur, assume or suffer to exist
any Indebtedness of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest
therein or any income or profits therefrom.
(b) So long as any Notes are
outstanding, neither the Company nor any Subsidiary shall, directly
or indirectly, (i) redeem, purchase or otherwise acquire any
capital stock or set aside any monies for such a redemption,
purchase or other acquisition of its capital stock (other than
pursuant to the Company’s stock option plan or similar
employee incentive plan as described in Section 3.1(g) of the
Purchase Agreement) or (ii) issue any Floating Price Security
(as defined in Section 10(d)(ii) ).
(c) If, at any time while any Note
is outstanding, the Company or any Subsidiary (i) issues or
incurs any Indebtedness for borrowed money, including, without
limitation, Indebtedness evidenced by notes, bonds, debentures or
other similar instruments, but excluding Indebtedness permitted in
Section 4.10(a) of the Purchase Agreement, or
(ii) effects any Subsequent Placement (other than the issuance
of Common Stock pursuant to the definition of Excluded Stock except
for clause (D) thereof), the Company shall notify the Holder
of such event and offer to repurchase an amount of this Note from
the Holder having an aggregate price (as determined below) equal to
the lesser of (A) the aggregate amount of such Indebtedness or
Subsequent Placement, and (B) the aggregate amount required to
repurchase this entire Note pursuant to this
Section 3(c) . All Notes repurchased under this
Section 3(c) shall be repurchased at a price equal to
the greater of (x) the outstanding principal amount of the
Notes purchased, plus all accrued but unpaid interest thereon
through the date of payment, and (y) the Event Equity Value of
the Underlying Shares then issuable upon conversion of the Notes
purchased (without regard to any restrictions on conversion) and
the closing of such repurchase shall occur promptly upon notice
from the Holder of an exercise of rights hereunder.
(d) The Company covenants that it
will at all times reserve and keep available out of its authorized
but unissued and otherwise unreserved Common Stock, solely for the
purpose of enabling it to issue Underlying Shares as required
hereunder, the number of Underlying Shares which are then issuable
and deliverable upon the conversion of (and otherwise in respect
of) each Note (taking into account the adjustments set forth in
Section 10 and subject to the limitations set forth in
Section 6(b) ), free from preemptive rights or any
other contingent purchase rights of Persons other than the Holder.
The Company covenants that all Underlying Shares so issuable and
deliverable shall, upon issuance in accordance with the terms
hereof, be duly and validly authorized and issued and fully paid
and nonassessable.
4. Registration of Notes .
The Company shall register the Notes upon records to be maintained
by the Company for that purpose (the “ Note Register
”) in the name of each record holder thereof from time to
time. The Company may deem and treat the registered Holder of
this
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Note as the absolute owner hereof for the
purpose of any conversion hereof or any payment of interest or
principal hereon, and for all other purposes, absent actual notice
to the contrary.
5. Registration of Transfers and
Exchanges . This Note and all rights hereunder are transferable
in whole or in part upon the books of the Company by the Holder
hereof; provided, however, that the transferee shall agree in
writing to be bound by the terms and subject to the conditions of
this Note and the Purchase Agreement. The Company shall register
the transfer of any portion of this Note in the Note Register upon
surrender of this Note to the Company at its address for notice set
forth herein. Upon any such registration or transfer, a new Note,
in substantially the form of this Note (any such new Note, a
“ New Note ”), evidencing the portion of this
Note so transferred shall be issued to the transferee and a New
Note evidencing the remaining portion of this Note not so
transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Note by the transferee thereof shall be
deemed the acceptance by such transferee of all of the rights and
obligations of a holder of a Note. This Note is exchangeable for an
equal aggregate principal amount of Notes of different authorized
denominations, as requested by the Holder surrendering the same. No
service charge or other fee will be imposed in connection with any
such registration of transfer or exchange.
6. Conversion .
(a) At the Option of the
Holder . All or any portion of this Note shall be convertible
into shares of Common Stock (subject to the limitations set forth
in Section 6(b) ), at the option of the Holder, at any
time and from time to time from and after the Original Issue Date.
The number of Underlying Shares issuable upon any conversion
hereunder shall equal the outstanding principal amount of this Note
to be converted, plus the amount of any accrued but unpaid interest
on this Note through the Conversion Date, divided by the Conversion
Price on the Conversion Date. The Holder shall effect conversions
under this Section 6(a) by delivering to the Company a
Conversion Notice