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
