reason, the shares subject to, but not delivered under, such option shall be available forother options to the same employee or other employees.          (3) In the event of any merger, reorganization, consolidation, recapitalization, stockdividend, or other change in corporate structure affecting the Common Stock of the Company, theCommittee shall make appropriate proportional adjustments to any or all of the aggregate number ofshares which may be delivered under the Plan and the number and option price of shares subject tothe outstanding options granted under the Plan (provided that the number of shares subject to anyoption shall always be a whole number). Any adjustment under this Section 3(b)(3) shall be madeonly to the extent that such adjustment will not cause a violation of the requirements of Section409A of the Internal Revenue Code.          SECTION 4. Eligibility and Extent of Participation. (a) The employees eligible toreceive options under the Plan shall consist of key employees of the Company and its subsidiaries.For the purpose of the Plan, the term “subsidiary” means a corporation 50% or more of the votingpower of which is owned by the Company directly or indirectly through one or more subsidiaries.          (b) Subject to the limitations of the Plan, the Committee shall, after such consultation withand consideration of the recommendations of management as the Committee considers desirable, selectfrom eligible employees those to be granted options and determine the time when each option shallbe granted and the number of shares subject to each option. Subject to the provisions of paragraph(b) of Section 3, more than one option may be granted to the same person.          SECTION 5. Option Price. The price at which shares may be purchased upon exercise ofa particular option shall be as specified by the Committee, in its sole discretion, at the timesuch option is granted and shall be set forth in the applicable option agreement.          SECTION 6. Exercise of Options. (a) Subject to the provisions of the Plan withrespect to death, retirement and termination of employment, the period during which each option maybe exercised shall be fixed by the Committee in its sole discretion at the time such option isgranted, but in no event shall such period expire later than fifteen years from the date the optionis granted.          (b) No option granted under the Plan may be exercised until the expiration of one year ofcontinued employment by the Company or any of its subsidiaries or affiliates immediately followingthe date the option is granted and, except as provided in Section 9, only during the continuance ofthe optionee’s employment with the Company or any of its subsidiaries or affiliates. Subject tothe foregoing limitations and unless cancelled prior to exercise, each option shall be exercisablein installments on a cumulative basis pursuant to the following schedule, subject to such differentor additional terms and conditions as the Committee may, in its sole discretion, specify in theapplicable option agreement or thereafter:     (1) 20% on and after the first anniversary of the grant of the option,     (2) an additional 20% on and after the second anniversary of the grant of the option,
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     (3) an additional 20% on and after the third anniversary of the grant of the option,     (4) an additional 20% on and after the fourth anniversary of the grant of the option,and     (5) the remaining 20% on and after the fifth anniversary of the grant of the option.          (c) The Committee may impose such other conditions with respect to the exercise of options,including without limitation any conditions relating to the application of federal or statesecurities laws, as it may deem necessary or advisable.          (d) No shares shall be delivered pursuant to any exercise of an option until payment in fullof the option price therefor is received by the Company. Such payment may be made in cash, or itsequivalent, or by exchanging shares of Company stock owned by the optionee (which are not thesubject of any pledge or other security interest), or by a combination of the foregoing, providedthat the combined value of all cash and cash equivalents and the fair market value of any suchstock so tendered to the Company, valued as of the date of such tender, is equal to such optionprice. No optionee or the legal representative, legatee or distributee of an optionee, shall bedeemed to be a holder of any shares subject to any option prior to the issuance of such shares uponexercise of such option.          (e) Notwithstanding the foregoing, unless otherwise specifically determined by the Committeeat the time of grant, all options theretofore granted and not fully exercisable shall becomeexercisable in full upon the happening of any of the following events: (i) a tender or exchangeoffer for Common Stock (other than such an offer by the Company) shall have been consummated andfollowing the consummation thereof the offeror (or any “group”, as defined in Section 13(d)(3) ofthe Securities Exchange Act, of which the offeror is a member) shall be the owner of shares of theCompany with respect to which 25% or more of the total number of votes for the election ofdirectors may be cast, (ii) the shareholders of the Company shall have approved an agreementproviding for a transaction for the exchange of at least a majority of the outstanding Common Stockfor cash or property or securities (other than common stock of the Company) or for the sale orother disposition of all or substantially all of the assets of the Company. Options which becomefully exercisable by reason of events specified in clauses (i) or (ii) shall remain exercisable for90 days following the date on which they become so exercisable, after which they will revert tobeing exercisable in accordance with their other terms, provided, however, that no option which haspreviously been exercised or has expired or otherwise terminated shall become exercisable by virtueof this paragraph nor shall this paragraph permit exercise of any option during the portion, ifany, of such 90 day period which follows the termination or expiration of any such option. As usedin this paragraph, the term “offeror” includes any person controlling, controlled by or undercommon control with the offeror.          (f) Anything herein to the contrary notwithstanding, no shares shall be issued pursuant to anyexercise of an option to the extent that upon issuance of such shares the Company would cease to bean includible corporation in an affiliated group of which KB Home
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is also an includible corporation (all as described in Section 1504 of the Internal RevenueCode). To the extent that the Company shall be so precluded from issuing shares upon the exerciseof an option, the optionee shall be entitled to receive either (i) shares reacquired by the Companyas contemplated by Section 3(b) hereof, (ii) a cash sum equal to the amount by which the fairmarket value of the shares which the optionee would otherwise be entitled to receive, valued as ofthe date of such exercise, exceeds the option price of such shares, net of applicable withholdingtaxes, plus any amount tendered by the optionee at the time of exercise, or (iii) a combination of(i) and (ii), as the Committee shall determine in its sole discretion.          SECTION 7. Financing of Shares Upon Exercise. If requested by the optionee at thetime of exercise of an option, the Committee may in its sole discretion provide financing by theCompany to the optionee for the purchase of such shares. Unless otherwise determined by theCommittee in accordance with subparagraph 7(g), such financing shall be upon the following termsand conditions:          (a) Amount. Loans may be made in an amount no greater than the lesser of (i) theexercise price, or (ii) 50% of the fair market value of the Common Stock purchased on the date ofexercise of the option, or (iii) such amount as may be permitted by law or regulation.          (b) Interest Rate. The principal amount of each such loan shall bear interest at afloating rate equal to 1% over the minimum commercial lending rate charged by Morgan Guaranty TrustCompany of New York, as the same may change from time to time, or any lesser rate required byapplicable law.          (c) Repayment. A payment on account of interest shall be due on the November 30following the borrowing in an amount equal to the lesser of (i) 3% per annum on the thenoutstanding balance of such loan or (ii) the aggregate amount of all cash dividends received by theoptionee on the Common Stock so financed during the period from date of option exercise. Accruedunpaid interest on December 1 of each year shall be added to principal of the loan. Principal andall accrued unpaid interest thereon shall be due and payable upon the first to occur of (1) thedate the optionee sells or otherwise transfers such shares**,**(2) the date the optionee ceasesemployment with the Company or any subsidiary or affiliate, or (3) the expiration of 12 months fromthe date of the borrowing.          (d) Security. Such loans shall be recourse obligations of the optionee secured by thepledge of the shares so financed.          (e) Documentation. In connection with such loan, the optionee shall execute suchdocuments, promissory notes and pledge and security agreements with the Company and shall take suchfurther and other action as the Committee may deem necessary or appropriate.          (f) General Restrictions. Such financing shall be subject to all legal requirementsand restrictions pertinent thereto, including, if applicable, Regulation G as promulgated by theFederal Reserve Board. The grant of any option by the Committee shall in no way obligate theCompany or the Committee to provide any financing whatsoever upon the exercise of any option.
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          (g) Amendments. Subject only to the restrictions set forth in subparagraph 7(f), theCommittee may, in its sole discretion, provide Company financing, or assist in arranging otherfinancing, for optionees upon the exercise of options upon such other terms and conditions as itmay deem to be appropriate or advisable.          SECTION 8. Transferability of Options. An option granted under the Plan may not betransferred except by will or the laws of descent and distribution and, during the lifetime of theperson to whom granted, may be exercised only by such person.          SECTION 9. Death, Retirement and Termination of employment. Subject to the conditionthat no option may be exercised in whole or in part after the expiration of the option periodspecified in the applicable option agreement:          (a) Upon the death of any optionee while employed or within the three-month period referred toin clause (b) below, the person or persons to whom such optionee’s right, under the option aretransferred by will or the laws of descent and distribution may, prior to the expiration of twelvemonths after the date of such optionee’s death, purchase any or all of the shares with respect towhich such optionee was entitled to exercise such option immediately prior to his death;          (b) Upon termination of employment for any reason**,**including retirement, an optionee may,prior to the expiration of three months after the date of such termination, purchase any or all ofthe shares with respect to which such optionee was entitled to exercise such option immediatelyprior to such termination; and          (c) Upon expiration of the twelve month or three month periods described in subparagraphs 9(a)and 9(b), as the case may be, the options of an optionee who has died or terminated employmentshall be cancelled to the extent not theretofore cancelled or exercised.          (d) For purposes of this Plan, termination of employment shall not be deemed to occur upon thetransfer of any optionee from the employ of the Company to the employ of any subsidiary oraffiliate. For purposes of this subparagraph 9(d), “affiliate” means (1) any entity 50% or more ofthe voting interest in which is owned, directly or indirectly, by an entity which owns, directly orindirectly, 50% or more of the voting interest in the Company and (2) any entity which owns,directly or indirectly, 50% or more of the voting interest in the Company.          SECTION 10. Delivery of Shares. No shares shall be delivered pursuant to any exerciseof an option until the requirements of such laws and regulations as may be deemed by the Committeeto be applicable thereto are satisfied.          SECTION 11. Withholding. Prior to the delivery of certificates for shares, theCompany shall have the right to require a payment from a participant to cover any applicablewithholding taxes due in connection with the exercise of an option.          SECTION 12. Amendments, Suspension or Discontinuance. The Board of Directors mayamend, suspend, or discontinue the Plan, and may, except upon the happening of an event describedin Section 6(e), cancel any option granted pursuant to the Plan prior to the time any portion ofsuch option becomes exercisable pursuant to the applicable option
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agreement, but except as permitted by paragraph (b) (3) of Section 3**,**may not, without theprior approval of the stockholders of the Company, make any amendment which operates (a) to abolishthe Committee, change the qualification of its members or withdraw the administration of the Planfrom its supervision, (b) to make any material change in the class of eligible employees as definedin the Plan, (c) to increase the total number of shares which may be delivered on exercise ofoptions granted under the Plan, or (d) to extend the maximum option period or the period duringwhich options may be granted under the Plan.          SECTION 13. Term of Plan. The Plan shall become effective on the date it is approvedand adopted by the Board of Directors of the Company, subject to the approval of the Plan byshareholders of the Company. No award shall be granted under the Plan after the date that is ten(10) years after the date on which the Plan was approved by the Company’s shareholders or aftersuch earlier date as the Committee may decide, in its sole discretion.
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