general compensation policies, makes recommendations to the Board as to the salaries of our officers and executive bonuses and makes or recommends to the Board the award of stock options and restricted stock grants to employees, officers and directors. The Compensation Committee held sixthree meetings during fiscal 2009 and acted by unanimous consent on three occasions.2010. The Board has determined that all members of the Compensation CommitteeDr. Kelly and Mr. Williams are “independent” as defined under the NasdaqNASDAQ listing standards. The Board has adopted and approved a written charter for the Compensation Committee. A copy of this charter is posted on our web site athttp://www.irvine-sensors.com under the Investors section. The inclusion of our web site address in this proxy statement does not include or incorporate by reference the information on our web site into this proxy statement.
performing similar functions. The full text of our code of ethics and conduct is posted on our web site athttp://www.irvine-sensors.com under the Investors section. We intend to disclose future amendments to certain provisions of our code of ethics and conduct, or waivers of such provisions, applicable to our directors and executive officers, at the same location on our web site identified above. The inclusion of our web site address in this proxy statement does not include or incorporate by reference the information on our web site into this proxy statement.
Upon request, we will provide without charge to any person who so requests, a copy of our code of ethics and conduct. Requests for such copies should be submitted to the Corporate Secretary, at Irvine Sensors Corporation, 3001 Red Hill Avenue, Bldg. 4-108, Costa Mesa, California or by telephone at(714) 549-8211.
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Required Vote
Directors are elected by a plurality of the votes present in person or by proxy at the Annual Meeting. The sixten nominees receiving the highest number of affirmative votes cast at the Annual Meeting will be the elected directors of the Company.Irvine Sensors.
Recommendation of the Board
The Board recommends that the stockholders vote FOR“FOR” the election of each of the nominees listed above.
Costa Brava, Griffin and the ESBP, who collectively owned an aggregate of approximately 60,604,201 shares of our Common Stock as of the Record Date, have entered into a Voting Agreement in connection with the December 2010 Financing pursuant to which the ESBP, Costa Brava and Griffin have agreed to vote FOR the election of Messrs. Hamot, Reed, Scollins, White and Williams.
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PROPOSAL TWO (A THROUGH I):TWO: APPROVAL OF GRANTING THE BOARD OF DIRECTORS THE AUTHORITYAN AMENDMENT TO EXERCISE ITS DISCRETION TO AMEND OUR CERTIFICATE OF
INCORPORATION TO EFFECT A REVERSE STOCK SPLITINCREASE THE NUMBER OF OUR OUTSTANDINGAUTHORIZED SHARES OF
COMMON STOCK IF NECESSARY TO REGAIN COMPLIANCE WITH THE NASDAQ CAPITAL MARKET’S MINIMUM BID REQUIREMENT, AT ANY OF THE FOLLOWING EXCHANGE RATIOS AT ANY TIME WITHIN ONE YEAR AFTER STOCKHOLDER APPROVAL IS OBTAINED, AND ONCE APPROVED BY THE STOCKHOLDERS, THE TIMING OF THE AMENDMENT, IF AT ALL, AND THE SPECIFIC REVERSE SPLIT RATIO TO BE EFFECTED SHALL BE DETERMINED IN THE SOLE DISCRETION OF OUR BOARD OF DIRECTORS: (A) A ONE-FOR-TWO REVERSE STOCK SPLIT; (B) A ONE-FOR-THREE REVERSE STOCK SPLIT; (C) A ONE- FOR-FOUR REVERSE STOCK SPLIT; (D) AONE-FOR-FIVE REVERSE STOCK SPLIT; (E) A ONE-FOR-SIX REVERSE STOCK SPLIT; (F) A ONE-FOR-SEVEN REVERSE STOCK SPLIT; (G) A ONE-FOR-EIGHT REVERSE STOCK SPLIT; (H) AONE-FOR-NINE REVERSE STOCK SPLIT; OR (I) A ONE-FOR-TEN REVERSE STOCK SPLIT500,000,000 SHARES
General
We and our Board believe it is advisable and in the best interests of the Company and its stockholders to approve granting the Board of Directors the authority to exercise its discretion to amend ourOur Certificate of Incorporation currently provides that we are authorized to effect a reverseissue two classes of stock, splitconsisting of our outstanding150,000,000 shares of Common Stock, if necessarypar value $0.01 per share, and 1,000,000 shares of Preferred Stock, par value $0.01 per share. As of January 15, 2011, approximately 98,513,871 shares of Common Stock were issued and outstanding, 3,682.25 shares ofSeries A-2 preferred stock were issued and outstanding, 1,821.2838 shares of Series B preferred stock were issued and outstanding, and 37,500 shares of Series C preferred stock were issued and outstanding.
The following table sets forth certain information with respect to regain compliance with the Nasdaq Capital Market’s minimum bid requirement, atCompany’s Common Stock:
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| | As of
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Common Stock | | January 15, 2011 | |
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Shares issued and outstanding | | | 98,513,871 | |
Shares issuable upon conversion of the outstanding shares of Preferred Stock | | | 9,496,710 | |
Shares issuable upon conversion of the outstanding principal balance of all convertible notes and debentures(1)(3) | | | 11,623,710 | |
Shares reserved for issuance upon the exercise of outstanding options and warrants | | | 28,893,535 | |
Shares reserved for issuance pursuant to future grants under our equity compensation plans(2) | | | 335,351 | |
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Total(1)(2)(3) | | | 148,863,177 | |
Shares presently authorized for issuance | | | 150,000,000 | |
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(1) | | Does not include shares issuable upon conversion of interest under any of the outstanding convertible notes or debentures as such amount is not ascertainable at this time. We have reserved 339,273 shares for issuance in payment of interest due on the Company’s debentures in March 2011 but additional shares will be issuable when and if interest on the convertible notes is ultimately converted into Common Stock. |
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(2) | | Does not include the 46,500,000 shares that will be available for issuance under the 2011 Omnibus Incentive Plan if Proposal Three is adopted. |
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(3) | | Does not include the shares issuable upon conversion of the Notes and potential Milestone Notes in connection with the December 2010 Financing described below if this Proposal is adopted. |
Each additional share of the following exchange ratios at any time within one year after stockholder approval is obtained, and once approvedCommon Stock authorized by the stockholders, the timing of the amendment, if at all, and the specific reverse split ratio to be effected shall be determined in the sole discretion of our Board of Directors: (A) a one-for-two reverse stock split; (B) a one-for-three reverse stock split; (C) a one-for-four reverse stock split; (D) a one-for-five reverse stock split; (E) a one-for-six reverse stock split; (F) a one-for-seven reverse stock split; (G) a one-for-eight reverse stock split; (H) a one-for-nine reverse stock split; or (I) a one-for-ten reverse stock split. The Board has approved of the proposed amendment of our Certificate of Incorporation will have the same rights and privileges as each share of Common Stock presently authorized.
While there are no statutory preemptive rights pursuant to which stockholders may receive or purchase any of the additional shares of Common Stock to be authorized by the proposed amendment, Irvine Sensors has entered into a Stockholders Agreement with Costa Brava and Griffin in connection with the December 2010 Financing described below, pursuant to which Costa Brava and Griffin have the right to participate in certain future issuances of securities by the Company on a pro rata basis with their initial investment. Traditional bank financings and stock issued in connection with strategic partnerships and investments, qualified public offerings, employee or director equity incentive plans and other customary transactions are excluded from this right of participation.
The Board believes this capital structure is inadequate for our present and future needs and will not be sufficient to permit the conversion of the Notes and potential Milestone Notes described below. Accordingly, the Board has approved, subject to stockholder approval, that would effectan amendment to our Certificate of Incorporation to increase the authorized number of shares of Common Stock from 150,000,000 to 500,000,000, which increases our total authorized capital stock to 501,000,000 shares. The Board is asking the stockholders to approve this amendment.
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Purpose of Authorizing Additional Common Stock
In December 2010 as more fully described in “Certain Relationships and Related Person Transactions,” we entered into a reverse stock split inSecurities Purchase Agreement with Costa Brava and Griffin, pursuant to which each two (2), three (3), four (4), five (5), six (6), seven (7), eight (8), nine (9) and/or ten (10)we issued and outstandingsold to Costa Brava and Griffin 12% Subordinated Secured Convertible Notes due December 23, 2015 (the “Notes”) in the aggregate principal amount of $7,774,800 and an aggregate of 51,788,571 shares of our Common Stock wouldfor $3,625,199.90, or $0.07 per share, and agreed to issue and sell in a subsequent closing not later than April 30, 2010 (subject to the amendment of our Certificate of Incorporation to increase our authorized Common Stock and the satisfaction of certain other conditions) additional 12% Subordinated Secured Convertible Notes (the “Milestone Notes”) to Costa Brava and Griffin for an aggregate purchase price of $1.2 million (collectively, the “December 2010 Financing”). The outstanding principal and accrued and unpaid interest on the Notes and the potential Milestone Notes may be combined and converted into one share. Although stockholders are being askedshares of our Common Stock at the conversion price of $0.07 per share, subject to vote on each ofprice anti-dilution protection and subject to the proposed reverse split exchange ratios, only one such proposal will be effected, if at all. Pending stockholder approval the Board will have the sole discretion pursuant to Section 242(c) of the Delaware General Corporation Law to elect, as it determines to be in our best interests and those of our stockholders whetherof the amendment of our Certificate of Incorporation that is the subject of this Proposal Two. Absent such approval, our presently authorized amount of Common Stock is not sufficient to provide for the conversion of the Notes and potential Milestone Notes, and we would be required to repay the issued Notes according to their terms. Depending on our business and financial developments, such repayment could produce a material and adverse effect on our financial condition. Furthermore, inability to convert the Notes and potential Milestone Notes would eliminate such conversion as a potential contributor to an increase in our net worth, which will be required if we are to re-establish listing of our Common Stock on the NASDAQ Stock Market or not to effect a reverse stock split,another national trading exchange. In addition, beginning after the first two years of the term of the Notes and potential Milestone Notes and if so,stockholder approval for an increase in our authorized Common Stock has been obtained, we can force the specificNotes and potential Milestone Notes to convert to Common Stock if certain conditions have been satisfied and the volume weighted average price per share of our Common Stock is $0.25 or greater for 30 consecutive trading days. Costa Brava and Griffin required us to agree to seek stockholder authority to increase the number of shares of our authorized Common Stock between and including two and ten which will be combinedfrom 150,000,000 shares to 500,000,000 shares as a condition to entering into one share of our Common Stock, at any time before the first anniversary of this Annual Meeting. The Board believes that stockholder approval of an amendment at each of the proposed reverse split ratios granting it the discretion to approve the specific ratio to be effected, rather than approval of only one exchange ratio at this time, providesDecember 2010 Financing. Since the Board with maximum flexibility to react to then-current market conditions and, therefore, isdetermined that the December 2010 Financing was in ourthe best interests of Irvine Sensors and those of our stockholders.stockholders, we are consequently submitting this Proposal Two for your vote and recommending its adoption.
The full textPossible Effects of the form of proposed amendment of the Certificate of Incorporation is attached to this proxy statement asAppendix A. By approving this Proposal, stockholders will be approving granting the Board the authority to exercise its discretion to amend our Certificate of Incorporation pursuant to which any whole number of outstanding shares between and including two and ten would be combined into one share of ourIncrease in Authorized Common Stock and authorizing the Board to file only one such amendment, as determined by the Board in the manner described herein. The Board at its discretion may also elect not to implement any reverse stock split.
If this proposal is approved by the stockholders, and following such approval the Board determines that effecting a reverse stock split is in our best interests and those of our stockholders,Directors will have the reverse stock split will become effective upon filing one such amendment withauthority to issue the Secretaryadditional authorized shares of State of the State of Delaware. The amendment filed thereby will contain the number of shares approved by the stockholders and selected by the Board within the limits set forth in this Proposal to be combined into one share of our Common Stock. Only one such amendment will be filed, if at all, and the other amendments will be abandoned in accordance with Section 242(c) of the Delaware General Corporation Law.
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Although we presently intend to effect the reverse stock split only if necessary to regain compliance with the Nasdaq Capital Market’s minimum bid requirement, under Section 242(c) of the Delaware General Corporation Law, the Board has reserved the right, notwithstanding the stockholders’ approval of the proposed amendment of the Certificate of Incorporation at the Annual Meeting, to abandon it atStock, or any timepart thereof, without further action by the stockholders beforeexcept as required by law or applicable requirements of self-regulatory organizations. In addition to the issuance of additional Common Stock, our Certificate of Incorporation, as amended, currently empowers the Board of Directors to authorize the issuance of one or more series of Preferred Stock without stockholder approval.
The proposed increase in the authorized number of shares of Common Stock could have an anti-takeover effect, in that additional shares could be issued, within the limits imposed by applicable law, in one or more transactions that could discourage, delay or make more difficult a change in control or takeover of Irvine Sensors, although this is not the present intent of the Board. For example, additional shares could be issued by us to dilute the stock ownership or voting rights of persons seeking to obtain control of Irvine Sensors and thereby increase the cost of acquiring a given percentage of the outstanding stock. Similarly, the issuance of additional shares to certain persons allied with our managementand/or Board could have the effect of making it more difficult to remove our current managementand/or directors by diluting the stock ownership or voting rights of persons seeking to cause such removal. Although this Proposal to increase the authorized number of shares of Common Stock has been prompted by business considerations and not by the threat of any hostile takeover attempt (nor is the Board currently aware of any such attempts directed at Irvine Sensors), stockholders should be aware that approval of the amendment ofto the Certificate of Incorporation is filed withcould facilitate future efforts by us to deter or prevent changes in control of Irvine Sensors, including transactions in which the Secretarystockholders might otherwise receive a premium for their shares over then-current market prices.
In addition, the issuance of Stateadditional shares by us could have an effect on the potential realizable value of a stockholder’s investment. In the absence of a proportionate increase in our earnings and book value (or decrease in our net loss), an increase in the aggregate number of outstanding shares of the State of Delaware. The Board may consider a variety of factors in determining whether or not to proceed with the proposed amendment of the Certificate of Incorporation, including overall trends in the stock market, recent changes and anticipated trends in the per share market price of our Common Stock business developments, and our actual and projected financial performance. Ifcaused by the closing bid price
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issuance of our Common Stock onadditional shares would dilute the Nasdaq Capital Market reaches a minimum of $1.00earnings per share and remains at or above that level forbook value per share (or increase the loss per share) of all outstanding shares of our capital stock. If such factors were reflected in the price per share of Common Stock, the potential realizable value of a minimum of ten consecutive trading days (or longer, if required by the Nasdaq Listing Qualifications Panel), as discussed more fully below, the Board may decide to abandon the filingstockholder’s investment could be adversely affected.
While authorization of the proposed amendmentadditional shares will not directly dilute the proportionate voting power or other rights of existing stockholders, future issuances of Common Stock enabled by authorization of the Certificateadditional shares could reduce the proportionate ownership of Incorporation. Ifexisting holders of Common Stock, and, depending on the Board fails to implement a reverse stock split priorprice at which such shares are issued, may be dilutive to the one-year anniversary of this Annual Meeting, stockholder approval again would be required prior to implementing any reverse stock split.existing stockholders.
The Board approvedProposed Amendment
If this proposal is adopted, the proposed amendment to our Certificate of Incorporation on June 11, 2010, subject to stockholder approval, and recommends thatwould amend the stockholders voteFORapprovalfirst paragraph of the amendment. Even if this Proposal is approved, the Board in its discretion may decide not to file the amendment toArticle IV of our Certificate of Incorporation withand is anticipated to be adopted substantially in the Secretaryform as follows:
“The corporation is authorized to issue two classes of Statecapital stock, designated Common Stock (hereinafter referred to as “Common Stock”) and Preferred Stock (hereinafter referred to as “Preferred Stock”). The amount of total capital stock of the Statecorporation is 501,000,000 shares, consisting of Delaware to effect the reverse stock split.
Purpose1,000,000 shares of Preferred Stock, $0.01 par value, and Background of the Reverse Stock Split
Our primary objective in effectuating the reverse stock split would be to attempt to raise the per share trading price of our Common Stock in an effort to continue our listing on the Nasdaq Capital Market. To maintain listing, the Nasdaq Capital Market requires, among other things, that our Common Stock maintain a minimum bid of $1.00 per share. The closing bid price of our Common Stock has been below $1.00 per share since September 26, 2008.
On September 15, 2009, we received notice from Nasdaq that our Common Stock had failed to maintain Nasdaq’s minimum closing bid price requirement of $1.00 and that we were being given until March 15, 2010 to demonstrate compliance with this requirement or face delisting of our Common Stock from the Nasdaq Capital Market. On March 19, 2010, we received a Nasdaq Staff determination letter that we had not regained compliance with Nasdaq’s minimum bid price requirements and that our shares would be delisted from Nasdaq unless we requested a hearing to appeal this action. We requested such a hearing, which was held before a Nasdaq Hearing Panel on May 6, 2010. The request for a hearing stayed the delisting of our securities pending the Nasdaq Listing Qualifications Panel’s decision. The Nasdaq Hearing Panel granted us an extension until September 13, 2010 to regain compliance with the $1.00 per share minimum closing bid price requirement. The Board is seeking approval for the authority to effectuate the reverse stock split as a means of increasing the share price of our Common Stock at or above $1.00 per share in order to avoid further action by the Nasdaq Capital Market. We expect that the reverse stock split will increase the bid price per share of our Common Stock above the $1.00 per share minimum price, thereby satisfying this listing requirement. However, there can be no assurance that the reverse stock split will have that effect, initially or in the future, or that it will enable us to maintain the listing of our Common Stock on the Nasdaq Capital Market.
In addition, we believe that the low per share market price of our Common Stock impairs its marketability to and acceptance by institutional investors and other members of the investing public and creates a negative impression of the Company. Theoretically, decreasing the number of500,000,000 shares of Common Stock, outstanding should not, by itself, affect the marketability of the shares, the type of investor who would be interested in acquiring them, or our reputation in the financial community. In practice, however, many investors, brokerage firms and market makers consider low-priced stocks as unduly speculative in nature and, as a matter of policy, avoid investment and trading in such stocks. Moreover, the analysts at many brokerage firms do not monitor the trading activity or otherwise provide coverage of lower priced stocks. The presence of these factors may be adversely affecting, and may continue to adversely affect, not only the pricing of our Common Stock but also its trading liquidity. In addition, these factors may affect our ability to raise additional capital through the sale of stock.
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We further believe that a higher stock price could help us attract and retain employees and other service providers. We believe that some potential employees and service providers are less likely to work for a company with a low stock price, regardless of the size of the company’s market capitalization. If the reverse stock split successfully increases the per share price of our Common Stock, we believe this increase will enhance our ability to attract and retain employees and service providers.
We hope that the anticipated increase in the price per share will encourage greater interest in our Common Stock by the financial community and the investing public, help us attract and retain employees and other service providers, and possibly promote greater liquidity for our stockholders with respect to those shares presently held by them. However, the possibility also exists that liquidity may be adversely affected by the reduced number of shares which would be outstanding if the reverse stock split is effected, particularly if the price per share of our Common Stock begins a declining trend after the reverse stock split is effected.
There can be no assurance that the reverse stock split will achieve any of the desired results. There also can be no assurance that the price per share of our Common Stock immediately after the reverse stock split will increase proportionately with the reverse stock split, or that any increase will be sustained for any period of time.
If stockholders do not approve the reverse stock split proposal and our stock price does not otherwise increase to greater than $1.00 per share for at least 10 consecutive trading days before September 13, 2010, we expect our Common Stock to be subject to a delisting action by Nasdaq. We believe the reverse stock split is the most likely way to assist the stock price in reaching the minimum bid level required by Nasdaq, although effecting the reverse stock split cannot guarantee that we will be in compliance with the minimum bid requirement for even for the minimum10-day trading period required by Nasdaq. Furthermore, the reverse stock split cannot guarantee we will be in compliance with either the market capitalization, net worth or stockholders’ equity criteria required to maintain our Nasdaq Capital Market listing.
If our Common Stock were delisted from the Nasdaq Capital Market, trading of our Common Stock would thereafter be conducted on the OTC Bulletin Board or the “pink sheets”. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, our Common Stock. To relist shares of our Common Stock on Nasdaq, we would be required to meet the initial listing requirements for either the Nasdaq Capital Market or the Nasdaq Global Market, which are more stringent than the maintenance requirements.
In addition, if our Common Stock were delisted from the Nasdaq Capital Market and the price of our Common Stock were below $5 at such time, such stock would come within the definition of “penny stock” as defined in the Securities Exchange Act of 1934, as amended and would be covered byRule 15g-9 of the Securities Exchange Act of 1934. That rule imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5 million or individuals with net worth in excess of $1 million or annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered byRule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. These additional sales practice restrictions will make trading in our Common Stock more difficult and the market less efficient.
We are not aware of any present efforts by anyone to accumulate our Common Stock, and the proposed reverse stock split is not intended to be an anti-takeover device.
The Reverse Stock Split May Not Result in an Increase in the Per Share Price of Our Common Stock; There Are Other Risks Associated with the Reverse Stock Split
We cannot predict whether the reverse stock split will increase the market price for our Common Stock. The history of similar stock split combinations for companies in like circumstances is varied. There is no assurance that:
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| • | the market price per share will either exceed or remain in excess of the $1.00 minimum bid price as required by the Nasdaq Capital Market; |
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| • | we will otherwise meet the requirements of Nasdaq for continued inclusion for trading on the Nasdaq Capital Market; |
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| • | the market price per share of our Common Stock after the reverse stock split will rise in proportion to the reduction in the number of shares outstanding before the reverse stock split; |
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| • | the reverse stock split will result in a per share price that will attract brokers and investors who do not trade in lower priced stocks; or |
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| • | the reverse stock split will result in a per share price that will increase our ability to attract and retain employees and other service providers. |
The market price of our Common Stock will also be based on our performance and other factors, some of which are unrelated to the number of shares outstanding. If the reverse stock split is effected and the market price of our Common Stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of a reverse stock split.
Principal Effects of Reverse Stock Split on Market for Common Stock
On June 15, 2010, the closing bid price for our Common Stock on the Nasdaq Capital Market was $0.28 per share. By decreasing the number of shares of Common Stock outstanding without altering the aggregate economic interest represented by the shares, we believe the market price will be increased. The greater the market price rises above $1.00 per share, the less risk there will be that we will fail to meet the requirements for maintaining the listing of our Common Stock on the Nasdaq Capital Market. However, there can be no assurance that the market price of the Common Stock will rise to or maintain any particular level or that we will at all times be able to meet the requirements for maintaining the listing of our Common Stock on the Nasdaq Capital Market.
Principal Effects of Reverse Stock Split on Common Stock and Preferred Stock; No Fractional Shares
If stockholders approve granting the Board the authority to exercise its discretion to amend our Certificate of Incorporation to effect a reverse stock split, and if the Board decides to effectuate such amendment and reverse stock split, the principal effect of the reverse stock split will be (i) to reduce the number of issued and outstanding shares of our Common Stock, in accordance with an exchange ratio approved by the stockholders and determined by the Board as set forth in this Proposal, from approximately 21,078,274 shares to between and including approximately 10,159,137 and 2,107,827 shares, depending on which reverse stock ratio is effectuated by the Board and based upon the number of shares outstanding on the record date for the Annual Meeting, (ii) to reduce the number of shares of our Common Stock issuable upon conversion of our outstandingSeries A-1 Stock from 912,950 shares to between and including approximately 456,475 and 91,295 shares, depending on which reverse stock ratio is effectuated by the Board, (iii) to reduce the number of shares of our Common Stock issuable upon conversion of our outstandingSeries A-2 Stock from 2,254,000 shares to between and including approximately 1,127,000 and 225,400 shares, depending on which reverse stock ratio is effectuated by the Board, (iv) to reduce the number of shares of our Common Stock issuable upon conversion of our outstanding Series B Stock from 5,108,280 shares to between and including approximately 2,554,140 and 510,828 shares, depending on which reverse stock ratio is effectuated by the Board, and (v) to reduce the number of shares of our Common Stock issuable upon conversion of our outstanding Series C Stock from 2,750,000 shares to between and including approximately 1,375,000 and 275,000 shares, depending on which reverse stock ratio is effectuated by the Board. Except as described above, the reverse stock split will not affect theSeries A-1 Stock, theSeries A-2 Stock, the Series B Stock and the Series C Stock. The total number of shares of Common Stock each stockholder holds will be reclassified automatically into the number of shares of Common Stock equal to the number of shares of Common Stock each stockholder held immediately before the reverse stock split divided by the exchange ratio approved by the stockholders and determined by the Board as set forth in this Proposal. If the number of shares of Common Stock a stockholder holds is not evenly divisible by such exchange ratio, that stockholder will not receive a fractional share but instead will receive, upon surrender of stock certificates representing such shares of Common Stock, cash in an amount equal to the fraction of a share that stockholder otherwise would have been entitled to receive multiplied by the last sale price (as adjusted to reflect the reverse stock split) of the Common Stock as last reported on the Nasdaq Capital Market on the trading day before the reverse stock split takes effect. The ownership of a fractional interest will not give the holder thereof any voting, dividend or other rights except to receive payment therefor as described herein. Stockholders should be aware that, under the escheat laws of the various jurisdictions where stockholders reside,
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where we are domiciled and where the funds will be deposited, sums due for fractional interests that are not timely claimed after the effective time may be required to be paid to the designated agent for each such jurisdiction. Thereafter, stockholders otherwise entitled to receive such funds may have to seek to obtain them directly from the state to which they were paid.
The reverse stock split will affect all of our stockholders uniformly and will not affect any stockholder’s percentage ownership interests, except to the extent that the reverse stock split results in any stockholders owning a fractional share. As described above, stockholders holding fractional shares will be entitled to cash payments in lieu of such fractional shares. Such cash payments will reduce the number of post-split stockholders to the extent there are stockholders presently holding fewer shares than between and including two and ten shares, depending on the exchange ratio selected by the Board. This, however, is not the purpose for which we are proposing to effect the reverse stock split and we are not aware that we have any stockholders who hold so few shares that they will be cashed out. Common stock issued pursuant to the reverse stock split will remain fully paid and non-assessable. The$0.01 par value of our Common Stock and Preferred Stock would remain unchanged at $0.01 per share. We will continue to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934.
Upon effectiveness of the reverse stock split, the number of authorized shares of Common Stock that are not issued or outstanding will increase substantially because the proposed amendment will not reduce the number of authorized shares while it will reduce the number of outstanding shares by a factor of between and including two and ten, depending on the exchange ratio selected by the Board. In other words, if stockholders approve Proposal Two and Four and the Board effectuates a reverse stock split, the number of authorized but unissued shares of Common Stock would increase from approximately 128,921,726 shares to between and including approximately 139,460,863 and 147,892,173 shares. If stockholders approve Proposal Two, we will continue to have 808,679 authorized but unissued shares of Preferred Stock. Authorized but unissued shares will be available for issuance, and we may issue such shares in financings or otherwise. If we issue additional shares, the ownership interest of holders of our Common Stock may also be diluted. Also, the issued shares may have rights, preferences or privileges senior to those of our Common Stock. Our future capital needs will be highly dependent on our ability to repay our debt, control expenses on the parent and subsidiary levels, and manage the development efforts on the parent and subsidiary levels. Thus, any projections of future cash needs and cash flows are subject to substantial uncertainty. If our available funds and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities, obtain a line of credit or curtail our existing operations. In addition, from time to time we may evaluate other methods of financing to meet our capital needs on terms that we believe are attractive.
Principal Effects of Reverse Stock Split on Outstanding Options, Warrants, Debentures and Preferred Stock
As of the record date for the Annual Meeting, we had outstanding employee stock options to purchase an aggregate of 568,907 shares of Common Stock with exercise prices per share ranging from $0.35 to $265.62 per share; warrants to purchase an aggregate of 5,897,409 shares of Common Stock with exercise prices per share ranging from $0.40 to $13.00 per share; debentures with principal and interest convertible into an aggregate of 3,440,208 shares of Common Stock at a conversion price of $0.40 per share; and shares of Preferred Stock convertible into an aggregate of 11,025,230 shares of Common Stock at conversion prices per share ranging from $0.30 to $0.50. Under the terms of the options, warrants, debentures and Preferred Stock, when and if the reverse stock split becomes effective, the number of shares of Common Stock covered by each of them will be reduced to between and including one-half and one-tenth the number currently covered and the exercise or conversion price per share will be increased by between and including two and ten times the current exercise or conversion price, resulting in the same aggregate price being required to be paid therefor upon exercise or conversion thereof as was required immediately preceding the reverse stock split. The number of shares reserved under our option plans and stock bonus plan will decrease to between and including one-half and one-tenth of the number of shares currently included in such plans.
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Principal Effects of Reverse Stock Split on Legal Ability to Pay Dividends
The Board has not in the past declared, nor does it have any plans to declare in the foreseeable future, any distributions of cash, dividends or other property, and we are not in arrears on any dividends. Therefore, we do not believe that the reverse stock split will have any effect with respect to future distributions, if any, to our stockholders.
Accounting Matters
The reverse stock split will not affect the par value of our Common Stock. As a result, on the effective date of the reverse stock split, the stated capital on our balance sheet attributable to our Common Stock will be reduced by a factor of between and including two and ten. In other words, stated capital will be reduced to between and including one-half and one-tenth of its present amount, and the additional paid-in capital account will be credited with the amount by which the stated capital is reduced. The per share net income or loss and net book value of our Common Stock will be increased because there will be fewer shares of Common Stock outstanding.
Potential Anti-Takeover Effect
The increased proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect (for example, by permitting issuances that would dilute the stock ownership of a person seeking to effect a change in the composition of our Board or contemplating a tender offer or other transaction for the combination of the Company with another company). However, the reverse stock split proposal is not being proposed to facilitate implementing a poison pill in response to any effort of which we are aware to accumulate shares of our Common Stock or obtain control of the Company, nor is it part of a plan by management to recommend a series of similar amendments to our Board and stockholders.
Procedure for Effecting Reverse Stock Split; Exchange of Stock Certificates; Payment for Fractional Shares
If the stockholders approve granting the Board the authority to exercise its discretion to effectuate the reverse stock split and if the Board determines that the reverse stock split is necessary and desirable to maintain listing on the Nasdaq Capital Market, we will file the proposed amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware. The reverse stock split will become effective at the time specified in the amendment, which will most likely be the date of the filing of the amendment and which we refer to as the “effective time.value.” Beginning at the effective time, each certificate representing outstanding pre-reverse stock split shares of Common Stock will be deemed for all corporate purposes to evidence ownership of post-reverse stock split shares of Common Stock.
We will appoint BNY Mellon Shareowner Services, 400 South Hope Street, 4th Floor, Los Angeles, California 90071,(877) 854-4574, to act as exchange agent for Common Stockholders in connection with the reverse stock split. We will deposit with the exchange agent, as soon as practicable after the effective time, cash in an amount equal to the value of the estimated aggregate number of fractional shares that will result from the reverse stock split. The funds required to purchase the fractional share interests are available and will be paid from our current cash reserves. Our stockholder list shows that some of the outstanding Common Stock is registered in the names of clearing agencies and broker nominees. Because we do not know the numbers of shares held by each beneficial owner for whom the clearing agencies and broker nominees are record holders, we cannot predict with certainty the number of fractional shares that will result from the reverse stock split or the total amount we will be required to pay for fractional share interests. However, we do not expect that amount will be material.
As of the record date for the Annual Meeting, we had approximately 676 Common Stockholders of record (although we had significantly more beneficial holders). We do not expect the reverse stock split and the payment of cash in lieu of fractional shares to result in a significant reduction in the number of record holders. We presently do not intend to seek any change in our status as a reporting company for federal securities law purposes, either before or after the reverse stock split.
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As soon as practicable after the effective time, we will mail a letter of transmittal to each Common Stockholder. Each Common Stockholder will be able to obtain a certificate evidencing its post-reverse-split shares and, if applicable, cash in lieu of a fractional share only by sending the exchange agent its old stock certificate(s), together with the properly executed and completed letter of transmittal and such evidence of ownership of the shares as we may require. Common Stockholders will not receive certificates for post-reverse stock split shares unless and until their old certificates are surrendered to the exchange agent together with the properly completed and executed letter of transmittal and such evidence of ownership of the shares as we may require.Stockholders should not destroy any stock certificates and should not forward their certificates to the exchange agent until they receive the letter of transmittal, and they should only send in their certificates with the letter of transmittal.The exchange agent will send each Common Stockholder’s new stock certificate and payment in lieu of any fractional share promptly after receipt of that stockholder’s properly completed letter of transmittal and old stock certificate(s).
Stockholders will not have to pay any service charges in connection with the exchange of their certificates or the payment of cash in lieu of fractional shares.
Even if the stockholders approve the reverse stock split, the Board reserves the right to not effect the reverse stock split if in the Board’s opinion it would not be in our best interests or those of our stockholders to effect such reverse stock split.
No Dissenter’s Rights
Under the Delaware General Corporation Law, stockholders are not entitled to dissenter’s rights with respect to the reverse stock split, and the Company will not independently provide stockholders with any such right.
Material Federal Income Tax Consequences of the Reverse Stock Split
The following is a summary of material federal income tax consequences of the reverse stock split to holders of the Company’s Common Stock and to the Company. The discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), existing, proposed and temporary Treasury regulations promulgated thereunder, Internal Revenue Service (“IRS”) rulings, administrative pronouncements and judicial decisions in effect as of the date of this proxy statement, all of which are subject to change (possibly with retroactive effect) or to different interpretations. The summary does not address all aspects of federal income taxation that may apply to a stockholder as a result of the reverse stock split and is included for general information only. In addition, the summary does not address any state, local or foreign income or other tax consequences of the reverse stock split.
The summary does not address tax consequences to stockholders that are subject to special tax rules, such as banks, insurance companies, regulated investment companies, personal holding companies, foreign entities, nonresident alien individuals, broker-dealers, S corporations, partnerships, estates, trusts and tax-exempt entities. The summary further assumes that stockholders have held the Company’s Common Stock subject to the reverse stock split as a capital asset within the meaning of Section 1221 of the Code, and will continue to hold such Common Stock as a capital asset following the reverse stock split.
THE FOLLOWING DISCUSSION IS BASED ON CURRENT LAW AND IS NOT INTENDED TO CONSTITUTE A COMPLETE DESCRIPTION OF ALL U.S. FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE REVERSE STOCK SPLIT. STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES. THIS DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
No gain or loss should be recognized by Common Stockholders as a result of the reverse stock split, except for cash payments received in lieu of fractional shares, the tax consequences of which are described below. The aggregate tax basis of the new Common Stock received by Common Stockholders (including any fraction of new Common Stock deemed to have been received) will be the same as their aggregate adjusted tax basis in their existing Common Stock. The holding period of the new Common Stock received as a result of the reverse stock split will
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include the period during which a Common Stockholder held the Common Stock surrendered in the reverse stock split.
Common Stockholders who receive cash in lieu of fractional shares of the new Common Stock in the reverse stock split will be treated as having sold such fractional shares for cash, and will generally recognize capital gain or loss in an amount equal to the difference between the amount of cash received and their tax basis in the fractional share. The gain or loss will be long-term capital gain or loss if a stockholder’s holding period for his or her new Common Stock exceeds 12 months.
The reverse stock split will be treated as a tax-free recapitalization of the Company under the Code. Consequently, the Company will not recognize any gain or loss as a result of the reverse stock split.
THE COMPANY’S VIEW REGARDING THE TAX CONSEQUENCE OF THE REVERSE STOCK SPLIT IS NOT BINDING ON THE IRS OR THE COURTS. ACCORDINGLY, EACH STOCKHOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR CONCERNING ALL OF THE POTENTIAL TAX CONSEQUENCES TO HIM OR HER OF THE REVERSE STOCK SPLIT.
Required Vote
The affirmative vote of the holders of a majority of all outstanding shares entitled to vote on this proposal will be required for approval of granting the Board of Directors the authority to exercise its discretion to amend our Certificate of Incorporation to effect a reverse stock split of our outstanding shares of Common Stock if necessary to regain compliance with the Nasdaq Capital Market’s minimum bid requirement, at anyoutstanding as of the following exchange ratios: (A) a one-for-two reverse stock split; (B) a one-for-three reverse stock split; (C) a one-for-four reverse stock split; (D) a one-for-five reverse stock split; (E) a one-for-six reverse stock split; (F) a one-for-seven reverse stock split; (G) a one-for-eight reverse stock split; (H) a one-for-nine reverse stock split; or (I) a one-for-ten reverse stock split,Record Date and entitled to vote at any time within one year after stockholder approvalthe Annual Meeting is obtained. Once approved by the stockholders, the timing of the amendment, if at all, and the specific reverse split ratiorequired to be effected shall be determined in the sole discretion of our Board of Directors. Even if this Proposal is approved, our Board in its discretion may decide not to fileapprove the amendment to our Certificate of Incorporation to effectincrease the reverse stock split.number of authorized shares of Common Stock to 500,000,000.
Recommendation of the Board
The Board recommends that the stockholders vote FOR“FOR” approval of granting the Board of Directors the authorityamendment to exercise its discretion to amend our Certificate of Incorporation to effect a reverse stock splitincrease the number of our outstandingauthorized shares of Common Stock if necessaryfrom 150,000,000 to regain compliance500,000,000.
Costa Brava, Griffin and the ESBP (who collectively own an aggregate of approximately 60,604,201 shares of our Common Stock) have entered into a Voting Agreement in connection with the Nasdaq Capital Market’s minimum bid requirement, at anyDecember 2010 Financing pursuant to which the ESBP, Costa Brava and Griffin have agreed to vote FOR Proposal Two.
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PROPOSAL THREE: APPROVAL AND ADOPTION OF THE IRVINE SENSORS CORPORATION 2011 OMNIBUS INCENTIVE PLAN AND THE RESERVATION OF 46,500,000 SHARES
OF COMMON STOCK FOR ISSUANCE THEREUNDER
General
On January 12, 2011, the Board of Directors adopted the following exchange ratios: (A) a one-for-two reverse stock split; (B) a one-for-three reverse stock split; (C) a one-for-four reverse stock split; (D) a one-for-five reverse stock split; (E) a one-for-six reverse stock split; (F) a one-for-seven reverse stock split; (G) a one-for-eight reverse stock split; (H) a one-for-nine reverse stock split; or (I) a one-for-ten reverse stock split, at any time within one year after2011 Omnibus Incentive Plan (the “2011 Plan”), subject to stockholder approval is obtained. Onceapproval. If approved by the stockholders at the timingAnnual Meeting, the 2011 Plan will become effective upon said approval. When the 2011 Plan becomes effective, all outstanding awards under our 2010 Non-Qualified Option Plan, 2006 Plan, 2003 Stock Incentive Plan, 2001 Non-Qualified Stock Option Plan, 2001 Stock Option Plan, and 2000 Non-Qualified Stock Option Plan (the “Current Plans”) will remain outstanding. This proposal will not affect awards already granted under the Current Plans, but no further grants may be made under any of the amendment, ifCurrent Plans other than under the 2006 Plan. As of January 15, 2011, there were options outstanding under the Current Plans to purchase approximately 20,851,206 shares of Common Stock and aggregate remaining authority to grant awards for the issuance of 335,351 shares of Common Stock.
Under the terms of our December 2010 Financing, we are required to seek stockholder approval of the 2011 Plan. Such approval is also necessary to permit us to grant incentive stock options to employees under Section 422 of the Internal Revenue Code, as amended (the “Code”), and to ensure that compensation paid under the 2011 Plan is eligible for an exemption from the limits on tax deductibility imposed by Section 162(m) of the Code, which limits the deductibility of certain compensation paid to individuals who are, at all,the end of the tax year for which we would otherwise claim our tax deduction, our Chief Executive Officer and our four other most highly paid executive officers.
Our stockholders are being asked to approve the 2011 Plan and to authorize the issuance of 46,500,000 shares of Common Stock thereunder. The Board believes that the 2011 Plan is necessary for us to be able to attract and retain the services of individuals essential to our long-term growth and success. The Board also believes that the flexibility of the 2011 Plan in types and specific terms of awards will allow us to align incentive compensation with increases in stockholder value.
2011 Omnibus Incentive Plan
The following is a summary of the principal features of the 2011 Plan and is qualified in its entirety by reference to the 2011 Plan. A copy of the 2011 Plan document as proposed to be adopted may be found at Appendix A at the end of this proxy. Any stockholder of Irvine Sensors who wishes to obtain an additional copy of the actual plan document may do so upon written request to Irvine Sensors at 3001 Red Hill Avenue, Bldg. 4-108, Costa Mesa, California 92626, Attention: Corporate Secretary.
Purpose. The 2011 Plan is designed to serve as a comprehensive equity incentive program to attract and retain the services of individuals essential to our long-term growth and financial success. Accordingly, the Company’s officers and other employees, non-employee directors and other consultants and advisors will have the opportunity to acquire a meaningful equity interest in Irvine Sensors through their participation in the 2011 Plan.
Administration. Both the Board and the specific reverse split ratioCompensation Committee have the authority to administer the 2011 Plan. The Board may at any time appoint a secondary committee comprised of two or more directors to have concurrent authority to make grants and issuances of any equity-based instruments permissible under the 2011 Plan, provided that such secondary committee will not have authority to make grants to executive officers and non-employee directors or in a manner that would cause the 2011 Plan not to comply with the requirements of Section 162(m) of the Code. The committee administering the 2011 Plan will have full power and authority to determine when and to whom awards will be effected shall be determined ingranted, and the sole discretiontype, amount, form of ourpayment and other terms and conditions of each award, consistent with the provisions of the 2011 Plan. Subject to the provisions of the 2011 Plan, the committee may amend or waive the terms and conditions, or accelerate the exercisability, of an outstanding award. The committee has authority to interpret the 2011 Plan, and establish rules and regulations for the administration of the 2011 Plan. In addition, the Board may exercise the powers of Directors.the committee at any time.
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PROPOSAL THREE: APPROVAL OF THE ISSUANCE OF UP TO $50,000,000 WORTH OF SHARES OF OUR COMMON STOCK AND/OR SECURITIES CONVERTIBLE INTO OR EXERCISABLE FOR COMMON STOCK, NOT TO EXCEED 25,000,000 SHARES, IN ONE OR MORE RELATED PRIVATE PLACEMENT TRANSACTIONS OCCURRING ON OR PRIOR TO THE DATE SIX MONTHS AFTER THE ANNUAL MEETING, WHICH SHARES WOULD BE ISSUED AT A MAXIMUM DISCOUNT TO THE THEN FAIR MARKET VALUE OF OUR COMMON STOCK ON THE DATE(S) OF ISSUANCE OF 35%
Eligible Participants. Any employee, officer, consultant, advisor or director providing services to Irvine Sensors or any of its affiliates (including our current and future subsidiaries), who is selected by the committee, is eligible to receive awards under the 2011 Plan. As of the Record Date, approximately 70 employees, five executive officers and ten directors were eligible to be selected by the committee to receive awards under the 2011 Plan.
Purpose and MannerShares Available For Awards. The aggregate number of Issuance
We are asking stockholders to approveshares of Common Stock that may be issued under all stock-based awards made under the issuance2011 Plan will be 46,500,000 shares. The shares of up to $50,000,000 worthCommon Stock issuable under the 2011 Plan may be drawn from shares of our authorized but unissued Common Stock or from shares of our Common Stockand/or securities convertible into that we acquire.
A maximum of 46,500,000 shares will be available for granting incentive stock options under the 2011 Plan, subject to the provisions of Section 422 or exercisable424 of the Code or any successor provision. In addition, a maximum of 46,500,000 shares will be available for granting restricted stock and restricted stock units under the 2011 Plan. If the committee so provides for purposes of Section 162(m) of the Code, no award recipient may be granted (i) options or SARs (defined below) under the 2011 Plan with respect to more than 15,000,000 shares of Common Stock not to exceed 25,000,000 shares, in onethe aggregate within any fiscal year or (ii) qualified performance based awards which could result in such person receiving more related private placement transactions occurring onthan $1,500,000 in cash or prior to the date six months after the Annual Meeting, which shares would be issued at a maximum discount to the thenequivalent fair market value of shares of Common Stock determined at the date of grant for each full or partial fiscal year contained in the performance period of a particular qualified performance based award, subject to certain adjustments as described in more detail below under the heading “Performance Awards.”
Notwithstanding the foregoing, because Irvine Sensors no longer has a class of voting securities listed on a national securities exchange, it is subject to Section 260.140.45 of the California Code of Regulations which limits the total number of shares issuable under the 2011 Plan (when combined with all of our other bonus or similar plans or agreements) to 30% of the then outstanding securities of the issuer (convertible preferred or convertible senior common shares of stock will be counted on an as if converted basis). As of the Record Date, the 46,500,000 shares reserved for issuance under the 2011 Plan, together with all other shares reserved for issuance under the Current Plans, would exceed this 30% limitation and the Company would not be able to issue the full 46,500,000 shares reserved for issuance under the 2011 Plan until the total number of issued shares of our securities increases. If Proposal Three is approved by holders of at least two-thirds of our outstanding securities entitled to vote at the Annual Meeting, then this limitation will not apply and will be waived.
The committee may adjust the number of shares and share limits described above in the case of a stock dividend or other distribution, including a stock split, merger or other similar corporate transaction or event, in order to prevent dilution or enlargement of the benefits or potential benefits intended to be provided under the 2011 Plan.
If any shares of our Common Stock onsubject to any award or to which an award relates are forfeited or are reacquired by us, or if any award terminates without the date(s)delivery of issuanceany shares, the shares previously set aside for such awards will be available for future awards under the 2011 Plan. In addition, shares used by award recipients as payment of 35%,the exercise price of an award or in satisfaction of the tax obligations relating to an award will be available again for award grants other than an incentive stock option.
Types of Awards and Terms and Conditions. The 2011 Plan permits the following purposes:granting of:
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| • | to provide additional working capital to effectively fulfill our contractual backlogstock options (including both incentive and continue to fund our ongoing operations;non-qualified stock options); |
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| • | to strengthen our financial position;stock appreciation rights (“SARs”); |
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| • | restricted stock and restricted stock units; |
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| • | performance awards of cash, stock or property; |
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| • | dividend equivalents; and |
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| • | to enable us to pursue market opportunities and execute on our business plan.other stock grants. |
A voteAwards may be granted alone, in favoraddition to, in combination with or in substitution for, any other award granted under the 2011 Plan or any other compensation plan. Awards can be granted for no cash consideration or for
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cash or other consideration as determined by the committee or as required by applicable law. Awards may provide that upon the grant or exercise thereof, the holder will receive shares of this proposal doesour Common Stock or other securities or property, or any combination of these, in a single payment or installments. The exercise price per share under any stock option and the grant price of any SAR will be determined by the committee and may not necessarily mean that webe less than the fair market value on the date of grant of such option or SAR, or less than 110% of fair market value for incentive stock options granted to holders of more than 10% of our Common Stock. Determinations of fair market value under the 2011 Plan will issue all $50,000,000 worthbe made in accordance with methods and procedures established by the committee. The term of awards will not be longer than ten years, or in the case of incentive stock options, longer than five years with respect to holders of more than 10% of our Common Stock.
Stock Options. The holder of an option will be entitled to purchase a number of shares of our Common Stock at a 35% discountspecified exercise price during a specified time period, all as determined by the committee. The option exercise price may be payable either in cash or, at the discretion of the committee, in other securities or other property having a fair market value on the exercise date equal to the exercise price. The shares subject to each option will generally vest in one or more installments over a specified period of service measured from the grant date. We do not receive any payment for the grant of an option. Upon cessation of service, except in the case of “Ordinary Retirement” as defined below, the optionee will have a limited period of time in which to exercise his or her outstanding options to the extent exercisable for vested shares. “Ordinary Retirement” means the retirement of the optionee on a date upon which, if the optionee is an employee, the sum of the optionee’s age and number of years of employment with Irvine Sensors and its subsidiaries equals or exceeds eighty-five (85) years or, if the optionee is a non-employee director, the number of years of service with Irvine Sensors and its subsidiaries exceeds five (5) years.
Stock Appreciation Rights. The holder of a SAR is entitled to receive the excess of the fair market value (calculated as of the exercise date or, at the committee’s discretion, as of any time during a specified period before or after the exercise date) of a specified number of shares of our Common Stock over the grant price of the SAR, as determined by the committee, paid solely in shares of Common Stock. SARs vest and become exercisable in accordance with a vesting schedule established by the committee. This type of SAR is sometimes described as a “stock only settled stock appreciation right.”
Restricted Stock and Restricted Stock Units. The holder of restricted stock will own shares of our Common Stock subject to restrictions imposed by the committee (including, for example, restrictions on transferability or on the right to vote the restricted shares or to receive any dividends with respect to the shares) for a specified time period determined by the committee. The restrictions, if any, may lapse or be waived separately or collectively, in installments or otherwise, as the committee may determine. The holder of restricted stock units will have the right, subject to any restrictions imposed by the committee, to receive shares of our Common Stock at some future date determined by the committee. The committee also may permit accelerated vesting in the case of a participant’s death, disability or retirement, or a change in control. If the participant’s employment or service as a director terminates during the vesting period for any other reason, the restricted stock and restricted stock units will be forfeited, unless the committee determines that it would be in the best interest of Irvine Sensors to waive the remaining restrictions.
Performance Awards. Performance awards give participants the right to receive payments in stock or property based solely upon the achievement of certain performance goals during a specified performance period. Subject to the terms of the 2011 Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any performance award granted, the amount of any payment or transfer to be made pursuant to any performance award and any other terms and conditions of any performance award is determined by the committee. From time to time, the committee may designate an award granted pursuant to the 2011 Plan as an award of qualified performance based compensation within the meaning of Section 162(m) of the Code. Such a qualified performance based award must, to the extent required by Section 162(m), be conditioned solely on the achievement of one or more objective performance goals. The committee must designate all participants for each performance period, and establish performance goals and target awards for each participant no later than 90 days after the beginning of each performance period within the parameters of Section 162(m) of the Code. Performance goals must be based solely on one or more of the following business criteria: revenue, cash flow, gross profit, earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization and net earnings, earnings per share, margins (including one or more of gross, operating and net income margins), returns
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(including one or more of return on assets, equity, investment, capital and revenue and total stockholder return), stock price, economic value added, working capital, market share, cost reductions, workforce satisfaction and diversity goals, employee retention, customer satisfaction, completion of key projects and strategic plan development and implementation.
The measure of performance may be set by reference to an absolute standard or a comparison to specified companies or groups of companies, or other external measures, and may be applied at individual or organizational levels. If the committee so provides for purposes of Section 162(m) of the Code, no person may be granted under the 2011 Plan qualified performance based awards which could result in such person receiving more than $1,500,000 in cash or the equivalent fair market value of shares of Common Stock determined at the date of grant for each full or partial fiscal year contained in the performance period of a particular qualified performance based award, except that if any other qualified performance based awards are outstanding for such person for a given fiscal year, such dollar limitation shall be reduced for each such fiscal year by the amount that could be received by the person under all such qualified performance based awards, divided, for each such qualified performance based award, by the number of full or partial fiscal years contained in the performance period of each such outstanding qualified performance based award (subject to adjustment in the case of a stock dividend or other distribution, including a stock split, merger or other similar corporate transaction or event, but only to the extent that such adjustment does not affect the status of any award intended to qualify as “performance based compensation” under Section 162(m) of the Code).
Dividend Equivalents. The holder of a dividend equivalent will be entitled to receive payments in shares of our Common Stock, other securities or other property equivalent to the amount of cash dividends paid by Irvine Sensors to its stockholders, with respect to the number of shares determined by the committee. Dividend equivalents will be subject to other terms and conditions determined by the committee.
Stock Awards. The committee may grant unrestricted shares of our Common Stock, subject to terms and conditions determined by the committee and the 2011 Plan limitations.
Duration, Termination and Amendment. Unless earlier discontinued or terminated by the Board, the 2011 Plan will expire on the tenth anniversary of its adoption. No awards may be made after that date. However, unless otherwise expressly provided in an applicable award agreement, any award granted under the 2011 Plan prior to expiration may extend beyond the end of such period through the award’s normal expiration date.
The Board and the committee, pursuant to the delegation of its authority, may amend, alter or discontinue the 2011 Plan at any time, although stockholder approval must be obtained for any action that would, absent such approval, (i) violate the rules or regulations of any securities exchange that are applicable to Irvine Sensors; (ii) cause us to be unable, under the Code, to grant incentive stock options under the 2011 Plan; (iii) increase the number of shares authorized under the 2011 Plan; (iv) permit the award of options or SARs at a price less than 100% of the fair market value of a share of Common Stock on the date of grant of such option or SAR, or the repricing of options or SARs; or (v) would prevent the grant of options or SARs that would qualify under Section 162(m) of the Code.
Acceleration. The committee may permit accelerated vesting of an award upon the occurrence of certain events, including a change in control, regardless of whether the award is assumed, substituted or otherwise continued in effect by the successor corporation. The acceleration of vesting in the event of a change in the ownership or control may be seen as an anti-takeover provision and may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of Irvine Sensors.
Transferability of Awards. Unless otherwise provided by the committee, awards under the 2011 Plan may only be transferred by will or by the laws of descent and distribution.
Delivery of Shares for Tax Obligation. Under the 2011 Plan, the committee may permit participants receiving or exercising awards, subject to the discretion of the committee and upon such terms and conditions as it may impose, to deliver shares of our Common Stock (either shares received upon the receipt or exercise of the award or shares previously owned by the holder of the option) to Irvine Sensors to satisfy federal and state income tax obligations.
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Certain Federal Income Tax Consequences
The following is a summary of certain U.S. federal income tax consequences generally applicable to awards under the 2011 Plan.
Grant of Options and SARs. The grant of a stock option or SAR is not expected to result in any taxable income for the recipient.
Exercise of Options and SARs. Upon exercising a non-qualified stock option, the optionee will recognize ordinary income equal to the excess of the fair market value of the shares of our Common Stock acquired on the date of exercise over the exercise price, and we will generally be entitled at that time to an income tax deduction for the same amount. Upon exercising an incentive stock option, the optionee generally will not recognize taxable income (except that an alternative minimum tax liability may arise), and we will not be entitled to an income tax deduction. Upon exercising a SAR, the recipient of the SAR will recognize ordinary income in an amount equal to the fair market value on the exercise date of any shares of our Common Stock betweenreceived, and we will receive an income tax deduction in the same amount. If the holder of a non-qualified stock option or SAR is our employee, then any ordinary income recognized upon exercise generally will be subject to income tax and payroll tax withholding.
Disposition of Shares Acquired Upon Exercise of Options and SARs. The tax consequence upon a disposition of shares acquired through the exercise of an option or SAR will depend on how long the shares have been held and whether the shares were acquired by exercising an incentive stock option or by exercising a non-qualified stock option or SAR. Generally, there will be no tax consequence to Irvine Sensors in connection with the disposition of shares acquired under an option or SAR, except that we may be entitled to an income tax deduction in the case of the disposition of shares acquired under an incentive stock option before the applicable incentive stock option holding periods set forth in the Code have been satisfied.
Awards Other than Options and SARs. As to other awards granted under the 2011 Plan that are payable in either cash or shares of our Common Stock that are either transferable or not subject to substantial risk of forfeiture, the holder of the award must recognize ordinary income equal to (a) the amount of cash received or, as applicable, (b) the excess of (i) the fair market value of the shares received (determined as of the date of receipt) over (ii) the Annual Meetingamount (if any) paid for the shares by the holder of the award. We will generally be entitled at that time to an income tax deduction for the same amount.
As to an award that is payable in shares of our Common Stock that are restricted from transfer and subject to substantial risk of forfeiture, unless a special election is made by the dateholder of the award under the Code, the holder must recognize ordinary income equal to the excess of (i) the fair market value of the shares received (determined as of the first time the shares become transferable or not subject to substantial risk of forfeiture, whichever occurs earlier) over (ii) the amount (if any) paid for the shares by the holder of the award. We will generally be entitled at that time to an income tax deduction for the same amount.
Income Tax Deduction. Subject to the usual rules concerning reasonable compensation, and assuming that, as expected, performance awards paid under the 2011 Plan are “qualified performance-based compensation” within the meaning of Section 162(m) of the Code, we will generally be entitled to a corresponding income tax deduction at the time a participant recognizes ordinary income from awards made under the 2011 Plan.
Application of Section 16. Special rules may apply to individuals subject to Section 16 of the Exchange Act. In particular, unless a special election is made pursuant to the Code, shares received through the exercise of a stock option or SAR may be treated as restricted as to transferability and subject to a substantial risk of forfeiture for a period of up to six months after the Annual Meeting. Rather, these parameters representdate of exercise. Accordingly, the amount of any ordinary income recognized and the amount of our income tax deduction will be determined as of the end of that period.
Deductibility of Executive Compensation Under Code Section 162(m). Section 162(m) of the Code generally limits to $1,000,000 the amount that a publicly-held corporation is allowed each year to deduct for the compensation paid to each of the corporation’s chief executive officer and the corporation’s other four most highly compensated executive officers. However, “qualified performance-based qualified compensation” is not subject to the $1,000,000 deduction limit. In general, to qualify as performance-based compensation, the following requirements need to be satisfied: (1) payments must be computed on the basis of an outerobjective, performance-based
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compensation standard determined by a committee consisting solely of two or more “outside directors,” (2) the material terms under which the compensation is to be paid, including the business criteria upon which the performance goals are based, and a limit on the mannermaximum bonus amount which may be paid to any participant pursuant with respect to any performance period, must be approved by a majority of our stockholders and (3) the committee must certify that the applicable performance goals were satisfied before payment of any performance-based compensation.
The 2011 Plan has been designed to permit grants of stock options and SARs issued under the 2011 Plan to qualify under the performance-based compensation rules so that income attributable to the exercise of a non-qualified stock option or a SAR may be exempt from $1,000,000 deduction limit. Grants of other awards under the 2011 Plan may not so qualify for this exemption. The 2011 Plan’s provisions are consistent in which we may issue discounted securities, for which we are seeking stockholder approval. The exact numberform with the performance-based compensation rules, so that if the committee that grants options or SARs consists exclusively of securities to be authorizedmembers of the Board of Directors of the Company who qualify as “outside directors,” and the market value discount at which these securities will be sold, subjectexercise price (or deemed exercise price, with respect to a maximum offering price of $50,000,000, a maximum share issuance of 25,000,000 shares and a maximumSARs) is not less than the fair market value discount of 35%, will be determined by our Board of Directors.
Basic Terms of Securities
We expect that the basic terms of the shares of Common Stock authorized pursuant to this proposalwhich such grants relate, the compensation income arising on exercise of those options or SARs should qualify as performance-based compensation which is deductible even if that income would be identicalin excess of the otherwise applicable limits on deductible compensation income under Code Section 162(m).
Importance of Consulting a Tax Advisor. The information set forth above is a summary only and does not purport to be a complete description of all tax considerations applicable to an award under the 2011 Plan. In addition, this information is based upon current federal income tax rules, and, therefore, is subject to change if and when those rules change. Moreover, because the tax consequences to any recipient may depend on his, her or its particular situation, each recipient should consult his or her own tax advisor as to the federal, state, local and other tax consequences of the grant or exercise of an award or the disposition of our Common Stock currently outstanding. The exact termsacquired as a result of any securities convertible into or exercisable for Common Stock that may be issued cannot be stated or estimated at the time of the filing of this proxy statement. Similarly, it is impracticable to describe the transaction in which such securities are to be issued because, at the time of the filing of this proxy statement, no such transaction has been identified. The exact terms of the securities, including, but not limited to, dividend or interest rate, conversion price, voting rights, redemption price, maturity dates and similar matters will be determined by our Board of Directors and we do not presently anticipate seeking from our stockholders further authorization of such securities prior to the issuance thereof unless required to do so by the Nasdaq Marketplace Rules.
Such securities will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.award.
New Plan Benefits
No benefits or amounts have been granted, awarded or received under the 2011 Plan. In addition, the committee, in its sole discretion, will determine the number and types of awards that will be granted. Thus, it is not possible to determine the benefits that will be received by eligible participants if the 2011 Plan were to be approved by the stockholders, with the exception of the option grants contemplated by the December 2010 Financing and the related Employment Agreements entered into by and between Irvine Sensors and each of Bill Joll, John C. Carson and John J. Stuart, Jr. at that time. See “Executive Compensation — Post-Employment Compensation — Employment Contracts.” The fair market value per share of Common Stock on any relevant date under the 2011 Plan will be the closing selling price per share on that date as reported by theOver-the-Counter Bulletin Board (the “OTCBB”) or such other securities exchange or trading system on which our securities are then listed. The closing sales price per share of our Common Stock as reported by the OTCBB on January 26, 2011 was $0.26.
Accounting Treatment
We account for stock-based compensation under Accounting Standards Codification (“ASC”) 718,Compensation — Stock Compensation, which requires the fair value of all option grants or stock issuances made to employees or directors on or after the beginning of fiscal 2006, as well as a portion of the fair value of each option and stock grant made to employees or directors prior to that date which represents the nonvested portion of these share-based awards as of such implementation date, to be recognized as an expense. These amounts are expensed over the respective vesting periods of each award using the straight-line attribution method. We calculate stock option-based compensation by estimating the fair value of each option as of its date of grant using the Black-Scholes option pricing model.
If we have outstanding stock options with exercise prices that are less than the average closing market price of our Common Stock over a reporting period, the number of such outstanding“in-the-money” options may affect our earnings per share on a fully diluted basis.
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Option Transactions
The table below shows, as to our current and prior Chief Executive Officer, our other two most highly compensated executive officers (with base salary and bonus for fiscal 2010 in excess of $100,000) and the other individuals and groups indicated below, the number of shares of Common Stock subject to option grants made under our option plans from September 28, 2009 through January 15, 2011, together with the weighted average exercise price payable per share. Between September 28, 2009 through January 15, 2011, we issued 11,340 shares of our Common Stock under direct stock issuance provisions of our option plans.
| | | | | | | | |
| | Number of Shares
| | Weighted Average
|
| | Underlying Options
| | Exercise Price
|
| | Granted
| | per Share
|
Name and Position | | (#) | | ($) |
|
Bill Joll | | | 5,000,000 | | | | 0.09 | |
Current Chief Executive Officer and | | | | | | | | |
President, commencing on December 23, 2010 and Director | | | | | | | | |
John C. Carson | | | 4,040,000 | | | | 0.09 | |
Chief Executive Officer and | | | | | | | | |
President through December 23, 2010, Chief Strategist and Director | | | | | | | | |
John J. Stuart, Jr. | | | 4,040,000 | | | | 0.09 | |
Senior Vice President., | | | | | | | | |
Chief Financial Officer and Secretary | | | | | | | | |
Peter Kenefick | | | 2,020,000 | | | | 0.09 | |
Senior Vice President | | | | | | | | |
John Leon | | | 2,020,000 | | | | 0.09 | |
Vice President | | | | | | | | |
Marc Dumont | | | 520,000 | | | | 0.09 | |
Director | | | | | | | | |
Jack Johnson | | | 520,000 | | | | 0.09 | |
Director | | | | | | | | |
Thomas M. Kelly | | | 520,000 | | | | 0.09 | |
Director | | | | | | | | |
All current executive officers as a group (5 persons) | | | 17,120,000 | | | | 0.09 | |
All nominees for election as director (10 persons) | | | 10,080,000 | | | | 0.09 | |
All current directors who are not executive officers as a group (8 persons) | | | 1,560,000 | | | | 0.09 | |
All employees, including current officers who are not executive officers, as a group (70 persons) | | | 530,000 | | | | 0.16 | |
As of January 15, 2011, options to purchase 20,851,206 shares of Common Stock were outstanding and 335,351 shares remained available for future grant under our existing option plans.
Vote Required Vote
The affirmative vote of at least a majority of the shares of the Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote on this matter is required by the Nasdaq Marketplace Rules for approval of this proposal.
No Dissenter’s Rights
Under the Delaware General Corporation Law,2011 Plan. Should such stockholder approval not be obtained, then the 2011 Plan will not be adopted. Notwithstanding the foregoing, in order to avoid a limitation on the number of shares that may be issuable under the 2011 Plan pursuant to Regulation 260.140.145 of the California Code of Regulations discussed above, we are seeking to obtain the approval of stockholders are notof Irvine Sensors holding at least two-thirds of the outstanding securities entitled to dissenter’s rights with respectvote at the Annual Meeting. If such higher approval is not obtained, this Proposal will still be adopted but the number of shares issuable under the 2011 Plan may be limited from time to time based on the proposal, and the Company will not independently provide stockholders with any such right.actual securities then outstanding.
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Independent of the outcome of the vote on this matter, our 2006 Plan will continue in effect and option grants and stock issuances may continue to be made under the 2006 Plan until all the shares of Common Stock authorized for issuance under the 2006 Plan have been issued or until such 2006 Plan otherwise terminates in accordance with its terms.
Recommendation of the Board
The Board recommends that the stockholders vote FOR“FOR” the approval and adoption of our 2011 Omnibus Incentive Plan and the issuancereservation of up to $50,000,000 worth of46,500,000 shares of our Common Stockand/or securities convertible into or exercisable for Common Stock, not to exceed 25,000,000 shares, in one or more related private placement transactions occurring on or prior to the date six months after the Annual Meeting, which shares would be issued at a maximum discount to the then fair market value of our Common Stock on the date(s) of issuance of 35%.
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PROPOSAL FOUR: APPROVAL OF THE ISSUANCE OF UP TO 10,000 ADDITIONAL
SHARES OF OUR SERIES C CONVERTIBLE PREFERRED STOCK, INITIALLY
CONVERTIBLE INTO UP TO 1,000,000 SHARES OF OUR COMMON STOCK,
TO LONGVIEW FUND, L.P.thereunder.
Reasons for IssuanceCosta Brava, Griffin and the ESBP (who collectively own an aggregate of Series C Convertible Preferred Stock
In connection with obtainingapproximately 60,604,201 shares of the consentCompany’s Common Stock) as of our senior lender, Longview Fund, L.P., to a settlement agreement with Timothy Looney and related parties, wethe Record Date have entered into ana Voting Agreement Consent and Waiver, as modified, (the “Longview Agreement”) with Longview pursuant to which we and Longview agreed, among other things, that if we cannot arrange for a third-party investor to purchase ourSeries A-1 Convertible Preferred Stock,Series A-2 Convertible Preferred Stock and Series C Convertible Preferred Stock beneficially owned by Longview at its stated value by July 15, 2010, or in the event Longview still owns Preferred Stock on July 15, 2010, we must issue to Longview (i) 10,000 additional shares of our Series C Convertible Preferred Stock, initially convertible into 1,000,000 shares of our Common Stock and (ii) a two-year warrant to purchase 1,000,000 shares of our Common Stock at an exercise price per share of $0.30 which will include a cashless exercise provision and will not be exercisable within six months of issuance. Pursuant to the Longview Agreement, we previously issued 27,500 shares of our Series C Convertible Preferred Stock initially convertible into 2,750,000 shares of our Common Stock in consideration for Longview’s waiver of its right to receive dividends on the Preferred Stock held by Longview that have already accumulated or will accumulate through July 15, 2010. Longview is an existing securityholder of, and senior lender to, us.
Because the issuance of 10,000 additional shares of Series C Convertible Preferred Stock to Longview would exceed 20% of our outstanding capital stock immediately preceding the date we entered into the Longview Agreement, we are asking our stockholders to approve the issuance of up to 10,000 additional shares of our Series C Convertible Preferred Stock to Longview. Stockholder approval of this proposal is being sought solely to comply with the Nasdaq Marketplace Rules governing the issuance of securities when any such issuances in the aggregate would exceed 20% of an issuer’s outstanding capital stock, and as such to satisfy the requirement to do so set forth in the Longview Agreement.
Description of Series C Convertible Preferred Stock
On April 28, 2010, pursuant to authority granted by our Certificate of Incorporation, our Board of Directors approved the creation of a new series of preferred stock designated as Series C Convertible Preferred Stock and, on April 29, 2010, we filed with the Secretary of State of the State of Delaware a Certificate of Designations of Rights, Preferences, Privileges and Limitations of the Series C Convertible Preferred Stock that created the new Series C Convertible Preferred Stock, authorized 37,500 shares of Series C Convertible Preferred Stock with a par value of $0.01 and designated the rights, preferences, privileges and limitations of such Series C Convertible Preferred Stock.
Each share of Series C Convertible Preferred Stock is convertible at any time at the holder’s option into 100 shares of Common Stock at an initial conversion price per converted share of Common Stock equal to $0.30, which was the last consolidated closing bid price of our Common Stock as determined in accordance with Nasdaq rules immediately preceding our entering into the Agreement with Longview. The conversion price of the Series C Convertible Preferred Stock is subject to adjustment for stock splits, stock dividends, recapitalizations and the like.
The Series C Convertible Preferred Stock is non-voting, except to the extent required by law. With respect to distributions upon our deemed dissolution, liquidation orwinding-up, the Series C Convertible Preferred Stock ranks senior to the Common Stock and junior to ourSeries A-1 10% Cumulative Convertible Preferred Stock,Series A-2 10% Cumulative Convertible Preferred Stock and Series B Convertible Preferred Stock. The liquidation preference per share of Series C Convertible Preferred Stock equals its stated value, $30 per share. The Series C Convertible Preferred Stock is not entitled to any preferential cash dividends; however, the Series C Convertible Preferred Stock is entitled to receive on an as-converted basis, pari passu with the Common Stock, but after payment of dividends to theSeries A-1 10% Cumulative Convertible Preferred Stock,Series A-2 10% Cumulative Convertible Preferred Stock and Series B Convertible Preferred Stock at the time outstanding, such dividends on the Common Stock as may be declared from time to time by our Board of Directors.
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The Series C Convertible Preferred Stock is not redeemable by the holder thereof, but we will have the right, upon 30 calendar days’ prior written notice, to redeem the Series C Convertible Preferred Stock at its stated value, $30 per share. The approval of the holders of at least a majority of the then outstanding Series C Convertible Preferred Stock will be required for certain matters, including to (i) amend the Certificate of Designations in a manner which would impair the rights of the holders of the Series C Convertible Preferred Stock or (ii) issue any shares of preferred stock with rights, preferences or privileges senior to or pari passu with the Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock is also subject to a blocker that would prevent each holder’s Common Stock ownership at any given time from exceeding 4.99% of our outstanding Common Stock (which percentage may increase but never above 9.99%).
None of the Series C Convertible Preferred Stock or the Common Stock issuable upon conversion thereof has been registered under the Securities Act of 1933 and none may be offered or sold in the United States absent registration or an applicable exemption from registration requirements. We do not plan to register the Series C Convertible Preferred Stock or the Common Stock issuable upon conversion thereof.
The information set forth above is qualified in its entirety by reference to the terms of the Agreement, Consent and Waiver, and the Certificate of Designations, attached hereto as Appendices B and C and which are incorporated herein by reference. Stockholders are urged to carefully read these documents.
Possible Effects upon Rights of Existing Stockholders
Our existing stockholders will continue to own their existing shares of Common Stock after the transaction described in this Proposal. The holders of our Common Stock are not participating in nor receiving any consideration from the transaction described in this Proposal. The holders of our Common Stock should not send in their share certificates because their share certificates will not be exchanged in connection with the transaction described in this Proposal.
The Series C Convertible Preferred Stock is senior to our Common Stock with respect to liquidation preferences, but is only entitled to receive on an as-converted basis, pari passu with the Common Stock, after payment of dividends to theSeries A-1 10% Cumulative Convertible Preferred Stock,Series A-2 10% Cumulative Convertible Preferred Stock and Series B Convertible Preferred Stock at the time outstanding, such dividends on the Common Stock as may be declared from time to time by our Board of Directors. In addition, on certain matters, the separate approval of the holders of at least a majority of the then outstanding Series C Convertible Preferred Stock may be required. For further explanation, see “Description of Series C Convertible Preferred Stock” above.
Existing stockholders also will suffer significant dilution in ownership interests and voting rights as a result of the issuance of shares of our Common Stock upon the conversion of the Series C Convertible Preferred Stock. Upon conversion in full of the Series C Convertible Preferred Stock over time (at the initial conversion price of $0.30 per converted share of Common Stock), an aggregate of approximately 15.1% of our outstanding Common Stock will consist of newly issued Common Stock resulting from conversion of the Series C Convertible Preferred Stock, and the ownership interest of our existing stockholders would be correspondingly reduced. The amounts and percentages described above do not give effect to (i) the Blocker, (ii) the issuance of shares of capital stock as described in any of the other proposals in this proxy statement, (iii) the issuance of shares of Common Stock for potential future anti-dilution adjustments of theSeries A-1 10% Cumulative Convertible Preferred Stock andSeries A-2 10% Cumulative Convertible Preferred Stock, (iv) the issuance of shares of Common StockDecember 2010 Financing pursuant to other outstanding options, warrantswhich the ESBP, Costa Brava and debentures of the Company or (v) any other future issuances of our Common Stock. The sale into the public market of these shares also could materially and adversely affect the market price of our Common Stock.
Required Vote
The affirmative vote of a majority of the shares of the Common Stock present or represented by proxy at the Annual Meeting and entitledGriffin have agreed to vote is required by the Nasdaq Marketplace Rules for approval of the issuance of up to 10,000 additional shares of our Series C Convertible Preferred Stock, initially convertible into up to 1,000,000 shares of our Common Stock, to Longview Fund, L.P. The Board has determined that stockholder approval of thisFOR Proposal is in the best interests of our stockholders.
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Recommendation of the BoardThree.
The Board recommends that stockholders vote FOR approval of the issuance of up to 10,000 additional shares of our Series C Convertible Preferred Stock, initially convertible into up to 1,000,000 shares of our Common Stock, to Longview Fund, L.P.
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PROPOSAL FIVE:FOUR: RATIFICATION OF INDEPENDENT AUDITORS
Change of Independent Auditors
On July 20, 2009 (the “Notice Date”), we advised Grant Thornton LLP (“Grant Thornton”) that it was dismissed as the Company’s principal independent registered public accounting firm.
Grant Thornton’s report on our consolidated financial statements for the fiscal years ended September 28, 2008 and September 30, 2007 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles, except that Grant Thornton’s report for the fiscal years ended September 28, 2008 and September 30, 2007 included a paragraph regarding uncertainty about our ability to continue as a going concern and the report for the fiscal year ended September 30, 2007 also included an explanatory paragraph regarding the restatement of our consolidated financial statements as of October 1, 2006 and October 2, 2005 and for each of the two years ended October 1, 2006 and October 2, 2005.
During the two fiscal year period ended September 28, 2008, and for the period from September 29, 2008 through the Notice Date, there were no disagreements between the us and Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Grant Thornton’s satisfaction, would have caused Grant Thornton to make reference to the subject matter of such disagreements in connection with the issuance of its report on our financial statements.
During the two fiscal year period ended September 28, 2008, and for the period from September 29, 2008 through the Notice Date, Grant Thornton did not advise us that any “reportable events” (as defined in Item 304(a)(1)(v) ofRegulation S-K promulgated by the Securities and Exchange Commission (“SEC”) pursuant to the Securities Exchange Act of 1934, as amended) occurred during such periods, except that during the two fiscal year period ended September 28, 2008, Grant Thornton communicated with management and the audit committee of our Board of Directors that there were material weaknesses in internal control over financial reporting, which were reported and described in Item 9A(T) of our Annual Report onForm 10-K for the fiscal year ended September 28, 2008 filed with the SEC, in Item 9A of our Annual Report onForm 10-K for the fiscal year ended September 30, 2007 filed with the SEC and in our Quarterly Reports onForm 10-Q filed with the SEC during the periods covered by those Annual Reports. As reported in our Annual Report onForm 10-K for the fiscal year ended September 28, 2008, we believe such material weaknesses were subsequently remediated as of the end of fiscal 2008. The Audit Committee of our Board of Directors discussed the subject matter of these material weaknesses with Grant Thornton. We authorized Grant Thornton to respond fully to the inquiries of our new independent registered public accounting firm concerning the material weaknesses.
Grant Thornton was provided with a copy of our disclosure onForm 8-K regarding our change in independent registered public accounting firm and was requested by us to furnish us with a letter addressed to the SEC stating whether Grant Thornton agreed with the statements made by us set forth above in response to Item 304(a) ofRegulation S-K and, if not, stating the respects in which Grant Thornton did not agree. Grant Thornton provided us with such a letter stating that they agreed with our disclosure.
On July 22, 2009, Squar, Milner, Peterson, Miranda & Williamson, LLP (“Squar Milner”) was engaged as the Company’s new principal independent registered public accounting firm to audit the Company’s financial statements for fiscal 2009. During the two fiscal year period ended September 28, 2008, and for the period from September 29, 2008 until the engagement of Squar Milner, neither we, nor anyone on our behalf, consulted Squar Milner on any matters described in Item 304(a)(2) ofRegulation S-K.
The decision to change accountants was recommended and approved by the Audit Committee of our Board of Directors.
The Audit Committee of the Board has appointed Squar, Milner, Peterson, Miranda & Williamson, LLP (“Squar Milner”) to also serve as our principal independent registered public auditor for our 20102011 fiscal year ending October 3, 2010,2, 2011, and is asking our stockholders to ratify this appointment. The affirmative vote of a majority of the shares represented and voting at the Annual Meeting is being sought for ratification of the selection of Squar Milner.
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Stockholder ratification of the appointment of Squar Milner as the Company’sour independent auditors is not required by our By-Laws or otherwise. However, we are submitting the appointment of Squar Milner to the stockholders for ratification as a matter of good corporate practice. In the event the stockholders fail to ratify the appointment, the Audit Committee of the Board may reconsider its selection. Even if the selection is ratified, the Audit Committee of the Board, in its discretion, may direct the appointment of a different independent auditing firm at any time during the year if the Audit Committee believes that such a change would be in the best interests of the CompanyIrvine Sensors and our stockholders or required by law.
Squar Milner began its engagement with the review of the financial statements included in our Quarterly Report onForm 10-Q for our third quarter of fiscal 2009, which ended June 28, 2009. Grant Thornton reviewed our financial statements included in our Quarterly Reports onForm 10-Q for the prior quarterly periods in fiscal 2009 and also reviewed our fiscal 2009 audit conducted by Squar Milner. Grant Thornton also provided consents in connection with our registration statements onForm S-3 andForm S-8 that were filed either within the review period of our fiscal 2009 audit or earlier in fiscal 2009.
A representative of Squar Milner is expected to be present at the Annual Meeting, will have the opportunity to make a statement if he or she desires to do so, and will be available to respond to appropriate questions from stockholders.
Audit and Other Fees
Audit Fees: Squar Milner billed us an aggregate of $174,600 for professional services rendered for the audit of our financial statements for fiscal 2010 and for the review of the financial statements included in our Quarterly Reports onForm 10-Q for the quarterly periods of fiscal 2010. Squar Milner billed us an aggregate of $139,200 for professional services rendered for the audit of our financial statements for the fiscal year ended September 27, 2009, which we refer to as fiscal 2009, for the review of the financial statements included in our Quarterly Report onForm 10-Q for the quarterly period ended June 28, 2009 and for consents issued in connection with our registration statements onForm S-3 andForm S-8 filed on December 24, 2009. Grant Thornton billed us an aggregate of $140,000 for professional services rendered for the reviews of the financial statements included in our Quarterly Reports onForm 10-Q for the quarterly periods ended December 28, 2008 and March 29, 2009 for review of our fiscal 2009 audit conducted by Squar Milner and for consents issued in connection with our registration statements onForm S-3 andForm S-8 in fiscal 2009 and on December 24, 2009 in connection with the filing of ourForm 10-K for fiscal 2009. Grant Thornton billed us an aggregate of $564,700 for such comparable professional services rendered for the fiscal year ended September 28, 2008, which we refer to as fiscal 2008.
Audit-Related Fees: In fiscal 20092010 and fiscal 2008,2009, Squar Milner and Grant Thornton did not bill us for any audit-related fees.
Tax Fees: We did not engage Squar Milner or Grant Thornton to provide advice or assistance in tax compliance/preparation and other tax services for eitherduring fiscal 2010 and fiscal 2009, oralthough we expect to engage Squar Milner to assist us in the preparation of our fiscal 2008.2010 tax return during fiscal 2011.
All Other Fees: We did not engage Squar Milner or Grant Thornton to provide any other services for either fiscal 20092010 or fiscal 2008.2009.
Except for the fees for services described under “Audit Fees” above, we did not pay Squar Milner or Grant Thornton any other fees or engage Squar Milner or Grant Thornton for any other services during fiscal 20092010 or fiscal 2008.2009.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors. Under this policy, pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition, the Audit Committee may also pre-approve particular services on acase-by-case basis. For each proposed service, the independent auditor is required to provide detailedback-up documentation at the time of approval. The Audit Committee may delegate pre-approval authority to one or more of its members. Such a member must report any decisions to the Audit Committee at the next scheduled meeting.
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Vote Sought
The affirmative vote of at least a majority of the shares of Common Stock present in person or by proxy at the Annual Meeting and entitled to vote on this matter is being sought for ratification of the appointment of Squar Milner as the Company’sour independent auditors for the fiscal year ending October 3, 2010.2, 2011.
Recommendation of the Board
The Board recommends that the stockholders vote “FOR” the ratification of the selection of Squar, Milner, Peterson, Miranda & Williamson, LLP to serve as the Company’sour independent auditors for the fiscal year ending October 3, 2010.2, 2011.
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OTHER MATTERS
We know of no other matters that will be presented for consideration at the Annual Meeting. If any other matters properly come before the Annual Meeting, it is the intention of the persons named in the enclosed form of proxy to vote the shares they represent as the Board may recommend. Discretionary authority with respect to such other matters is granted by the execution of the enclosed proxy. The proxy holders shall vote at their discretion on any procedural matters that may come before the meeting.
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EXECUTIVE OFFICERS
The following is a brief description of the capacities in which each of our executive officers, who is not also one of our directors or nominee for director, has served during the past five years and other biographical information. The biographies of our directors, Messrs. Hamot, Carson, Dumont, Johnson, Joll, Kelly, RaganoReed, Scollins, White and Richards,Williams, appear earlier in this proxy statement under “Proposal One: Election of Directors.”
John Leon, age 43, became one of our Vice Presidents in December 2010. Prior to becoming Vice President, he was Manager of various government-funded programs for us, in which capacity he led the development of our EAGLEtm, VAULTtm and other information security products. He joined us in April 2002 as a Systems Engineer, after serving as a principal of iNetWorks Corporation, one of our subsidiaries involved in the development of ultra high speed processing technology. Mr. Leon is co-inventor on three patents related to high density electronics and information security. Mr. Leon holds Masters and B.S. degrees in Computer Science specializing in Software and Network Engineering from California State University at Fullerton.
Peter Kenefick, age 50,51, has been one of our Vice Presidents since October 2006.2006 and a Senior Vice President since September 2008. He was also Vice President of Optex from September 2007. He joined us in April 2005 as Director of Advanced Systems. Prior to that time, from January 2001 until he joined us, Mr. Kenefick was Program Manager at Hamilton Sundstrand Sensor Systems, where he was responsible for development and low rate production of a highly complex military sensor system. From August 1994 to January 2001, Mr. Kenefick had program management assignments with BF Goodrich Aerospace, Space Flight Systems, culminating with his appointment as Director of Space Programs for that company. Prior to his affiliation with BF Goodrich, Mr. Kenefick had approximately 13 years of program management and engineering experience with aerospace and defense contractors. Mr. Kenefick holds a B.S. degree in Mechanical Engineering from Rensselaer Polytechnic Institute.
Dr. Volkan Ozguz, age 54, has been one of our Senior Vice Presidents since March 2005 and Chief Technical Officer since March 2004. He has been with us since December 1995 in various management positions in research and development. Effective December 2009, Dr. Ozguz took an extended personal leave of absence, but still retains his positions with us and is available for consulting services while on leave. Prior to joining us, Dr. Ozguz was a research scientist and lecturer at the University of California, San Diego. He is the author of numerous technical publications and is the inventor on several patents assigned to us. Dr. Ozguz holds a B.S. and M.S. in Electrical Engineering from Istanbul Technical University and a Ph.D. in Electrical Engineering from North Carolina State University.
Daryl Smetana, age 58, joined us in 1984 as a detector and cryogenics technologist. He has also served as a Project Engineer, Program Manager. In 1993, Mr. Smetana was promoted to Director of Programs. In 1994, he also served as Director of Business Management and, in 1996, as Deputy General Manager for our Advanced Technology Division. In 2003, Mr. Smetana became our Deputy Chief Operations Officer and served in that capacity until January 2006 when he became our Vice President of Operations, his current position. Mr. Smetana holds a B.S. in Physics from the California Polytechnic State University, Pomona and a degree in Audio Engineering from the College for Recording Arts in San Francisco.
John J. Stuart, Jr., age 70,71, joined us in January 1983 as our Manager of Special Projects and Communications, became our Chief Financial Officer and Treasurer in July 1985, a Vice President in June 1995, a Senior Vice President in November 1998 and Secretary in March 2001. He relinquished the position of Treasurer in February 1995. Effective October 1998, Mr. Stuart re-assumed the position of Treasurer in addition to his other responsibilities. Mr. Stuart has been a member of the Board of Directors of Optex (from December 30, 2005), of Novalog (since October 1995), of MSI (since October 1997), of RedHawk Vision (since March 2000) and of iNetWorks (since October 2000). During these periods Mr. Stuart has also served as Chief Financial Officer and Secretary of Optex, and has served and continues to serve as Chief Financial Officer of MSI, RedHawk Vision and iNetWorks. He was also Chief Financial Officer of Novalog from October 1995 to June 2001. In May 2002, he became Secretary of Novalog, and in October 2002, resumed the position of Chief Financial Officer of Novalog. Mr. Stuart holds a B.S. in Industrial Management from the Massachusetts Institute of Technology.
Executive Compensation
The following narrative of our compensation practices and related compensation information should be read in conjunction with the Summary Compensation Table and other tables included in this proxy statement, as well as our financial statements and management’s discussion and analysis of financial condition and results of operations included in our Annual Report onForm 10-K for the fiscal year ended September 27, 2009.October 3, 2010. The following narrative includes statements of judgment and forward-looking statements that involve risks and uncertainties. These forward-looking statements are based on our current expectations, estimates and projections about our industry, our business, compensation, management’s beliefs, and certain assumptions made by us, all of which are subject to
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change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,‘‘estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words and include, but are not limited to, statements regarding projected performance and compensation. Actual results could differ significantly from those projected in the forward-looking statements as a result of certain factors, including, but not limited to, the risk factors discussed in our Annual Report onForm 10-K for the fiscal year ended September 27, 2009.October 3, 2010. We assume no obligation to update the forward-looking statements or such risk factors.
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Summary of Fiscal 20082009 and Fiscal 20092010 Executive Compensation
A summary of executive compensation for fiscal 20082009 and fiscal 20092010 for our namedformer principal executive officer and our two other highest paid named executive officers is presented in the following table. We collectively refer to the offers in this table as our “named executive officers.” A narrative description of the material factors pertinent to the information contained in this summary compensation table follows this table.
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Change in
| | | | | | | | | | | | | | | | | | | Change in
| | | | |
| | | | | | | | | | | | | | Pension
| | | | | | | | | | | | | | | | | | | Pension
| | | | |
| | | | | | | | | | | | | | Value and
| | | | | | | | | | | | | | | | | | | Value and
| | | | |
| | | | | | | | | | | | | | Nonqualified
| | | | | | | | | | | | | | | | | | | Nonqualified
| | | | |
| | | | | | | | | | | | Non-Equity
| | Deferred
| | | | | | | | | | | | | | | | | Non-Equity
| | Deferred
| | | | |
| | | | | | | | Stock
| | | | Incentive
| | Compensation
| | All Other
| | | | | | | | | | | | | | | Incentive
| | Compensation
| | All Other
| | |
| | | | | | Bonus
| | Awards
| | Option
| | Plan
| | Earnings
| | Compensation
| | | | | | | Salary
| | Bonus
| | Stock
| | Option
| | Plan
| | Earnings
| | Compensation
| | |
| | Fiscal
| | Salary
| | ($)
| | ($)
| | Awards
| | Compensation
| | ($)
| | ($)
| | Total
| | | Fiscal
| | ($)
| | ($)
| | Awards
| | Awards
| | Compensation
| | ($)
| | ($)
| | Total
|
Name and Principal Position
| | Year
| | ($)
| | (1)
| | (2)
| | ($)
| | ($)
| | (3)
| | (4)
| | ($)
| | | Year
| | (1)
| | (1)
| | ($)
| | ($)
| | ($)
| | (2)
| | (3)
| | ($)
|
(a) | | (b) | | (c) | | (d) | | (e) | | (f) | | (g) | | (h) | | (i) | | (j) | | | (b) | | (c) | | (d) | | (e) | | (f) | | (g) | | (h) | | (i) | | (j) |
|
John C. Carson | | | 2009 | | | | 290,014 | | | | 29,000 | | | | — | | | | — | | | | — | | | | — | | | | 31,953 | | | | 350,967 | | | | 2010 | | | | 261,012 | | | | — | | | | — | | | | 1,612 | | | | — | | | | — | | | | 14,262 | | | | 276,886 | |
Chief Executive Officer and | | | 2008 | | | | 280,779 | | | | — | | | | — | | | | — | | | | — | | | | (95,470 | ) | | | 53,854 | | | | 239,163 | | |
President | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Vice Chairman and Chief | | | | 2009 | | | | 290,014 | | | | 29,000 | | | | | | | | | | — | | | | — | | | | 31,953 | | | | 350,967 | |
Strategist(4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
John J. Stuart, Jr. | | | 2009 | | | | 258,350 | | | | 25,000 | | | | — | | | | — | | | | — | | | | — | | | | 29,583 | | | | 312,993 | | | | 2010 | | | | 224,677 | | | | — | | | | — | | | | 1,612 | | | | — | | | | — | | | | 16,935 | | | | 243,224 | |
Chief Financial Officer, Senior | | | 2008 | | | | 251,231 | | | | — | | | | — | | | | — | | | | — | | | | (97,710 | ) | | | 33,822 | | | | 188,343 | | | | 2009 | | | | 258,350 | | | | 25,000 | | | | — | | | | — | | | | — | | | | — | | | | 29,583 | | | | 312,993 | |
Vice President, Secretary and Treasurer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Volkan Ozguz | | | 2009 | | | | 244,442 | | | | 10,564 | | | | — | | | | — | | | | | | | | — | | | | 26,463 | | | | 281,469 | | |
Senior Vice President, Chief | | | 2008 | | | | 248,352 | | | | 11,956 | | | | 43,605 | | | | — | | | | | | | | — | | | | 10,516 | | | | 314,429 | | |
Technical Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Peter Kenefick | | | | 2010 | | | | 195,437 | | | | — | | | | — | | | | 806 | | | | — | | | | — | | | | 11,081 | | | | 209,470 | |
Senior Vice President | | | | 2009 | | | | 217,151 | | | | 2,146 | | | | — | | | | — | | | | — | | | | — | | | | 24,991 | | | | 244,288 | |
| | |
(1) | | The sole fiscal 2008 bonus award was declared for Dr. Ozguz in January 2009 based on performance against fiscal 2008 individual incentive targets established in January 2008, as measured upon filing of our Initial Form10-K in January 2009. The fiscal 2009 bonus awards were declared for Mr. Carson and Mr. Stuart in December 2009 based on performance against fiscal 2009 individual incentive targets established in March 2009, but havewere not yet been paid. All bonus awards forpaid as of October 3, 2010. A portion of the salary compensation in both fiscal 2008 andyears was accrued, but not yet paid at fiscal 2009 are payable 35% in cash and 65% in common stock under the 2006 Omnibus Incentive Plan.year-end. |
|
(2) | | Reflects stock portion of the bonus award for fiscal 2008 referred to in footnote (1) above. |
|
(3) | | Pension values declined in fiscal 2008 because the named individuals remained employed with us, and the present value of projected future payment streams declined correspondingly. In fiscal 2009, the named individualsMr. Carson and Mr. Stuart voluntarily waived their future pension entitlements under our Executive Salary Continuation Plan, which would have otherwise been an aggregate of $2,442,858 at September 27, 2009.2009, based on actuarial considerations. This reduction is not reflected in the table. Nonqualified deferred compensationDeferred Compensation in our plan is derived from a market-based security, our Common Stock, and as such, does not contribute above-market earnings to the accounts of the named individuals. |
|
(4)(3) | | Amounts in this column include the value of shares contributed to the named individual’s account in the Employee Stock Bonus Plan. See “Employee Stock Bonus Plan.” Amounts in this column |
|
(4) | | Mr. Carson also includeserviced as the valueChief Executive Officer and President of shares contributed to a Rabbi Trust to be held forIrvine Sensors until the benefitcompletion of the named individuals pursuant to a non-qualified deferred compensation retirement plan. See “Non-Qualified Deferred Compensation Plan.”December 2010 Financing as described below in “Certain Relationships and Related Person Transactions”. |
28
Principal Elements of Executive Compensation
Base Salary. Our Compensation Committee reviews all named executive officer base salaries annually, taking into account both updated peer group data in the public domain and from third-party proprietary survey sources such as the AEA and the NACD and individual performance during the previous year. We believe that adjustments should be made to base salary both to reflect market changes and to reward high performance within the confines of overall expense control.annually. Each of our named executive officers undergoes an annual performance review with our Chief Executive Officer, and during that review develops an individual performance plan for the upcoming year. In reviewing past performance, the Chief Executive Officer and the named executive officer will compare actual performance during the review year to the objectives set at the beginning of the year, taking into account other factors that may not have been anticipated when the objectives were first set. In setting objectives for the upcoming year, the Chief Executive Officer and the named executive officer will typically consider not only corporate objectives, but also the named executive officer’s short and long-term career objectives.
To assist our Compensation Committee in reviewing named executive officer performance in fiscal 2008 for fiscal 2009 compensation purposes and in fiscal 2007 for fiscal 2008 compensation purposes, our Chief Executive Officer provided the Compensation Committee with his analysis of the performance and potential of each named executive officer, and made recommendations based on how well each named executive officer executed on his individual performance plan while also taking into account compensation paid in comparable industries, as identified by the AEA and the NACD. In the case of the Chief Executive Officer, the Compensation Committee ranked his fiscal 2007 performance against goals set by the Compensation Committee early in fiscal 2007. These considerations resulted in a recommendation for a 11.5% increase in the Chief Executive Officer’s base salary commencing in January 2008. Recommendations to adjust base salaries of other named executive officers during fiscal 2008 were made by the Compensation Committee on January 14, 2008, ratified by the Board of Directors on January 15, 2008 and such adjustments took effect on January 2, 2008, resulting in the base salaries of our other named executive officers being increased by 4% for the last three quarters of fiscal 2008. There were also no adjustments to the base salaries of the other named executive officers in fiscal 2009 and fiscal 2010, although those individuals, in addition to the Chief Executive Officer and other salaried employees of the Company, agreed to reduced paid work schedules as a Company-wide cost reduction measure in fiscal 2010, which resulted in an approximate 10% reduction in aggregate salary compensation of the Chief Executive Officer and other named executive officers’ base salariesofficers in fiscal 2009, although2010. Such
27
reductions were eliminated following the December 2010 Financings. In addition, the base salaries for Messrs. Joll, Carson and Stuart are governed by the terms of these individuals weretheir employment agreements entered into in effect for the whole of fiscal 2009 as compared to only three quarters of fiscal 2008.December 2010.
Discretionary Bonus. The Compensation Committee also has the discretion under extraordinary circumstances to award bonuses to named executive officers at the recommendation of the Chief Executive Officer. The Chief Executive Officer did not recommended any discretionary bonuses to named executive officers for fiscal 2008 and2009 or fiscal 2009.2010.
Annual Incentive Awards Plan. We have an annual incentive awards plan for executives to more closely align executive compensation with our annual operating plan as measured by financial results. Incentive targets for each named executive officer are determined by the Compensation Committee after considering the recommendation of our Chief Executive Officer. Annual incentive plan awards are designed to reward personal contributions to our success and are earned under a structured formula. The threshold for earning incentive awards for fiscal 20092010 was set at attaining 90% of our total target revenues or the revenues of the respective business unit for which the named executive officer was responsible and at attaining 50% to 70% for other metrics. Achievement of the threshold award level was to result in 50% of the target bonus associated with each metric for each named executive officer, with bonus awards increasing linearly as achievement exceeded threshold levels up to 100% of the target bonus being earned at full achievement of performance targets. For achievement above target, awards were to increase proportionately to the percentage increase in the metric above target up to a maximum of 200%.
For fiscal 20092010 and fiscal 2008,2009, annual performance-measured incentive award targets for named executive officers were established for payments to be made with a combination of stock awards vesting over time and cash. BothSince both potential stock and cash awards for fiscal 20092010 and fiscal 20082009 were based on performance measurements within a twelve monthtwelve-month period, so they areany such awards would not be considered long-term incentive awards as discussed below, even though a portion of such stock awards domay not have become fully vested upon grant.
TwoNo named executive officers met incentive bonus award targets for fiscal 2010. Three named executive officers, Mr. Carson, Mr. Stuart and Mr. Stuart,Kenefick, partially met incentive bonus award targets for fiscal 2009. Mr. Carson’s and Mr. Stuart’s incentive awards resulted from the consummation of a sale of our patent assets by the Company for an aggregate sales price of $9.5 million in fiscal 2009. TheseMr. Kenefick’s incentive award resulted from partial satisfaction of operating results of the business unit which he managed. The payment of these incentive awards earned in fiscal 2009 incentive awards to
29
Mr. Carson and Mr. Stuart have been approved bywas deferred until December 2010, although the Compensation Committeeobligation for these payments was accrued in December 2009 and the Board, effective with the filing of our InitialForm 10-Kis included in compensation shown for fiscal 2009 but have not yet been paid. The stock component will be paid with shares of common stock, one-third of which shares will be immediately vested andin the remaining two-thirds of which will vest upon each anniversary of the filing of the fiscal 2009 InitialForm 10-K over a two-year period, so long as the recipients remain in our service.
One named executive officer, Dr. Ozguz, partially met incentive bonus award targets as determined by final results for fiscal 2008. Dr. Ozguz’s incentive award resulted from achievement of his fiscal 2008 threshold business unit revenue target of $9.1 million. The incentive award to Dr. Ozguz, based on performance metrics for fiscal 2008, was approved by theabove Summary Compensation Committee and the Board, effective with the filing of ourForm 10-K for fiscal 2008. The stock component of Dr. Ozguz’s award was paid with shares of common stock issued on April 1, 2009, one-third of which shares were immediately vested and the remaining two-thirds of which will vest upon each anniversary of the filing of the fiscal 2008Form 10-K over a two-year period, so long as Dr. Ozguz remains in our service.Table.
Fiscal 20102011 annual incentive award targets for named executive officers were established in January 2010, based on performance targets for the various business units, as well as those of our total business. Threshold criteria for award of fiscal 2010 incentive awards remained at 90% for revenue targets and 70% to 80% for other performance metrics. Fiscal 2010 incentive award targets have not yet been set for Dr. Ozguz, pending completion of his personal leave of absence. The fiscal 2010 incentive award targets for Mr. Carson, the CEO and Mr. Stuart, the CFO, contain elements related to total revenue, EBIT and earnings before interest, taxes, depreciation and amortization, or EBITDA, of the consolidated business. Accordingly, incentive awards for these individuals will be substantially more difficult to achieve because of the requirement for the consolidated business to achieve at least 90% of the total revenue target, 70% of the EBIT target and 70% of the EBITDA target in fiscal 2010, regardless of whether any of the business units exceed their threshold targets.established.
Long-Term Equity-Based Incentive Awards. The goal of our long- term, equity-based incentive awards is to serve as a long term staff retention vehicle by aligning the interests of executive officers with stockholders and providing each executive officer with a significant incentive to manage our business from the perspective of an owner with an equity stake. The Compensation Committee administers our equity-based incentive plans for executive officers and determines the size of long-term, equity-based incentives according to each executive’s corporate position, and sets a level it considers appropriate to create a meaningful opportunity for stock ownership. In addition, the Compensation Committee takes into account an individual’s recent performance and his or her potential for future responsibility and promotion. Our Chief Executive Officer historically has made recommendations to our Board of Directors and Compensation Committee regarding the amount of stock and stock options and other compensation to grant to our other named executive officers based upon his assessment of their performance, and may continue to do so in the future. Our executive officers, however, do not make any determinations as to when grants are made of stock or stock options. We do not require a minimum stock ownership by our executive officers.
Under our 2006 Omnibus Incentive Plan, the development of which took into account certain advice of a compensation consultant, we have the ability to grant different forms of equity compensation, including stock options, stock appreciation rights, non-vested stock and non-vested stock units, performance awards and other stock grants. PriorSimilar flexibility is reflected in our proposed 2011 Omnibus Incentive Plan, which is being presented for stockholder approval and adoption pursuant to fiscal 2007,Proposal Three of this proxy statement. Of the various mechanisms available, we chose largely tohave historically focused on the use of stock options or grants of restricted stock as equity
28
compensation for purposesour employees, depending on our financial circumstances and then current employee perceptions as to the incentive value of providingsuch instruments. We believe both types of instruments can provide long-term incentives since we believed they could provide incentives that are commensurate with total stockholder return and employee retention. While we have continued to utilize the grant of stock options to officers and directors in recognition of special circumstances, starting in fiscal 2007 we changed our standard executive compensation practice to emphasize an “earned bonus” concept, with the amount of the bonus based on attainment of pre-specified internal measures related to the executive’s areas of responsibility and to de-emphasize the use of stock options as the primary element of our incentive compensation. We made this change to more closely align the value of incentive payments with the current performance of each executive, rather than primarily relying on the incentives derived from stock options, whose value is based partially on the performance of the corporation as a whole and partially by market forces outside of the control of the executive. We plan to pay any such incentive bonuses generally by awarding 65% of said bonuses in stock valued at the closing price of our common stock not earlier than four trading days after ourForm 10-K is filed for the fiscal year in which the bonuses are earned, or such later date when the
30
amount of the incentive bonus is both determinable and has been ratified by the Compensation Committee or the Board of Directors, and the 35% remainder in cash. The stock component of such an award typically vests in three equal annual increments with the first one-third vesting immediately upon grant. We believe that this approach will offer a more immediate incentive to achievement of pre-specified performance goals while still providing an incentive to work towards achieving increases in the value of our common stock. In contrast, stock options only provide actual economic value to the executive officer if the market price of our shares appreciates over the option term. We continue to believe that time-vesting incentive awards, whether of nonvested stock or stock option grants, offers an incentive for executive retention. Lastly, changes in the financial accounting standards for share based compensation that became effective in our fiscal 2006 eliminated the accounting benefit from the issuance of stock options that previously existed, and we believe our current incentive compensation program should provide greater incentives for our executives at the same or lesser cost than continuing our previous primary reliance on stock options.
In fiscal 2008, we made stock option grants to named executive officers in recognition of extraordinary demands placed upon such individuals by the Company’s financial circumstances. In fiscal 2009, we made no stock option grants to named executive officers. In fiscal 2010, we made stock option grants to all employees, including named executive officers, in recognition of extraordinary demands placed upon our employees by our financial circumstances. The compensation amounts shown for stock options in the Summary Compensation Table are calculated in accordance with Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”)ASC 718 and represent the amount of compensation earned during fiscal 20082009 and fiscal 20092010 that is reflected in our financial statements. Actual compensation earned from stock options can be higher or lower than the compensation expense recognized for purposes of SFAS 123(R).ASC 718.
The stock options we granted in fiscal 20082010 to named executive officers were to Mr. Carson, Mr. Stuart and Mr. StuartKenefick and amounted to options to purchase 60,00040,000 shares, 40,000 shares and 30,00020,000 shares, respectively, or an aggregate of less than 1.0% of our presently outstanding common stock.Common Stock. These options were granted to Mr. Carson, Mr. Stuart and Mr. StuartKenefick on March 5, 2008,August 7, 2010, pursuant to action taken at a meetingby Unanimous Written Consent of our Compensation Committee oneffective as of that date. The material terms of the stock options granted to these named executive officers in fiscal 20082010 included: (a) exercise price of $13.00$0.16 per share, which was greater than the fair market value of our Common Stock on the grant date; (b) 50% of grant vesting immediately, 25% of grant vesting at September 30, 2008, March 31, 2009, September 30, 2009August 7, 2011 and March 31, 2010;25% of grant vesting at August 7, 2012; and (c) ten year term.
Grants of stock or stock options provided to executive officers are typically granted pursuant to action by the Compensation Committee either by unanimous written consent or at a duly constituted meeting of the Compensation Committee in person on the same day as a regularly scheduled meeting of the Board of Directors, in conjunction with ongoing review of each executive officer’s individual performance, unless the executive officer is a new hire or other individual performance considerations are brought to the attention of our Compensation Committee during the course of the year. Such a Compensation Committee meeting is usually scheduled well in advance, without regard to earnings or other major announcements by us. We intend to continue this practice of generally approving stock-based awards concurrently with regularly scheduled meetings, unless earlier approval is required for new hires, new performance considerations or retention purposes, regardless of whether or not our Board of Directors or Compensation Committee knows material non-public information on such date. We have not timed, nor do we intend to time, our release of material non-public information for the purpose of affecting the value of executive compensation. The date of our stock or stock option grants is the date our Board of Directors or Compensation Committee meets to approve such grants or the date our Compensation Committee executes its action by unanimous written consent regarding such approval.purposes. In accordance with our 2006 Omnibus IncentivePlan and the 2011 Plan, the exercise price of all stock options is setmust be at least equal to be equal or greater than the closing price of our common stock as reported by the Nasdaq Capital MarketCommon Stock on the date of the stock option grants.
2010 Non-Qualified Option grants to non-executivePlan. In December 2010, our Board adopted the 2010 Non-Qualified Plan under which our eligible officers, directors and employees, typically have historically occurred in conjunction with their ongoing performance review, or shortly after hire, either uponconsultants and advisors who qualify as “accredited” within the next scheduled meetingmeaning of Rule 501 under the Securities Act of 1933, as amended, may be granted non-incentive stock options. 18,500,000 shares of our Common Stock were reserved for issuance under the 2001 Non-Qualified Plan. Effective as of the Board andfirst day following the closing of the first tranche of December 2010 Financing, stock options for 18,500,000 shares under the 2010 Non-Qualified Option Plan were granted by our Compensation Committee as follows: Bill Joll was granted a ten year option to purchase 5,000,000 shares, John Carson was granted a ten year option to purchase 4,000,000 shares, John Stuart was granted a ten year option to purchase 4,000,000 shares, John Leon was granted a ten year option to purchase 2,000,000 shares, Peter Kenefick was granted a ten year option to purchase 1,000,000 shares, and Messrs. Dumont, Johnson, Kelly, Ragano and Richards were granted, in the aggregate, ten year options to purchase 2,500,000 shares (or 500,000 shares each). For Mr. Joll, 2,000,000 shares were immediately vested, with the balance vesting in 36 monthly installments thereafter. For Messrs. Carson and Stuart, 2,000,000 shares will vest on the earlier of (the “Initial Vesting Date”): (a) July 10, 2012 or pursuant to unanimous written consent(b) the satisfaction or waiver of the Compensation Committee.
Ifcompensation restrictions set forth in the BoardLooney Note, with the balance vesting in 24 equal monthly installments after the Initial Vesting Date. For Messrs. Kenefick and Leon, 25% of Directors determined that an executive officer has engagedthe shares will vest one year after the grant date, with the balance vesting in fraudulent or intentional misconduct,36 equal monthly installments thereafter. Other vesting terms for Messrs. Joll, Carson and ifStuart are as set forth in the misconduct resulted in a significant restatementJoll, Carson and Stuart Employment Agreements and applicable stock option agreements to certain of our financial results, we expect that we would, among other disciplinary action, seek reimbursement of any portion of performance-based or incentive compensation paid or awarded to the executive that is greater than would have been paid or awarded if calculated based on the restated financial results. This remedy would be in addition to,senior executives and not in lieu of, other disciplinary actions and any actions imposed by law enforcement agencies, regulators or other authorities.directors.
3129
Outstanding equity awards held by named executive officers at fiscal 20092010 year-end, September 27, 2009,October 3, 2010, are shown in the following table:
Outstanding Equity Awards at Fiscal Year-End
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards | | | Option Awards | | Stock Awards |
| | | | | | | | | | | | | | | | | | Equity
| | | | | | | | | | | | | | | | | | | Equity
|
| | | | | | | | | | | | | | | | Equity
| | Incentive Plan
| | | | | | | | | | | | | | | | | Equity
| | Incentive Plan
|
| | | | | | Equity
| | | | | | | | | | Incentive Plan
| | Awards:
| | | | | | | Equity
| | | | | | | | | | Incentive Plan
| | Awards:
|
| | | | | | Incentive Plan
| | | | | | | | | | Awards:
| | Market or
| | | | | | | Incentive Plan
| | | | | | | | | | Awards:
| | Market or
|
| | | | | | Awards:
| | | | | | | | Market
| | Number of
| | Payout Value
| | | | | | | Awards:
| | | | | | | | Market
| | Number of
| | Payout Value
|
| | Number of
| | Number of
| | Number of
| | | | | | Number of
| | Value of
| | Unearned
| | of Unearned
| | | Number of
| | Number of
| | Number of
| | | | | | Number of
| | Value of
| | Unearned
| | of Unearned
|
| | Securities
| | Securities
| | Securities
| | | | | | Shares or
| | Shares or
| | Shares, Units
| | Shares, Units
| | | Securities
| | Securities
| | Securities
| | | | | | Shares or
| | Shares or
| | Shares, Units
| | Shares, Units
|
| | Underlying
| | Underlying
| | Underlying
| | | | | | Units of
| | Units of
| | or Other
| | or Other
| | | Underlying
| | Underlying
| | Underlying
| | | | | | Units of
| | Units of
| | or Other
| | or Other
|
| | Unexercised
| | Unexercised
| | Unexercised
| | Option
| | | | Stock That
| | Stock That
| | Rights That
| | Rights That
| | | Unexercised
| | Unexercised
| | Unexercised
| | Option
| | | | Stock That
| | Stock That
| | Rights That
| | Rights That
|
| | Options
| | Options
| | Unearned
| | Exercise
| | Option
| | Have Not
| | Have Not
| | Have Not
| | Have Not
| | | Options
| | Options
| | Unearned
| | Exercise
| | Option
| | Have Not
| | Have Not
| | Have Not
| | Have Not
|
| | (#)
| | (#)
| | Options
| | Price
| | Expiration
| | Vested
| | Vested
| | Vested
| | Vested
| | | Exercisable
| | Unexercisable
| | Options
| | Price
| | Expiration
| | Vested
| | Vested
| | Vested
| | Vested
|
Name
| | Exercisable
| | Unexercisable
| | (#)
| | ($)
| | Date
| | (#)
| | ($)
| | (#)
| | ($)
| | | (#)
| | (#)
| | (#)
| | ($)
| | Date
| | (#)
| | ($)
| | (#)
| | ($)
|
(a) | | (b) | | (c) | | (d) | | (e) | | (f) | | (g) | | (h) | | (i) | | (j) | | | (b) | | (c) | | (d) | | (e) | | (f) | | (g) | | (h) | | (i) | | (j) |
|
John C. Carson | | | 3,500 | | | | — | | | | — | | | | 26.40 | | | | 9/20/15 | | | | — | | | | — | | | | — | | | | — | | | | 20,000 | | | | 20,000 | | | | — | | | | 0.16 | | | | 8/07/20 | | | | 20,000 | | | | — | | | | — | | | | — | |
Chief Executive Officer | | | 15,000 | | | | | | | | | | | | 36.20 | | | | 3/02/14 | | | | — | | | | — | | | | | | | | | | | | 60,000 | | | | — | | | | — | | | | 13.00 | | | | 3/05/18 | | | | — | | | | — | | | | — | | | | — | |
and President | | | 60,000 | | | | | | | | | | | | 13.00 | | | | 3/05/18 | | | | 30,000 | | | | — | | | | | | | | | | | | 3,500 | | | | — | | | | — | | | | 26.40 | | | | 9/20/15 | | | | — | | | | — | | | | — | | | | — | |
during fiscal 2010 | | | | 15,000 | | | | — | | | | — | | | | 36.20 | | | | 3/02/14 | | | | — | | | | — | | | | — | | | | — | |
John J. Stuart, Jr. | | | 2,400 | | | | — | | | | — | | | | 11.60 | | | | 4/16/12 | | | | — | | | | — | | | | — | | | | — | | | | 20,000 | | | | 20,000 | | | | — | | | | 0.16 | | | | 8/07/20 | | | | 20,000 | | | | — | | | | — | | | | — | |
Chief Financial Officer, | | | 7,500 | | | | | | | | | | | | 26.40 | | | | 9/20/15 | | | | — | | | | — | | | | | | | | | | | | 2,400 | | | | — | | | | — | | | | 11.60 | | | | 4/16/12 | | | | — | | | | — | | | | — | | | | — | |
Senior Vice President, | | | 15,000 | | | | | | | | | | | | 36.20 | | | | 3/02/14 | | | | — | | | | — | | | | | | | | | | | | 30,000 | | | | — | | | | — | | | | 13.00 | | | | 3/05/18 | | | | — | | | | — | | | | — | | | | — | |
Secretary and Treasurer | | | 30,000 | | | | | | | | | | | | 13.00 | | | | 3/05/18 | | | | 15,000 | | | | — | | | | | | | | | | | | 7,500 | | | | — | | | | — | | | | 26.40 | | | | 9/20/15 | | | | — | | | | — | | | | — | | | | — | |
Volkan Ozguz | | | 1,500 | | | | — | | | | — | | | | 10.40 | | | | 3/25/13 | | | | — | | | | — | | | | — | | | | — | | |
Senior Vice President, | | | 1,500 | | | | | | | | | | | | 11.50 | | | | 12/03/11 | | | | | | | | | | | | | | | | | | |
Chief Technical Officer | | | 1,448 | | | | | | | | | | | | 11.60 | | | | 4/16/12 | | | | | | | | | | | | | | | | | | |
| | | | 15,000 | | | | — | | | | — | | | | 36.20 | | | | 3/02/14 | | | | — | | | | — | | | | — | | | | — | |
Peter Kenefick | | | | 10,000 | | | | 10,000 | | | | — | | | | 0.16 | | | | 8/07/20 | | | | 10,000 | | | | — | | | | — | | | | — | |
Senior Vice President | | | | 1,600 | | | | — | | | | — | | | | 14.10 | | | | 6/06/12 | | | | — | | | | — | | | | — | | | | — | |
| | | 1,500 | | | | | | | | | | | | 21.50 | | | | 3/16/15 | | | | | | | | | | | | | | | | | | | | 1,500 | | | | — | | | | — | | | | 17.00 | | | | 5/10/15 | | | | — | | | | — | | | | — | | | | — | |
| | | 5,000 | | | | | | | | | | | | 26.40 | | | | 9/20/15 | | | | | | | | | | | | | | | | | | | | 720 | | | | — | | | | — | | | | 26.40 | | | | 9/20/15 | | | | — | | | | — | | | | — | | | | — | |
| | | 1,393 | | | | | | | | | | | | 28.50 | | | | 3/29/14 | | | | | | | | | | | | | | | | | | |
Non-Qualified Deferred Compensation Plan. We maintain a deferred compensation plan, the Non-Qualified Deferred Compensation Plan, for certain key employees with long-term service with us, including three executive officers and other non-executive employees. This plan was established to recognize long term service and motivate such employees to continue their employment with us. Annual contributions are made at the discretion of our Board of Directors. All contributions under this plan are in the form of our common stockCommon Stock and are made to a Rabbi Trust under such plan to be held for the benefit of the deferred compensation plan participants. In October 2007, the Board of Directors authorized a fiscal 2008 contribution to the deferred compensation plan in the amount of 10,000 shares of common stock valued at $99,000. The Board of Directors has historically contributed 10,000 shares of common stockCommon Stock to the deferred compensation plan each fiscal year so long as such contribution does not exceed approximately $262,000 in value, but the Board of Directors did not make such a contribution for fiscal 2009 and fiscal 2010, and there is no assurance that this practice will be continued in the future. Participants’ potential distributions from the Rabbi Trust represent unsecured claims against us. The Rabbi Trust was established by us and is subject to creditors’ claims. Shares in this plan are fully vested and may be distributed to each plan beneficiary when they retire or terminate from service with us. We amended the Non-Qualified Deferred Compensation Plan in fiscal 2008 to comply with technical requirements of Section 409A of the Internal Revenue Code. The valuation of the shares of common stockCommon Stock held by the Rabbi Trust for the benefit of two named executive officers, Mr. Carson and Mr. Stuart, declined $9,675$6,323 and $7,815,$5,107, respectively, induring fiscal 2009.2010.
EmployeeIrvine Sensors Corporation Cash and Deferred & Stock Bonus Plan. All of the Company’sOur employees participate in the EmployeeIrvine Sensors Corporation Cash or Deferred & Stock Bonus Plan, which we refer to as the ESBP or our Employee Stock Bonus Plan, which is a tax-qualified retirement plan established by us in fiscal 1982 and funded annually with stock contributions thereafter to encourage employee retention and align employee interests with those of outside stockholders. Employees are enrolled in the ESBP as of the day following the date on which the employee completes at least one hour of work. In order to share in our contribution to the ESBP in any fiscal year of the ESBP, which we refer to as the Plan Year, an employee must have worked a minimum of 1,000 hours during the Plan Year, and be employed by us at the end of the Plan Year. To date, the ESBP has been funded only with previously unissued shares of our common and preferred stock; thus, we have not contributed any cash to the ESBP. The ESBP’s assets are allocated annually to the participating employees’ accounts in the respective ratios that each participating employee’s compensation for that year bears to the total compensation of participating employees. An employee’s participation in the ESBP terminates on his retirement, disability or death, at which time the employee
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will receive that portion of his or her account that has vested. In fiscal 2009,2010, an employee’s account vested at a rate of 20% per
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year and was 100% vested after five years of employment or upon attaining age 65, whichever comes first. Participants are allowed to diversify contributions made in shares of the Company’sour stock into other investment options after having attained three years of service. There are no special vesting rates for executives. All executive officers named in the Summary Compensation Table participate in the ESBP. In the fiscal year ended September 28, 2008,27, 2009, we contributed 501,0101,785,714 shares of common stockCommon Stock to the ESBP valued at $1,400,000$750,000 as of the date of contribution. In the fiscal year ended September 27, 2009,October 3, 2010, we contributed 1,785,7142,673,796 shares of common stockCommon Stock to the ESBP valued at $750,000 as of the date of contribution. Historically, we have contributed approximately 10% of gross annual payroll to the ESBP, but there is no assurance that we will continue this practice in the future. The value of contributions to the accounts of the named executive officers for fiscal 20082009 and fiscal 20092010 have been included in “All Other Compensation” in the Summary Compensation Table based on valuation at September 28, 200827, 2009 and September 27, 2009,October 3, 2010, the last dates of the respective fiscal years, the effective dates when allocations were made to participant accounts.
Perquisites. Our executives are entitled to the same perquisites as all employees and do not receive additional perquisites because they hold executive positions, except as described below. Our executive officers all participate in our Employee Stock Bonus Plan,ESBP, a tax-qualified retirement plan made available to all full-time employees. In addition, threetwo of theour executive officers, Mr. Carson and Mr. Stuart, are long term employees who participate in the Non-Qualified Deferred Compensation Plan, under whichbut the Board authorized the contribution of 10,000 shares of common stock valued at $99,000 fordid not authorize any contributions to this Plan in fiscal 2008.2009 and fiscal 2010. Mr. Carson and Mr. Stuart our Chief Executive Officer and our Chief Financial Officer, respectively, were eligible for retirement benefits pursuant to our Executive Salary Continuation Program prior to September 2009, when they voluntarily waived their entitlements to future benefits under this Program. For further details regarding our Executive Salary Continuation Program, see “Post Employment Compensation — Executive Salary Continuation Plan.” Our health and life insurance plans are the same for all employees. We typically offer reimbursement to newly hired executive officers for relocation costs.
Post-Employment Compensation
We do not provide post-retirement health coverage for our executives or employees. However, we have previously provided post-employment compensation payments to two retired executives and had the obligation to do so for two current executives upon their retirement until said executives voluntarily waived their entitlements to such future payments in September 2009. In addition, threetwo of our executivesexecutive officers participate in a non-qualified deferred compensation plan, as described above. Further, all full time employees, including our executives, are eligible to participate in our tax-qualified retirement plan.
Executive Salary Continuation Program. We adopted an Executive Salary Continuation Program which we refer to as the ESCP,(the “ESCP”) in 1996 to provide retirement benefits to certain executive officers, two of which, Mr. Carson and Mr. Stuart, are still employed by us and were eligible for benefits pursuant to the ESCP upon retirement until Mr. Carson and Mr. Stuart voluntarily waived their entitlements for all benefits pursuant to the ESCP in September 2009. On December 26, 2007, the ESCP was amended and restated to comply with technical final implementation regulations of Section 409A of the Internal Revenue Code. The ESCP is intended to be a “top-hat” plan (i.e., an unfunded deferred compensation plan maintained for a select group of management or highly compensated employees) under Section 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974.1974, as amended. The ESCP pays out benefits upon retirement based upon a combination of the executive’s age and years of service with us. Upon retirement, ESCP participants are entitled to receive benefits for the remainder of their lifetime, however, neither a surviving spouse nor any other beneficiary of the participant is entitled to receive benefits upon the participant’s death, whether or not such occurs prior to commencing benefits or after benefits have been paid. The ESCP currently provides lifetime post-retirement deferred compensation to two of our retired executives aggregating $184,700 per annum. Based upon their respective ages and years of service, our present Chief Executive Officer and President, John C.Mr. Carson and our present Senior Vice-President and Chief Financial Officer, John J.Mr. Stuart Jr., were also eligible for lifetime post-retirement deferred compensation upon their separation from service with us prior to their voluntary waiver of such entitlements in September 2009. Prior to this waiver, both Mr. Carson’s and Mr. Stuart’s benefits under the ESCP were fixed at $137,000 per annum, an amount that was unchanged by the amendment and restatement of the ESCP in December 2007. The amendment andNo current employee has any retirement benefits under the ESCP.
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restatement of the ESCP in December 2007 eliminated the requirement that participants under the ESCP enter into post-retirement consulting contracts with us. The ESCP was originally adopted in recognition of the extensive prior contributions to us of the participants who were nearing retirement age and as an incentive for retention of the participants who were not yet near retirement age.
Non-Qualified Deferred Compensation Plan. We maintain the Non-Qualified Deferred Compensation Plan for certain key employees with long-term service with us. Annual contributions are made at the discretion of our Board of Directors. All contributions are in the form of our common stockCommon Stock and are made to a Rabbi Trust under such plan to be held for the benefit of the deferred compensation plan participants. Shares in this plan may be distributed to each plan beneficiary when they terminate or retire from service.
Employee Stock Bonus Plan.All of our full-time employees are eligible to participate in the ESBP, which is a tax-qualified retirement plan. To date, the ESBP has been funded only with previously unissued shares of our common and preferred stock; thus we have not contributed any cash to the ESBP. All our named executive officers participate in the ESBP.
Employment Contracts, Termination of Employment andChange-In-Control Agreements
Employment Contracts. We do not have employment contracts with any of our current named principal executive officers. Accordingly, the employment of any ofofficer, Mr. Bill Joll and our currenttwo other highest paid named executive officers, mayJohn C. Carson and John J. Stuart, Jr.
Under the employment agreement with Mr. Joll (the “Joll Employment Agreement”), Mr. Joll will receive an initial base salary of $300,000 per year and a bonus of $50,000 upon the effectiveness date of the Joll Employment Agreement, and will be eligible to receive discretionary bonuses from time to time targeted at 50% of base salary each year (but pro rated for our fiscal year ending October 2, 2011) based on performance goals established from time to time by the Compensation Committee. We also will pay or reimburse Mr. Joll for his reasonable relocation costs for moving to California up to an aggregate of $30,000. The Joll Employment Agreement also provides that Mr. Joll will be granted (i) a ten year stock option to purchase 5,000,000 shares of Common Stock, of which 2,000,000 of the shares subject to such option will be immediately vested upon the grant date, and the balance of which will vest in 36 equal monthly installments thereafter; and (ii) within 60 days after the next stockholder meeting, an additional ten year stock option to purchase that number of shares of Common Stock equal to the greater of (1) 10,000,000 shares or (2) five percent (5%) of the total of (A) the Common Stock then outstanding, (B) the Common Stock issuable upon conversion of all of our outstanding Preferred Stock and other convertible securities, and (C) the Common Stock issuable upon exercise of all options and warrants then outstanding, of which 1,000,000 of the shares subject to such option will be immediately vested upon the grant date, and the balance of which will vest in 36 equal monthly installments thereafter. The options described above will be subject to the terms of our equity incentive plan then in effect, except that such options will remain outstanding until the earlier of (i) five years following Mr. Joll’s termination without cause (as defined in the Joll Employment Agreement) or a termination upon Mr. Joll’s death or permanent disability, or (ii) the respective termination date of such option, provided that no further vesting will occur after the termination of Mr. Joll’s service (as defined in our equity incentive plan then in effect) with us. In the event Mr. Joll’s employment is terminated due to death, all stock options will become fully vested and a pro rated bonus will be paid to the extent we ultimately achieve any corporate goals or milestones for such payment. In the event Mr. Joll’s employment is terminated due to disability (as defined in the Joll Employment Agreement), all stock options will vest in full and be exercisable for 5 years following termination of employment, Mr. Joll will receive a continuation of base salary until Mr. Joll is eligible for short-term disability payments under our group disability policies, but not exceeding 90 days, and Mr. Joll will receive a pro rated bonus to the extent we ultimately achieve any corporate goals or milestones for such payment. In the event Mr. Joll’s employment is terminated without cause (as defined in the Joll Employment Agreement) or due to resignation for good reason (as defined in the Joll Employment Agreement), Mr. Joll will be entitled to receive: (1) salary continuation payments for 24 months; (2) a pro rated bonus to the extent we ultimately achieve any corporate goals or milestones for such payment; (3) full vesting of stock options and such stock options will be exercisable for 5 years following termination of employment; and (4) COBRA benefits on an after-tax basis for twelve months if Mr. Joll elects COBRA coverage. The term of the Joll Employment Agreement is the lesser of five years and the termination of Mr. Joll’s employment and the agreement will automatically renew for successive terms of two years unless certain prior notice is given.
Under the employment agreement with Mr. Carson (the “Carson Employment Agreement”), Mr. Carson will receive an initial base salary of $300,000 per year and be eligible to receive discretionary bonuses from time to time targeted at 50% of base salary each year (subject to the compensation restrictions set forth in the Looney Note) based on performance goals established from time to time by the Compensation Committee. The Carson
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Employment Agreement also provides that Mr. Carson will be granted (i) a ten year stock option to purchase 4,000,000 shares of Common Stock, of which 2,000,000 of the shares subject to such option will be vested upon the earlier of (the “Initial Vesting Date”) (A) July 10, 2012, or (B) the satisfaction or waiver of the compensation restrictions set forth in the Looney Note, and the balance of which will vest in 24 equal monthly installments after the Initial Vesting Date, subject to the terms of the 2010 Nonqualified Plan (defined below) and related form of stock option agreement thereunder; and (ii) provided that stockholders approve an increase in our authorized capital stock and approve a new stock incentive plan (the “Qualified Plan”), an additional ten year stock option to purchase 5,000,000 shares of Common Stock, of which 1,000,000 of the shares subject to such option will be vested upon the earlier of (the “Top-Off Initial Vesting Date”) (i) July 10, 2012, or (ii) the satisfaction or waiver of the compensation restrictions set forth in the Looney Note, and the balance of which will vest in 24 equal monthly installments after the Top-Off Initial Vesting Date, subject to the terms of the our Qualified Plan and related form of stock option agreement thereunder including our standard retirement provisions under such plans. In the event Mr. Carson’s employment is terminated due to death, the stock options described above will become fully vested and a pro rated bonus will be paid to the extent we ultimately achieve any time atcorporate goals or milestones for such payment. In the event Mr. Carson’s employment is terminated due to disability (as defined in the Carson Employment Agreement), the stock options described above will vest in accordance with the terms of the applicable stock option agreement, Mr. Carson will receive a continuation of base salary until Mr. Carson is eligible for short-term disability payments under our discretion.group disability policies, but not exceeding 90 days, and Mr. Carson will receive a pro rated bonus to the extent we ultimately achieve any corporate goals or milestones for such payment. In the event Mr. Carson’s employment is terminated without cause (as defined in the Carson Employment Agreement) or due to resignation for good reason (as defined in the Carson Employment Agreement), Mr. Carson will be entitled to receive: (1) salary continuation payments for 24 months; (2) a pro rated bonus to the extent we ultimately achieve any corporate goals or milestones for such payment; (3) the right to retire in lieu of being terminated without cause; and (4) COBRA benefits on an after-tax basis for twelve months if Mr. Carson elects COBRA coverage. The term of the Carson Employment Agreement is the lesser of four years and the termination of Mr. Carson’s employment and the agreement will automatically renew for successive terms of two years unless certain prior notice is given.
The material terms of the employment agreement with Mr. Stuart (the “Stuart Employment Agreement”) are the same as those set forth in the Carson Employment Agreement, except that his base salary is $260,000 per year and his top-off stock option will be for 4,000,000 shares of Common Stock.
Termination of Employment,Change-in-Control. We do not have any existing arrangements providing for payments or benefits in connection with the resignation, severance, retirement or other termination of any of our named executive officers, changes in their compensation or a change in control except as set forth below.
Nonvested grants of stock options, restricted stock or other equity-related securities under our 2006 Omnibus Incentive Plan and our prior option plans generally provide for accelerated vesting of such grants immediately prior to the effective date of a change in control, unless the obligations of the nonvested securities are assumed by the successor corporation or its parent, or the value of such nonvested securities are replaced by a cash incentive program of the successor corporation or its parent that provides for the realization of said value no later than the original vesting date of the replaced nonvested securities. Nonvested grants of stock options, restricted stock or other equity-related securities under our 2006 Omnibus Incentive Plan also become fully vested in the event of Ordinary Retirement, which is defined to be retirement on or after the date at which the sum of the retiree’s age and number of years of employment with us exceeds eighty-five (85) years for employees or, if the holder of the nonvested security is a non-employee director, when the number of years of service to us exceeds five (5) years. Of our existing named executive officers, only Mr. Carson and Mr. Stuart presently meet the criteria for Ordinary Retirement. All ofOf our current non-employee directors, except Mr. Johnson,Dumont and Dr. Kelly meet the criteria for Ordinary Retirement. The 2006 Omnibus Plan also permits the Compensation Committee or the Board to make future nonvested grants of options or restricted stock to executive officers and directors that vest upon said executive officers and directors termination from service with us under other conditions.
As discussed above, all of our full-time employees, including all of our named executive officers, participate in the ESBP and are eligible for distribution of benefits thereunder upon their retirement. Mr. Carson and Mr. Stuart are the only named executive officers who are participants in the Non-Qualified Deferred Compensation Plan and are thus eligible for distribution of benefits thereunder.
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Principal Elements of Director Compensation
Directors who are our employees are not separately compensated for their services as directors or as members of committees of the Board. Directors who were not our employees receivedpresently receive a quarterly retainer of $2,500, $1,500$2,250, $1,350 for each board meeting attended, $750$630 for each Audit Committee meeting attended and $500$450 for each Compensation Committee or Nominating and Corporate Governance Committee meeting attended in fiscal 2009.2010. The Board is currently reviewing compensation for directors and committee members for fiscal 2011 and anticipates that some adjustments to director compensation will be implemented in the near future. These amounts were unchangeda 10% reduction from director compensation for the first half of fiscal 20082009 as recommended by the Compensation Committee in its meeting of March 31, 2009 and ratified and approved by the Board on April 1, 2009. In the future, any adjustments to director compensation will be approved by the Compensation Committee. Before its termination
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Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies for compensation paid to the principal executive officer and to each of the three other most highly compensated officers (other than the principal financial officer) to the extent that such compensation exceeds $1.0 million per covered officer in any fiscal year. The limitation applies only to compensation that is not considered to be performance-based. Non-performance-based compensation paid to our executive officers during fiscal 20082010 did not exceed the $1.0 million limit per officer, and we do not expect the non-performance-based compensation to be paid to our executive officers during fiscal 20102011 to exceed that limit. Because it is unlikely that the cash compensation payable to any of our executive officers in the foreseeable future will approach the $1.0 million limit, we do not expect to take any action to limit or restructure the elements of cash compensation payable to our executive officers so as to qualify that compensation as performance-based compensation under Section 162(m). We will reconsider this decision should the individual cash compensation of any executive officer ever approach the $1.0 million level.