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Exhibit 10.16
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE (this "
Agreement ") is made and entered into this 29th day
of December, 2006 by and among Irvine Sensors Corporation, a
Delaware corporation (the " Company ") and Pequot
Private Equity Fund III, L.P. and Pequot Offshore Private Equity
Partners III, L.P. (collectively " Pequot ") and
inures to the benefit of each of the Company’s and
Pequot’s current, former and future parents, subsidiaries,
related entities, and insurance carriers as well as their
fiduciaries, predecessors, successors, officers, directors,
partners, agents, affiliates, advisors, employees, stockholders and
assigns (collectively referred to herein as "
Releasees "). Each of the Company and Pequot are
sometimes referred to herein as a " Party ," and
collectively as the " Parties ." Capitalized terms
used herein and not otherwise defined shall have the meaning
ascribed to them in the Securities Purchase Agreement dated as of
December 30, 2005 (the " Securities Purchase
Agreement ") between the Company and Pequot, or the Notes
and Warrants, as applicable, referred to therein.
RECITALS
A. WHEREAS, Pequot loaned to the Company the principal
amount of $10,000,000 pursuant to the Notes and the other
agreements and instruments between the Company (or its
subsidiaries) and Pequot identified on Schedule A hereto
(collectively, the " Transaction Documents ");
B. WHEREAS , a dispute has arisen regarding alleged
Events of Default and certain other matters under the Notes;
C. WHEREAS, Longview Fund, L.P. and Alpha Capital Anstalt
(collectively, the " New Investors ") desire to
purchase the Notes from Pequot and enter into a new loan agreement
with the Company to fund the concurrent repayment in full of all of
the Company’s outstanding obligations to Square 1 Bank (the "
Refinancing "); and
D. WHEREAS, the Parties wish to permanently resolve all
disputes between them and all claims against each other.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and the
agreements and covenants contained herein, the Parties agree as
follows:
1. Settlement . In compromise and settlement of
the claims and disputes among the Parties, the Parties agree to the
following:
(a) Assignment of the Notes . Pequot shall assign
(the " Assignment " ) and deliver all of the original
Notes, as well the Security Agreement and each Subsidiary Security
Agreement identified as Items 12 through 18 on Schedule A attached
hereto (the " Assigned Security Agreements "), to the
New Investors in exchange for one lump-sum cash payment by the New
Investors to Pequot in the aggregate amount of $10,000,000 (the "
Purchase Price "), which shall be paid at the closing
of the Assignment (the " Closing "), all on the
terms
and conditions set forth in the Addendum to
Assignment of Series 1 and Series 2 Senior Subordinated Secured
Convertible Notes Dated December 30, 2005. The Assignment and
the Refinancing are collectively referred to herein as the "
Transaction ."
(b) Settlement Payment . As partial
consideration for this Agreement and in connection with the
Refinancing and the amount due to Pequot under the Notes, the
Company agrees to pay to Pequot a settlement payment in the amount
of $1,250,000 (the " Settlement Amount "). The
Settlement Amount will be paid as described in paragraph 1(c)
below.
(c) Warrants . The Company acknowledges
that the issuance of warrants and other securities to the New
Investors in connection with the Refinancing will automatically
trigger an anti-dilution adjustment to each of the Warrants as
described in Section 2 below. On the date of the Closing of
the Refinancing and immediately after consummation thereof on
December 29, 2006, Pequot agrees to exercise a portion of the
Warrants to purchase 1,346,154 Warrant Shares for cash, the total
exercise price being $1,750,000.20. Pequot will promptly remit on
December 29, 2006 by wire transfer to the Company an aggregate
of $500,000.20, which represents the aggregate cash exercise price
of $1,750,000.20 for such Warrant Shares less the Settlement
Amount, and the Company agrees to have such Warrant Shares
delivered electronically to Pequot no later than Friday,
December 29, 2006.
(d) Mandatory Exercise . Subject to the provisions
of this Section 1(d) and Section 3 hereof, Pequot shall
exercise the Warrants to purchase an additional 902,267 Warrant
Shares for cash no later than 75 days following the Closing or, if
such date is not a Business Day, the next succeeding Business Day
following such 75 day period (such final date, the "
Mandatory Exercise Date ") and shall immediately
remit to the Company by wire transfer the aggregate of $403,500.23,
which represents the aggregate cash exercise price of $1,172,947.10
for such Warrant Shares (the " Mandatory Exercise ")
less the Interest as described in Section 1(e) below, and less
the expense reimbursement described in Section 1(f) below, and
the Company shall immediately deliver to Pequot 902,267 Warrant
Shares in freely transferable electronic form; provided that
Pequot’s obligation to complete the Mandatory Exercise is
subject to each of the following conditions being satisfied on the
earlier of the actual exercise date of the Warrants or the
Mandatory Exercise Date (the " Conditions "):
(i) the Closing of the Transaction has been publicly announced
by the Company; (ii) the average daily VWAP of the
Company’s Common Stock has, for any seven consecutive trading
days following and during the effective registration of such
Warrant Shares for resale with the Commission (and all of the other
Conditions are satisfied during such seven day period), exceeded
110% of the Exercise Price of the Warrants; (iii) the number
of authorized but unissued and otherwise unreserved shares of
Common Stock is sufficient for such issuance; (iv) such
Warrant Shares are registered for resale and may be freely sold by
Pequot pursuant to an effective Registration Statement covering all
of such Warrant Shares; (v) the Common Stock is listed or
quoted (and is not suspended from trading) on an Eligible Market
and such Warrant Shares are approved for listing upon issuance;
(vi) such issuance would be permitted in full without
violating the rules or regulations of any Trading Market;
(vii) no public announcement of a pending or proposed Change
of Control transaction after the Closing of the Transaction has
occurred that has not been consummated; and (viii) there has
been no breach, noncompliance or other violation of this Agreement
by the
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Company that remains uncured. Upon the request of
Pequot, the Company agrees to confirm in writing that the
Conditions have been met. In the event that any of the foregoing
Conditions is not satisfied by the Mandatory Exercise Date, then
this Section 1(d) shall no longer be of any force or effect,
and the Holder of the Warrants may exercise the Warrants in
accordance with their terms (including, without limitation, on a
"cashless exercise" basis). In the event that there is any
adjustment to the Exercise Price (other than as specifically
described herein), all references to dollar amounts and number of
shares shall be adjusted to preserve the economic intent of the
transactions contemplated hereunder.
(e) Accrued, Unpaid Interest . The Parties agree
that $539,446.87 (the " Interest ") represents all
unpaid interest accrued on the Notes from September 30, 2006
through the Closing, which Interest shall be payable on the
earliest of (i) the Mandatory Exercise as an offset to the
aggregate exercise price therefor as set forth in Section 1(d)
above, (ii) the exercise after the Mandatory Exercise Date by
Pequot of the Warrants to purchase an aggregate of 902,267 Warrant
Shares as an offset to the aggregate exercise price therefor,
(iii) such earlier date in cash at the election of the
Company; or (iv) May 31, 2007 in cash. In the event the
exercise of such Warrants is completed on a cashless basis, the
Company shall have the option to pay a proportional amount of the
Interest (based on the total amount of Warrants exercised on a
cashless basis relative to the 902,267 Warrant Shares to be
exercised in accordance with this Section 1(e)), in shares in
the manner provided in the Notes; provided that such shares are
registered for resale and may be freely tradable by Pequot pursuant
to an effective Registration Statement filed with the Commission
covering such shares and each of the other Conditions (applied,
mutatis mutandis , to such shares) are and remain satisfied.
Upon the written request of Pequot, the Company agrees to provide
written confirmation that each of such Conditions have been
satisfied. For avoidance of doubt, the number of freely-tradable
shares of Common Stock that would be issued to Pequot as payment
for the Interest shall be determined by dividing the amount of the
Interest set forth above by 93% of the arithmetic average of the
VWAP for each of the 20 consecutive Trading Days prior to the
exercise date (not including such date) and rounding down to the
nearest whole share. If the Company does not pay Pequot the
Interest in full by the Mandatory Exercise Date, the Company shall
pay Pequot interest on the amount of unpaid Interest for the period
from and including the Mandatory Exercise Date 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 amount permitted by law). The
Parties agree that the exercise price for the Warrants may be paid
by offsetting the Settlement Amount, the Interest and the Expenses
pursuant to Sections 1(b), 1(d), 1(e) and 1(f) of this Agreement,
and that such offsets shall qualify as "immediately available
funds" as set forth in the Warrants.
(f) Costs and Expenses . The Company shall
reimburse Pequot an amount equal to $230,000 (the "
Expenses " ) for the amount of the fees and expenses of
Pequot’s outside attorneys actually incurred by Pequot in
connection with the alleged defaults by the Company under the
Notes, the negotiations relating to such alleged defaults, and the
negotiation and documentation related to this Agreement and the
Transaction. An amount equal to the Expenses shall be payable by
the Company (i) by an offset from the Warrant exercise price
in connection with the Mandatory Exercise, or (ii) by wire
transfer to Pequot on the Mandatory Exercise Date in the event the
Mandatory Exercise has not been completed by such date. If the
Company does not pay Pequot the Expenses in full on the Mandatory
Exercise Date, the
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Company shall pay Pequot interest on the amount
of unpaid Expenses for the period from and including the Mandatory
Exercise Date 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 amount permitted by law).
(g) Termination of Transaction Documents; Waiver of
Existing Defaults . The Parties hereto agree that
(a) upon the Closing of the Transaction, neither Party shall
have any further rights, obligations or liabilities to the other
Party or its Releasees under any of the Notes, the Assigned
Security Agreements, the Guaranty or the Side Letter, (b) upon
exercise of the Warrants in full and the Company’s delivery
of all Warrant Shares in respect thereof, neither Party shall have
any further rights, obligations or liabilities to the other Party
or its Releasees under the Securities Purchase Agreement (other
than the indemnification rights contained in Sections 4.5, 4.7,
4.14, 7.19 and Article VI of the Securities Purchase Agreement,
which shall continue in full force and effect (collectively, the "
Surviving Provisions "); and (c) upon the
Closing, the Pre-Negotiation Agreement dated October 18, 2006
between the Parties, the Side Letter and the Securities Purchase
Agreement (other than the Surviving Provisions) and the
Subordination Agreement dated December 30, 2005 between Pequot
and Square 1 Bank shall terminate. Upon the Closing of the
Transaction, the Parties hereby waive any existing defaults,
breaches or noncompliance of the other Party under any of the
Transaction Documents.
2. Notice of Adjustment of Warrants . The Company
represents and warrants to Pequot that the Refinancing is
automatically triggering the ratchet anti-dilution provisions set
forth in the Warrants, and as a result, effective as of the
Closing: (a) the Exercise Price of all of Pequot’s
outstanding Warrants is reduced to $1.30 per share, and
(b) the number of Warrant Shares that Pequot may purchase
under the Warrants is increased by 1,863,905 shares of Common Stock
to a total of 3,210,059 Warrant Shares issuable upon exercise of
the Warrants in full. For the avoidance of doubt, the Company
acknowledges and agrees that nothing in this Agreement modifies the
terms of the Warrants in any respect or shall prevent or limit any
other exercise of the Warrants, additional or other adjustment to
the Exercise Price and/or the number of Warrant Shares issuable
upon exercise of the Warrants, in each case, in accordance with the
terms and conditions of the Warrants.
3. Consent to Assignment of Notes; Exercise of
Warrants . Each of the Company and Pequot hereby
(a) consents to Pequot’s assignment of the Notes and the
Assigned Security Agreements to the New Investor, and
(b) waives any requirement that Pequot deliver an Exercise
Notice to the Company in connection with the exercise of the
Warrants pursuant to Sections 1(b) and 1(d). Pequot hereby consents
to the Refinancing.
4. Registration Rights . Without limiting any of
the Company’s obligations under the Securities Purchase
Agreement or the Warrants, the Company agrees to file a
registration statement on a Form S-3 with the Securities and
Exchange Commission in accordance with Article VI of the Securities
Purchase Agreement to register the balance of the 1,863,905 shares
of Common Stock underlying the Warrants within five Business Days
following the filing of the Company’s Form 10-K for the
fiscal year ended October 2, 2006. Without limiting any of the
Company’s obligations under the Securities Purchase Agreement
or the Warrants, the Company shall use its best efforts to have
such registration statement declared effective as soon as
reasonably practicable thereafter. Un
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