EXHIBIT 10.17
IRVINE SENSORS CORPORATION
STOCK APPRECIATION RIGHTS AGREEMENT
(STOCK SETTLED)
     This STOCK APPRECIATION RIGHTS AGREEMENT (this “Agreement”), dated as of
                                                               ,                
      (the “Effective Date”), is between Irvine Sensors Corporation, a Delaware
corporation (the “Company”) and                                           , an
individual resident of                                           
(“Participant”). This Agreement is granted under the Irvine Sensors Corporation
2006 Omnibus Incentive Plan (the “Plan”) and is subject to the terms of that
Plan. This Agreement represents the Company’s unfunded and unsecured promise to
issue common stock of the Company, $0.01 par value (“Shares”) at a future date
based on appreciation in the market value of such Shares from the date of this
Agreement, subject to the terms of this Agreement and the Plan.
     1. Award. The Company hereby grants Participant stock appreciation rights
(the “SAR”) with respect to                      shares of Common Stock (the
“Award”). The initial value of the SAR is $                     per share (the
“Grant Price”). The Award represents the right to receive the Shares only when,
and with respect to the number of Shares to which, the Award has vested (the
“Vested Shares”). The Award is subject to the terms and conditions set forth in
this Agreement and in the Plan. A copy of the Plan will be furnished upon
request of Participant. The SAR shall terminate at the close of business ten
(10) years from the Effective Date.
     2. Vesting. Subject to the terms and conditions of this Agreement and the
Plan, the SAR awarded to Participant pursuant to this Agreement shall vest and
may be exercised by Participant with respect to the number of Vested Shares set
forth in the following schedule:

      On or after Each of the Following Dates   Percentage of Shares with
Respect to Which
the SAR Is Exercisable                                                

     Notwithstanding the provisions set forth above in this Section 2, (i) in
the event of termination of Participant’s employment with or Service to the
Company as a result of Participant’s death or Permanent Disability while in the
employ or Service of the Company, the next vesting date for the SAR, as set out
above, shall accelerate by twelve (12) months as of such date of termination;
and (ii) if, after the initial vesting date set forth above, Participant ceases
to be an employee or provide Service by reason of Ordinary Retirement prior to
the vesting of the SAR under Sections 2 or 6 hereof, then the vesting of the
SAR, as set out above, shall accelerate in full as of such date of Ordinary
Retirement. For purposes of this Agreement, “ Ordinary Retirement ” shall mean
the retirement of the Participant on a date upon which, if the Participant is an
employee, the sum of the Participant’s age and number of years of employment
with the Company equals or exceeds eighty-five (85) years or, if the Participant
is a non-employee director, the number of years of Service to the Company
exceeds five (5) years.

 

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     3. Exercise of SAR after Death or Termination of Employment or Service. The
SAR shall terminate and may no longer be exercised if Participant ceases to be
employed by or provide Service to the Company or its Affiliates, except that:
     (a) If Participant’s employment or Service shall be terminated for any
reason, voluntary or involuntary, other than for “Misconduct” (as defined in
Section 3(f)), Ordinary Retirement (as defined in Section 2) or Participant’s
death or Permanent Disability, Participant may at any time within a period of
three (3) months after such termination exercise the SAR to the extent the SAR
was exercisable by Participant on the date of the termination of Participant’s
employment or Service.
     (b) If Participant’s employment is terminated for Misconduct, the SAR shall
be terminated as of the date of the act giving rise to such termination.
     (c) If Participant shall die while the SAR is still exercisable according
to its terms, or if employment or Service is terminated because of Participant’s
Permanent Disability while in the employ or Service of the Company and
Participant shall not have fully exercised the SAR, such SAR may be exercised at
any time within twelve (12) months after Participant’s death or date of
termination of employment or Service for such Permanent Disability by
Participant, personal representatives, administrators or guardians of
Participant, as applicable, or by any person or persons to whom the SAR is
transferred by will or the applicable laws of descent and distribution, to the
extent of the full number of Vested Shares Participant was entitled to purchase
under the SAR on (i) the earlier of the date of death or termination of
employment or Service or (ii) the date of termination for such Permanent
Disability, as applicable.
     (d) If Participant’s employment or Service is terminated for Ordinary
Retirement, the SAR shall not be terminated and shall remain exercisable for its
full term.
     (e) Notwithstanding the above, in no case may the SAR be exercised to any
extent by anyone after the termination date of the SAR.
     (f) “Misconduct” shall mean (i) the commission of any act of fraud,
embezzlement or dishonesty by Participant, (ii) any unauthorized use or
disclosure by such person of confidential information or trade secrets of the
Company (or of any Affiliate), or (iii) any other intentional misconduct by such
person adversely affecting the business or affairs of the Company (or any
Affiliate) in a material manner. However, if the term or concept has been
defined in an employment agreement between the Company and Participant, then
Misconduct shall have the definition set forth in such employment agreement. The
foregoing definition shall not in any way preclude or restrict the right of the
Company (or any Affiliate) to discharge or dismiss any Participant or other
person in the Service of the Company (or any Affiliate) for any other acts or
omissions but such other acts or omissions shall not be deemed, for purposes of
the Agreement, to constitute grounds for termination for Misconduct.
     4. Method of Exercise of SAR.
     (a) SARs may be exercised with respect to Vested Shares by delivery to the
Company of a written notice which shall state that Participant elects to
exercise the SAR as to the number of Vested Shares specified in the notice as of
the date specified in the notice.
     (b) Subject to deduction as described in Section 4(c) for withholding, upon
exercise of the SAR, the Participant shall be entitled to receive a number of
Shares (“Issued Shares”) for each Vested Share with respect to which the SAR is
exercised that is equal to (i) the excess of the Fair Market Value of one Share
on the date of exercise, over the Grant Price, divided by (ii) the Fair Market
Value of one Share on the date of exercise. The distribution to the Participant,
or in the case of the Participant’s death, to the Participant’s legal
representative, of Issued Shares shall be

 

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evidenced by a stock certificate, appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company, or other appropriate
means as determined by the Company. This SAR may be exercised only with respect
to full shares and no fractional share of stock shall be issued.
     (c) By signing this Agreement, Participant agrees that the Company may
withhold from Issued Shares due upon exercise of the SAR, or at its election
from the Participant’s wages or other cash compensation, all income tax
(including federal, state and local taxes), social insurance, payroll tax or
other tax-related withholding (“Tax Related Items”) due from the Company or the
subsidiary that is the Participant’s actual employer. To the extent that the
Company determines that it is not feasible, or not permissible under applicable
law, to withhold in Shares, then prior to the issuance of Issued Shares as
provided in Section 4(b) above, Participant shall pay, or make adequate
arrangements satisfactory to the Company or to the Participant’s actual employer
(in their sole discretion) to satisfy all withholding obligations of the Company
and/or the Participant’s actual employer. In this regard, Participant authorizes
the Company or the Participant’s actual employer to withhold all applicable Tax
Related Items legally payable by Participant from Participant’s wages or other
cash compensation payable to Participant by the Company or the Participant’s
actual employer. Participant shall pay to the Company or to the Participant’s
actual employer any amount of Tax Related Items that the Company or the
Participant’s actual employer may be required to withhold as a result of
Participant’s receipt of the Award, the vesting of the Award, or exercise of the
Award that cannot be satisfied by the means previously described. The Company
may refuse to deliver Issued Shares to Participant if Participant fails to
comply with Participant’s obligation in connection with the Tax Related Items as
described herein.
     Regardless of any action the Company or the subsidiary of the Company that
is Participant’s actual employer takes with respect to any or all Tax Related
Items, Participant acknowledges that the ultimate liability for all Tax Related
Items legally due by Participant is and remains Participant’s responsibility and
that the Company and/or the Participant’s actual employer (i) make no
representations or undertakings regarding the treatment of any Tax Related Items
in connection with any aspect of the Award, including the grant of the Award,
the vesting of Award, or the exercise of the Award; and (ii) do not commit to
structure the terms of the grant or any aspect of the Award to reduce or
eliminate the Participant’s liability for Tax Related Items.
     5. Additional Restrictions on Transfer of SAR. During the lifetime of
Participant, the SAR shall be exercisable only by Participant and shall not be
sold, assigned, transferred, gifted, pledged, hypothecated, or in any manner
encumbered or disposed of at any time prior to delivery of the Issued Shares in
accordance with Section 4, other than by will or the laws of descent and
distribution.
     6. Change in Control.
     (a) Immediately prior to the effective date of a “Change in Control” (as
defined in Section 6(e)), this SAR shall vest and become exercisable for all of
the Shares subject to the Award and may be exercised for any or all of those
Shares subject to the Award. However, this SAR shall not vest and become
exercisable on an accelerated basis if and to the extent: (i) this SAR is to be
assumed by the successor corporation (or parent thereof) or is otherwise to be
continued in full force and effect pursuant to the terms of the Change in
Control transaction or (ii) this SAR is to be replaced with a cash incentive
program of the successor corporation which preserves the economic value existing
at the time of the Change in Control of the Shares subject to the Award for
which this SAR is not otherwise at that time exercisable and provides for
subsequent payout of that economic value no later than the time this SAR would
have vested and become exercisable for those Shares subject to the Award.

 

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     (b) Immediately following the consummation of the Change in Control, this
SAR shall terminate, except to the extent assumed by the successor corporation
(or parent thereof) or otherwise continued in effect pursuant to the terms of
the Change in Control transaction.
     (c) If this SAR is assumed or otherwise continued in effect in connection
with a Change in Control, then this SAR shall be appropriately adjusted, upon
such Change in Control, to apply to the number and class of securities which
would have been issuable to Participant in consummation of such Change in
Control had this SAR been exercised immediately prior to such Change in Control,
and appropriate adjustments shall also be made to the Grant Price, provided the
aggregate Grant Price shall remain the same. To the extent that the holders of
Common Stock receive cash consideration for their Common Stock in consummation
of the Change in Control, the successor corporation (or its parent) may, in
connection with the assumption of this SAR, substitute one or more shares of its
own common stock with a fair market value equivalent to the cash consideration
paid per share of Common Stock in such Change in Control.
     (d) This Agreement shall not in any way affect the right of the Company to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
     (e) For purposes of this Agreement, “Change in Control” shall mean a change
in ownership or control of the Company effected through any of the following
transactions: (i) a merger, consolidation or other reorganization unless
securities representing more than 50% of the total combined voting power of the
voting securities of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly and in substantially the same
proportion, by the persons who beneficially owned the Company’s outstanding
voting securities immediately prior to such transaction; (ii) the sale, transfer
or other disposition of all or substantially all of the Company’s assets; or
(iii) the acquisition, directly or indirectly by any person or related group of
persons (other than the Company or a person that directly or indirectly
controls, is controlled by, or is under common control with, the Company), of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than 50% of the total combined voting power of the
Company’s outstanding securities pursuant to a tender or exchange offer made
directly to the Company’s stockholders.
     7. Capital Adjustments and Reorganization. Should any change be made to the
Common Stock by reason of any stock split, reverse stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Company’s receipt
of consideration, appropriate adjustments shall be made to (a) the number and/or
class of securities subject to this SAR and (b) the Grant Price in order to
reflect such change and thereby preclude a dilution or enlargement of benefits
hereunder.
     8. Miscellaneous
     (a) Entire Agreement; Plan Provisions Control. This Agreement (and any
addendum hereto) and the Plan constitute the entire agreement between the
parties hereto with regard to the subject matter hereof. In the event that any
provision of the Agreement conflicts with or is inconsistent in any respect with
the terms of the Plan, the terms of the Plan shall control. All decisions of the
Committee with respect to any question or issue arising under the Plan or this
Agreement shall be and binding on all persons having an interest in this SAR.
All capitalized terms used in this Agreement and not otherwise defined in this
Agreement shall have the meaning assigned to them in the Plan.

 

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     (b) Rights of Stockholders. Prior to the exercise of the SAR and prior to
receipt by the Participant, Participant’s legal representative, or a permissible
assignee, of Issued Shares as provided in this Agreement, neither Participant,
Participant’s legal representative nor a permissible assignee shall be or have
any of the rights and privileges of a stockholder of the Company with respect to
this Agreement or the Shares subject to the Award referenced in this Agreement.
     (c) No Right to Employment. The grant of the SAR shall not be construed as
giving Participant the right to be retained in the employ of, or if Participant
is a director of the Company or an Affiliate as giving the Participant the right
to continue as a director of, the Company or an Affiliate, nor will it affect in
any way the right of the Company or an Affiliate to terminate such employment or
position at any time, with or without cause. In addition, the Company or an
Affiliate may at any time dismiss Participant from employment, or terminate the
term of a director of the Company or an Affiliate, free from any liability or
any claim under the Plan or this Agreement. Nothing in this Agreement shall
confer on any person any legal or equitable right against the Company or any
Affiliate, directly or indirectly, or give rise to any cause of action at law or
in equity against the Company or an Affiliate. The SAR granted under this
Agreement shall not form any part of the wages or salary of Participant for
purposes of severance pay or termination indemnities, irrespective of the reason
for termination of employment. Under no circumstances shall any person ceasing
to be an employee of the Company or any Affiliate be entitled to any
compensation for any loss of any right or benefit under this Agreement or the
Plan which such employee might otherwise have enjoyed but for termination of
employment, whether such compensation is claimed by way of damages for wrongful
or unfair dismissal, breach of contract or otherwise. By participating in the
Plan, Participant shall be deemed to have accepted all the terms and conditions
of the Plan and this Agreement and the terms and conditions of any rules and
regulations adopted by the Committee and shall be fully bound thereby.
     (d) Governing Law. The validity, construction and effect of the Plan and
this Agreement, and any rules and regulations relating to the Plan and this
Agreement, shall be determined in accordance with the internal laws, and not the
law of conflicts, of the State of Delaware.
     (e) Severability. If any provision of the Agreement is or becomes or is
deemed to be invalid, illegal or unenforceable in any jurisdiction or would
disqualify the Agreement under any law deemed applicable by the Committee, such
provision shall be construed or deemed amended to conform to applicable laws, or
if it cannot be so construed or deemed amended without, in the determination of
the Committee, materially altering the purpose or intent of the Plan or the
Agreement, such provision shall be stricken as to such jurisdiction or the
Agreement, and the remainder of the Agreement shall remain in full force and
effect.
     (f) No Trust or Fund Created. Neither the Plan nor this Agreement shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and Participant or
any other person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured creditor of the Company or
any Affiliate.
     (g) Headings. Headings are given to the Sections and subsections of the
Agreement solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Agreement or any provision thereof.

 

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     (h) Notices. Any notice required to be given or delivered to the Company
under the terms of this Agreement shall be addressed to the Company at its
principal corporate offices. Any notice required to be given or delivered to
Participant shall be addressed to Participant at the address indicated below
Participant’s signature line at the end of this Agreement or at such other
address as Participant may designate by ten (10) days’ advance written notice to
the Company. Any notice required to be given under this Agreement shall be in
writing and shall be deemed effective upon personal delivery or upon the third
(3rd) day following deposit in the U.S. mail, registered or certified, postage
prepaid and properly addressed to the party entitled to such notice.
     (i) Conditions Precedent to Issuance of Issued Shares. Issued Shares shall
not be issued pursuant to the exercise of the SAR unless such exercise and the
issuance and delivery of the applicable Issued Shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act of 1934, as amended, the
rules and regulations promulgated thereunder, state blue sky laws, the
requirements of any applicable Stock Exchange or the Nasdaq Stock Market and the
Delaware General Corporation Law. As a condition to the exercise of the purchase
price relating to the SAR, the Company may require that the person exercising or
paying the purchase price represent and warrant that the Issued Shares are being
purchased only for investment and without any present intention to sell or
distribute such Issued Shares if, in the opinion of counsel for the Company,
such a representation and warranty is required by law.
     (j) Withholding. In order to provide the Company with the opportunity to
claim the benefit of any income tax deduction which may be available to it in
connection with the Award, and in order to comply with all applicable federal or
state tax laws or regulations, the Company may take such action as it deems
appropriate to insure that, if necessary, all applicable federal or state
payroll, withholding, income or other taxes are withheld or collected from
Participant.
     (k) Consultation With Professional Tax and Investment Advisors. Participant
acknowledges that the grant, exercise and vesting with respect to this SAR, and
the sale or other taxable disposition of the Issued Shares, may have tax
consequences pursuant to the Internal Revenue Code of 1986, as amended, or under
local, state or international tax laws. Participant further acknowledges that
Participant is relying solely and exclusively on Participant’s own professional
tax and investment advisors with respect to any and all such matters (and is not
relying, in any manner, on the Company or any of its employees or
representatives). Participant understands and agrees that any and all tax
consequences resulting from the SAR and its grant, exercise and vesting, and the
sale or other taxable disposition of the Issued Shares, is solely and
exclusively the responsibility of Participant without any expectation or
understanding that the Company or any of its employees or representatives will
pay or reimburse Participant for such taxes or other items.

 

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     IN WITNESS WHEREOF, the Company and Participant have executed this
Agreement on the date set forth in the first paragraph.

            IRVINE SENSORS CORPORATION
      By:           Name:           Title:        

            PARTICIPANT:
                Name:           Address:                    Facsimile: