Document:

Exhibit 10.3

 

STANDSTILL AGREEMENT

 

This
Standstill Agreement (this “Agreement”) is dated as of November     , 2010 (the “Effective Date”),
by and between The Howard Hughes Corporation, a Delaware corporation (the “Company”),
and Pershing Square Capital Management, L.P., a Delaware limited partnership,
Pershing Square, L.P., a Delaware limited partnership, Pershing Square II,
L.P., a Delaware limited partnership, and PSRH, Inc., a Cayman Islands
corporation (collectively, “Investor”).

 

WHEREAS, Investor
has entered into that certain Amended and Restated Stock Purchase Agreement,
effective as of March 31, 2010 (the “Investment Agreement”), that
contemplates, among other things, the purchase by Investor of shares of Common
Stock subject to the terms and conditions contained therein;

 

WHEREAS,
the transactions contemplated by the Investment Agreement are intended to
assist General Growth Properties, Inc. (“GGP”) in its plans to
recapitalize and emerge from bankruptcy and is not intended to constitute a
change of control of GGP or the Company or otherwise give Investor the power to
control the business and affairs of GGP or the Company;

 

WHEREAS,
as a material condition to GGP’s and Investor’s obligations to consummate the
transactions contemplated by the Investment Agreement, the Company and Investor
have agreed to execute this Agreement; and

 

WHEREAS,
certain terms used in this Agreement are defined in Section 4.1.

 

NOW
THEREFORE, in consideration of the premises and the mutual covenants and
agreements hereinafter contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereby agree as follows:

 

ARTICLE I

 

COMPANY
RELATED PRINCIPLES

 

SECTION 1.1                               Board of
Directors.  So long as
Investor and the Investor Parties, collectively, shall Beneficially Own more
than ten percent (10%) of the outstanding shares of Common Stock, none of Investor or the Investor Parties shall take any action that is
inconsistent with its support for the following corporate governance principles:

 

(a)                                 A majority of the members of
the Board shall be Independent Directors, where “Independent Director”
means a director who satisfies all standards for independence promulgated by
the New York Stock Exchange (or the applicable exchange where shares of Common
Stock are then listed);

 

(b)                                 the Board shall have a
nominating committee, a majority of which shall be Disinterested Directors;

 

 

(c)                                  except as regards voting to
elect the Purchaser GGO Board Designees (as such term is defined in the
Investment Agreement), in connection with any stockholder meeting or consent
solicitation relating to the election of members of the Board, if Investor and
the Investor Parties, collectively, Beneficially Own a number of shares of
Common Stock greater than 10% of the shares of Common Stock outstanding as of
the applicable record date, then Investor shall, and shall cause the other
Investor Parties to, vote in such election of members of the Board all shares
of Common Stock that are Beneficially Owned by the Investor and the Investor
Parties in excess of such number of shares of Common Stock in proportion to the
Votes Cast;

 

(d)                                 the Board shall consist of nine (9) members and not be increased or
reduced, unless approved by seventy-five percent (75%)  of the Board;

 

(e)                                  any Change in Control (other than a transaction contemplated by Section 2.1(b)(ii))
in which a Large Stockholder or its controlled Affiliate is the acquiror or
part of the acquiror group or is proposed to be directly or indirectly combined
with the Company must be approved by a majority of the Disinterested Directors
as if it were a Company Transaction involving such Large Stockholder and by a
majority of the voting power of the stockholders (other than such Large
Stockholder or its controlled Affiliates); and

 

(f)                                   any Change in Control (other than a transaction contemplated by Section 2.2(b)(v))
in which any Large Stockholder or its controlled Affiliate receives per share
consideration in its capacity as a stockholder of the Company in excess of that
to be received by other stockholders, must be approved by a majority of the
Disinterested Directors as if it were a Company Transaction involving such
Large Stockholder and by a majority of the voting power of the stockholders
(other than such Large Stockholder or its controlled Affiliates).

 

The Company shall not waive any provisions similar to
Sections 1.1(c), (e) or (f) above for any Large Stockholder under any
other agreement unless the Company grants a similar waiver under this Agreement.

 

SECTION 1.2                               Voting.

 

(a)         Subject to Sections 1.1(c), (e) and
(f), in connection with any matter being voted on at a stockholder meeting or
in a consent solicitation that the Board has recommended that the stockholders
of the Company approve, Investor and the other Investor Parties may vote
the shares of Common Stock that they Beneficially Own against or in favor of
such matter, in their sole and absolute discretion.

 

(b)         Subject to Sections 1.1(c), (e) and
(f), in connection with any matter being voted on at a stockholder meeting or
in a consent solicitation  that the Board
has recommended that the stockholders of the Company not approve, Investor
and the other Investor Parties may vote the shares of Common Stock that they
Beneficially Own:

 

(i)                                     against such
matter; or

 

(ii)                                  in favor of
such matter; provided, however, that if Investor and the other
Investor Parties (taken as a whole) Beneficially Own shares of Common Stock
that 

 

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represent more than the Voting
Cap of the then-outstanding Common Stock, then, with respect to the shares that
account for the excess over the Voting Cap, Investor shall, and shall
cause the other Investor Parties to, vote in proportion to the Votes Cast.

 

SECTION 1.3                               Related Party
Transactions.

 

(a)                                 Without the approval of a
majority of the Disinterested Directors, Investor shall not, and shall not
permit any of the Investor Parties to, engage in any Company Transaction.  “Company  Transaction” means (i) any
transaction or series of related transactions, directly or indirectly, between
the Company or any Subsidiary of the Company, on the one hand, and any of the
Investor Parties, on the other hand, or (ii) with respect to the purchase
or sale of Common Stock by any of the Investor Parties, any waiver of any
limitation or restriction with respect to such purchase or sale in the Charter
or the Transaction Documents, including any exemption from the provisions of Article XV
of the Charter; provided, however, that none of the following shall
constitute a Company Transaction:

 

(i)                                     transactions
expressly contemplated in the Transaction Documents;

 

(ii)                                  customary
compensation arrangements (whether in the form of cash or equity awards),
expense reimbursement, director insurance coverage and/or indemnification
arrangements (and related advancement of expenses) in each case for Board
designees, or any use by such persons, for Company business purposes, of
aircraft, vehicles, property, equipment or other assets owned or customarily
provided to members of the Board by the Company or any of its Subsidiaries;

 

(iii)                               any transaction
or series of transactions if the same is in the Ordinary Course of Business and
does not involve payments by the Company in excess of $5,000,000 in the
aggregate for such transaction or series of transactions; and

 

(iv)                              any transaction
among the Company and/or its Subsidiaries and General Growth Properties, Inc.
and/or its Subsidiaries.

 

(b)                                 Following the Closing (as
such term is defined in the Investment Agreement), any decisions by the Company
regarding material amendments or modifications of the Plan (as such term is
defined in the Investment Agreement) or waivers of the Company’s material
rights under the Plan, shall require the approval of the majority of
Disinterested Directors to the extent such amendment, modification or waiver
relates to any Investor Party’s rights or obligations.

 

SECTION 1.4                          No Other Voting
Restrictions.  For the
avoidance of doubt, except as restricted herein or by applicable Law, Investor
and the other Investor Parties may
vote the Common Stock that they Beneficially Own
in their sole and absolute discretion.

 

SECTION 1.5                          Amendment of
the Charter.  The Company
hereby agrees that following the Closing Date, without the consent of Investor,
the Company shall not amend (or propose to amend) the provisions of the Charter
in a manner that would change the applicable threshold in the definition of
Substantial Holder in the Charter to a level other than 4.99%.

 

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ARTICLE II

 

INVESTOR
RELATED COVENANTS

 

SECTION 2.1                               Ownership
Limitations.

 

(a)                                 Except as provided in Section 2.1(b), Investor
agrees that it (together with the other Investor Parties) shall not acquire
Economic Ownership of shares of Common Stock that would result in the Investor
Parties in the aggregate Economically Owning a percentage of the
then-outstanding Common Stock on a Fully Diluted Basis that is greater than the
Ownership Cap.  For the avoidance of doubt,
no Person shall be in violation of this Section 2.1 as a result of (i) any
acquisition by the Company of any Common Stock; (ii) any change in the
percentage of the Investor Parties’ Economic Ownership of Common Stock that
results from a change in the aggregate number of shares of Common Stock
outstanding; or (iii) any change in the number of shares of Common Stock
Economically Owned by the Investor Parties as a result of any anti-dilution
adjustments to any Equity Securities (as defined in the Investment Agreement)
Economically Owned by any Investor Party.

 

(b)                                 Notwithstanding Section 2.1(a),
any of the Investor Parties may acquire Economic Ownership of shares of Common
Stock that would result in the Investor Parties (taken as a whole) having
Economic Ownership of a percentage of the then-outstanding Common Stock on a
Fully Diluted Basis that is greater than the Ownership Cap under any of the
following circumstances:

 

(i)                                     acquisitions of
shares pursuant to any pro rata stock dividend or stock distribution effected
by the Company and approved by a majority of the Independent Directors; or

 

(ii)                                  if such
acquisition is pursuant to a tender offer or exchange offer, in each case that
includes an offer for all outstanding shares of Common Stock owned by the
Target Stockholders, or a merger, consolidation, binding share exchange or
similar transaction pursuant to an agreement with the Company, so long as in
each case (A) such offer, merger, consolidation, binding share exchange or
similar transaction is approved by a majority of the Disinterested Directors or
by a special committee comprised of Disinterested Directors (such tender offer
or exchange offer, an “Approved Offer”, and such merger, consolidation, binding
share exchange or similar transaction, an “Approved Merger”), and (B) in
any such Approved Offer, a majority of the Target Shares are tendered into such
Approved Offer and not withdrawn prior to the final expiration of such Approved
Offer, or in such Approved Merger, a majority of the Target Shares that are
voted (in person or by proxy) on the related transaction proposal are voted in
favor of such proposal.  As used in this Section 2.1(b)(ii):  “Target Shares” means the
then-outstanding shares of Common Stock not owned by the Investor Parties; and “Target
Stockholders” means the stockholders of the Company other than the Investor
Parties.

 

(c)                                  The limitation set forth in Section 2.1(a) may
only be waived by the Company if a majority of the Disinterested Directors
consent thereto.

 

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SECTION 2.2                               Transfer
Restrictions.

 

(a)                                 Subject to Section 2.2(b),
unless approved by a majority of the Independent Directors, Investor shall
not, and shall not permit any of the Investor Parties to, sell or otherwise
transfer or agree to transfer (each of the foregoing, a “Transfer”),
directly or indirectly, any shares of Common Stock that are held directly or
indirectly by Investor or any of the other Investor Parties if, immediately
after giving effect to such Transfer, the Person that acquires such Common
Stock (other than any underwriter acting in such capacity in an underwritten
public offering of such shares) would, together with its Affiliates, to the
actual knowledge (“Knowledge”) of the transferor Beneficially Own more
than ten percent (10%) of the then-outstanding Common Stock.  A transferor shall be deemed to have
Knowledge of any transferee’s Beneficial Ownership of Common Stock if the
transferor has actual knowledge of the identity of the transferee and such
Beneficial Ownership has been, at the time of the agreement to transfer,
publicly disclosed in accordance with Section 13 of the Exchange Act.

 

(b)                                 The limitations in Section 2.2(a) shall
not apply, and any Investor Party may Transfer freely:

 

(i)                                     to any Person
(including any Affiliate of Investor) if such Person has executed and delivered
to the Company a Transferee Agreement (as defined below);

 

(ii)                                  to one or more
underwriters or initial purchasers acting in their capacity as such in a manner
not intended to circumvent the restrictions contained in Section 2.2(a);

 

(iii)                               in a sale in
the public market, in accordance with Rule 144, including the volume and
manner of sale limitations set forth therein;

 

(iv)                              in any Merger
Transaction (other than a transaction contemplated by Section 2.2(b)(v) below)
or transaction contemplated by clause (iii) of the definition of Change of
Control (A) in which (in either case) no Investor Party is the acquiror or
part of the acquiring group or is proposed to be combined with the Company and (B) that
has been approved by the Board and a majority of the stockholders (it being
understood that this clause (iv) does not affect the agreement of the
parties under Sections 1.1(e) and (f));

 

(v)                                 in connection
with a tender or exchange offer that (A) is not solicited by any Investor
Party (unless such transaction was approved in accordance with Section 2.1(b)(ii))
and in which all holders of Common Stock are offered the opportunity to sell
shares of Common Stock and (B) complies with applicable securities laws,
including Rule 14d-10 promulgated under the Exchange Act; and

 

(vi)                              in connection
with any bona fide mortgage, encumbrance, pledge or hypothecation of capital
stock to a financial institution in connection with any bona fide loan.

 

(c)                                  No Transfer under Section 2.2(b)(i) shall
be valid unless and until a Transferee Agreement has been executed by the
Transferee and delivered to the Company. 
For the purpose of this Agreement a “Transferee Agreement” executed by a
Transferee means an 

 

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agreement
substantially in the form of this Agreement or in such other form as is
reasonably satisfactory to the Company except that:

 

(i)                                     notwithstanding
Section 1.1(c), in connection with any stockholder meeting or
consent solicitation relating to the election of members of the Board, such
Transferee may vote the shares of Common Stock that it Beneficially Owns in
favor of one director candidate in its sole and absolute discretion and
regarding any other director candidates in such election must vote in
proportion to Votes Cast;

 

(ii)                                  “Investor”
shall be defined to mean such Transferee;

 

(iii)                               “Ownership Cap”
shall be defined to mean the lower of (x) forty percent (40%) and (y) the
sum of five percent (5%) and the percentage of the outstanding Common Stock on
a Fully Diluted Basis that the
Transferee Economically Owns as of the date of (and after giving effect to)
such Transfer;

 

(iv)                              “Voting Cap”
shall be defined to mean the lower of (x) thirty percent (30%) and (y) the
sum of five percent (5%) and the percentage of the outstanding Common Stock on
a Fully Diluted Basis that the
Transferee Beneficially Owns as of the date of (and after giving effect to)
such Transfer; and

 

(v)                                 any obligation
on the part of Investor hereunder to cause the Investor Parties to take any
action or refrain from taking any action shall only apply to the Investor
Parties controlled by the Transferee and the Transferee Agreement shall provide
that the Transferee shall use all reasonable efforts to cause Affiliates that
the Transferee does not control to take or refrain from taking the action that
it is otherwise required to cause under this Agreement.

 

SECTION 2.3                               Purchaser GGO
Board Designees.

 

(a)                                 Notwithstanding anything
contained herein to the contrary, the provisions in Article I
(collectively, the “Specified Provisions”) shall be suspended and shall
not apply in the event that the Purchaser GGO Board Designees
(as defined in the Investor Letter Agreement)  that Investor
is entitled to designate under the terms of Section 2 of the
Investor Letter Agreement are not elected at a stockholders’ meeting at which
the stockholders voted on the election of such Purchaser GGO Board Designees
(any such period, a “Suspension Period”); provided, however,
that this Section 2.3(a) shall apply only if Investor has
complied with its obligations under Section 2 of the
Investor Letter Agreement, including Investor’s timely designation of Purchaser
GGO Board Designees.  No Suspension
Period shall be deemed to occur during any reasonable period of time during
which a Purchaser GGO Board Designee is being replaced upon the death,
resignation, retirement, disqualification or removal from office of such
Purchaser GGO Board Designee.  Any
Suspension Period shall end upon the election of the Purchaser GGO Board
Designees that Investor is entitled to designate under the terms of Section 2 of the Investor Letter Agreement.  At all times other than during a Suspension
Period, the Specified Provisions shall apply in full force and effect.

 

(b)                                 Notwithstanding anything
contained herein or in the Investment Agreement, no Person that acquires Common
Stock from the Investor Parties or from any other 

 

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Person
shall have any rights of Investor under Section 2
of the Investor Letter Agreement with respect to the designation of members
of the Board.

 

ARTICLE III

 

TERMINATION

 

SECTION 3.1                               Termination of
Agreement.  This
Agreement may be terminated as follows (the date of such termination, the “Termination
Date”)

 

(a)                                 if Investor and the Company
mutually agree to terminate this Agreement, but only if the Disinterested
Directors have approved such termination;

 

(b)                                 upon five (5) days notice by Investor, at any time after (i) the
Other Stockholders Beneficially Own more than seventy
percent (70%) of the then-outstanding
Common Stock and (ii) the Investor Parties Beneficially Own less than fifteen percent (15%) of the
then-outstanding Common Stock on a Fully Diluted Basis;

 

(c)                                  without any further action
by the parties hereto, if Investor and the Investor Parties Beneficially Own
less than ten percent (10%) of the then-outstanding Common Stock on a Fully Diluted Basis;

 

(d)                                 without any other action by
the parties hereto, upon the consummation of a Change of Control not involving
Investor or any Investor Party as a purchaser of any direct or indirect
interest in the Company or any of its assets or properties; provided
that the Investor Parties shall not have violated this Agreement in connection
with any transaction under this clause; and

 

(e)                                  without any other action by
the parties hereto, upon the consummation of: (i) a sale of all or
substantially all of the assets the Company and its Subsidiaries (determined on
a consolidated basis), in one transaction or series of related transactions; or
(ii) the acquisition (by purchase, merger or otherwise) by any Person or
Group of Beneficial Ownership of voting securities of the Company entitling
such Person or Group to exercise ninety
percent (90%) or more of the total voting
power of all outstanding securities entitled to vote generally in elections of
directors of the Company; provided that the Investor Parties shall not
have violated this Agreement in connection with any transaction under the
preceding clauses (i) and (ii).

 

SECTION 3.2                               Procedure upon
Termination.  In the
event of termination pursuant to Section 3.1, this Agreement shall
terminate on the Termination Date without further action by Investor and the
Company.

 

SECTION 3.3                               Effect of
Termination.  In the
event that this Agreement is validly terminated as provided in this Article III,
then each of the parties hereto shall be relieved of their duties and
obligations arising under this Agreement after the date of such termination and
such termination shall be without liability to the other party; provided,
however, that Article V shall survive any such termination
and shall be enforceable hereunder; provided further, however,
that

 

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nothing in this Section 3.3 shall
relieve any party hereto of any liability for a breach of a representation,
warranty or covenant in this Agreement prior to the Termination Date.

 

ARTICLE IV

 

DEFINITIONS

 

SECTION 4.1                               Defined Terms.  For purposes of this Agreement, the following
terms, when used in this Agreement with initial capital letters, shall have the
respective meanings set forth in this Agreement:

 

(a)                       “Affiliate”
of any particular Person means any other Person controlling, controlled by or
under common control with such particular Person.  For the purposes of this Agreement, “control”
means the possession, directly or indirectly, of the power to direct the
management and policies of a Person whether through the ownership of voting
securities, contract or otherwise.

 

(b)                       “Beneficial
Ownership” by a Person of any securities means “beneficial ownership” as
used for purposes of Rule 13d-3 adopted by the SEC under the Exchange Act;
provided, however, to the extent the term “Beneficial Ownership”
is used in connection with any obligation on the part of an Investor Party to
vote, or direct the vote, of shares of Common Stock, “Beneficial Ownership” by
a Person of any securities shall be deemed to refer solely to those securities
with respect to which such Person possesses the power to vote or direct the vote.  The term “Beneficially Own” shall have
a correlative meaning.

 

(c)                        “Board”
means the Board of Directors of the Company.

 

(d)                       “Business
Day” means any day other than (i) a Saturday, (ii) a Sunday, or (iii) any
day on which commercial banks in New York, New York are required or authorized
to close by law or executive order.

 

(e)                        “Change of
Control” means any transaction involving (i) a Merger Transaction, (ii) a
sale of all or substantially all of the assets the Company and its Subsidiaries
(determined on a consolidated basis), in one transaction or series of related
transactions, or (iii) the consolidation, merger, amalgamation,
reorganization (other than pursuant to the Plan contemplated by the Investment
Agreement) of the Company or a similar transaction in which the Company is
combined with another Person, unless shares of Common Stock held by holders who
are not affiliated with the Company or any entity acquiring the Company remain
unchanged or are exchanged for, converted into or constitute solely (except to
the extent of applicable appraisal rights or cash received in lieu of
fractional shares) the right to receive as consideration Public Stock and the
Persons or Group who beneficially own the outstanding Common Stock of the
Company immediately before consummation of the transaction beneficially own
more than 50% (by voting power) of the outstanding voting stock of the combined
or surviving entity or new parent immediately thereafter.

 

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(f)                         “Charter”
means the Amended and Restated Certificate of Incorporation of the Company
effective as of the date hereof.

 

(g)                        “Common
Stock”  means the common stock, par
value $0.01 per share, of the Company, as authorized by the Charter as of the
Effective Date, and any successor security as provided by Section 5.11.

 

(h)                       “Disinterested
Director” means (i) with respect to a Company
Transaction or potential Company
Transaction, a director who (A) is not Affiliated with, and was
not nominated by, any Investor Party that is a participant in such transaction
or potential transaction and (B) who has no personal financial interest in
the transaction (other than the same interest, if a stockholder of the Company,
as the other stockholders of the Company) and (ii) with respect to any
matter other than a Company Transaction, a
director who is not Affiliated with, and was not nominated by, any Investor
Party.

 

(i)                           “Economic
Ownership” by a Person of any securities includes ownership by any Person
who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has (i) “beneficial ownership” as defined in Rule 13d-3
adopted by the SEC under the Exchange Act or (ii) economic interest in
such security as a result of any cash-settled total return swap transaction or
any other swap, other derivative or “synthetic” ownership arrangement (in which
case the number of securities with respect to which such Person has Economic
Ownership shall be determined by the Company in it reasonable judgment based on
such Person’s equivalent net long position); provided, however,
that for purposes of determining Economic Ownership, a Person shall be deemed
to be the Economic Owner of any securities which may be acquired by such Person
pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise
(irrespective of whether the right to acquire such securities is exercisable
immediately or only after the giving of notice or the passage of time,
including the giving of notice or the passage of time in excess of sixty (60)
days, the satisfaction of any conditions, the occurrence of any event or any
combination of the foregoing), in each case, without duplication of any securities
included pursuant to sub-clauses (i) or (ii) above.  For purposes of this Agreement, a Person
shall be deemed to be the Economic Owner of any securities Economically Owned
by any Group of which such Person is or becomes a member.  The term “Economically Own” shall have
a correlative meaning.

 

(j)                          “Exchange
Act” means the Securities Exchange Act of 1934, as amended, or any
successor federal statute, and the rules and regulations of the SEC
promulgated thereunder, all as the same may be amended and shall be in effect
from time to time.

 

(k)                       “Fair Market
Value” means, with respect to each share of Public Stock,  the average of the daily volume weighted
average prices per share of such Public Stock for the ten consecutive trading
days immediately preceding the day as of which Fair Market Value is being
determined, as reported on the New York Stock Exchange, or if such shares are
not listed on the New York Stock Exchange, as reported by the principal U.S.
national or regional securities exchange or quotation system on which such
shares are then listed or 

 

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quoted; provided, however,
that in the absence of such listing or quotations, the Fair Market Value of
such shares shall be the fair market value per share as determined by an
Independent Financial Expert appointed for such purpose, using one or more
valuation methods that the Independent Financial Expert in its best
professional judgment determines to be most appropriate, assuming such shares
are fully distributed and are to be sold in an arm’s-length transaction and
there was no compulsion on the part of any party to such sale to buy or sell
and taking into account all relevant factors.

 

(l)                           “Fully
Diluted Basis” means all outstanding shares of the Common Stock assuming
the exercise of all outstanding Share Equivalents, without regard to any
restrictions or conditions with respect to the exercisability of such Share
Equivalents.

 

(m)                   “Governmental Entity”
means any (i) nation, region, state, province, county, city, town,
village, district or other jurisdiction, (ii) federal, state, local,
municipal, foreign or other government, (iii) governmental or
quasi-governmental authority of any nature (including any governmental agency,
branch, department, court or tribunal, or other entity), (iv) multinational
organization or body or (v) body entitled to exercise any administrative,
executive, judicial, legislative, police, regulatory or taxing authority or
power of any nature or any other self-regulatory organizations.

 

(n)                       “Group”
has the meaning assigned to it in Section 13(d)(3) of the Exchange
Act and Rule 13d-5 thereunder.

 

(o)                       “Independent
Financial Expert” means a nationally recognized financial advisory firm
approved by a majority of the Disinterested Directors.

 

(p)                       “Investor
Investment Advisor” means any independently operated business unit of any
Affiliate of Investor that holds shares of Common Stock (i) in trust for
the benefit of persons other than any Investor Party, (ii) in mutual
funds, open- or closed-end investment funds or other pooled investment vehicles
sponsored, managed or advised or subadvised by such Investor Investment
Advisor, (iii) as agent and not principal, or (iv) in any other case
where such Investor Investment Advisor is disaggregated from Investor for the
purposes of Section 13(d) of the Exchange Act; provided, however,
that  (A) in each case, such shares of Common Stock were acquired
in the ordinary course of business of the Investor Investment Advisor’s
respective investment management or securities business and not with the intent
or purpose on the part of Investor or the Investor Parties of influencing
control of the Company or avoiding the provisions of this Agreement and (B) where
appropriate, “Chinese walls” or other informational barriers and other
procedures have been established.  For
avoidance of doubt, for purposes of this Agreement shares of Common Stock held
by an Investor Investment Advisor shall not be deemed to be Beneficially Owned
by Investor or the Investor Parties.

 

(q)                       “Investor Letter Agreement” means that certain letter agreement,
dated as of the date hereof, between the Company and Investor, with respect to,
among other things, the Purchaser GGO Board Designees (as defined therein).

 

10

 

(r)                          “Investor
Parties” means Investor and its Affiliates; provided, however,
that none of the Company, any Subsidiary of the Company or any Investor
Investment Advisor shall be deemed to be an Investor Party.

 

(s)                         “Large Stockholder” means a Person that is the Beneficial Owner of
more than ten percent (10%) of the outstanding shares of Common Stock on a
Fully Diluted Basis.

 

(t)                          “Law”
means any statutes, laws (including common law), rules, ordinances,
regulations, codes, orders, judgments, decisions, injunctions, writs, decrees,
applicable to the Company, Common Stock or Investor Parties.

 

(u)                       “Merger
Transaction” means any transaction involving the acquisition (by purchase,
merger or otherwise) by any Person or Group of Beneficial Ownership of voting
securities of the Company entitling such Person or Group to exercise a majority
of the total voting power of all outstanding securities entitled to vote
generally in elections of directors of the Company.

 

(v)                       “Ordinary
Course of Business” means the ordinary and usual course of day-to-day
operations of the business of the Company consistent with past practice.

 

(w)                     “Other Stockholder”
means, as of the date of the action in question, any Person not Affiliated with
Brookfield Asset Management, Inc., Fairholme Capital Management LLC,
Pershing Capital Management L.P., any of transferee who is a party to a
Transferee Agreement or any of their respective Affiliates.

 

(x)                       “Ownership
Cap” means forty percent (40%).

 

(y)                       “Person”
means an individual, a group (including a “group” under Section 13(d) of
the Exchange Act), a partnership, a corporation, a limited liability company,
an association, a joint stock company, a trust, a joint venture, an
unincorporated organization and a Governmental Entity or any department, agency
or political subdivision thereof.

 

(z)                        “Public
Stock” means common stock listed on a recognized U.S. national securities
exchange with an aggregate market capitalization (held by non-Affiliates of the
issuer) in excess of $1 billion in Fair Market Value.

 

(aa)                “Rule 144” means
Rule 144 promulgated by the SEC under the Securities Act, or any successor
rule or regulation hereafter adopted by the SEC, as the same may be
amended and shall be in effect from time to time.

 

(bb)                “SEC” means the
Securities and Exchange Commission or any other federal agency then
administering the Exchange Act, the Securities Act and other federal securities
laws.

 

11

 

(cc)                  “Securities Act”
means the Securities Act of 1933, as amended, or any successor federal statute,
and the rules and regulations of the SEC promulgated thereunder, all as
the same may be amended and shall be in effect from time to time.

 

(dd)                “Share Equivalent”
means any stock, warrants, rights, calls, options or other securities
exchangeable or exercisable for, or convertible into, shares of Common Stock.

 

(ee)                  “Subsidiary” means,
with respect to a Person, any corporation, limited liability company,
partnership, trust or other entity of which such Person owns (either alone,
directly, or indirectly through, or together with, one or more of its
Subsidiaries) 50% or more of the equity interests the holder of which is
generally entitled to vote for the election of the board of directors or
governing body of such corporation, limited liability company, partnership,
trust or other entity.

 

(ff)                    “Transaction Documents”
means, individually or collectively, the Investment Agreement or the Warrant.

 

(gg)                  “Transferee” means
any proposed transferee of securities pursuant to Sections 2.2(b)(i) or
2.2(b)(vi).

 

(hh)                “Votes Cast” means the aggregate number of shares of Common Stock
that are properly voted for or against any action to be taken by stockholders,
excluding any shares if the holder of such shares is contractually
required to vote in proportion of the total number of votes cast pursuant to this Agreement or any Transferee Agreement executed hereunder.

 

(ii)                        “Voting Cap”
means 30%.

 

(jj)                      “Warrant
Agreement” means that certain Warrant Agreement, dated as of the date
hereof, by and between the Company and Mellon Investor Services LLC.

 

(kk)                “Warrants” means the
GGO Warrants (as defined in the Investment Agreement).

 

ARTICLE V

 

MISCELLANEOUS

 

SECTION 5.1                               Notices. All notices
and other communications in connection with this Agreement shall be in writing
and shall be considered given if given in the manner, and be deemed given at
times, as follows:  (a) on the date
delivered, if personally delivered; (b) on the day of transmission if sent
via facsimile transmission to the facsimile number given below, and telephonic
confirmation of receipt is obtained promptly after completion of transmission;
or (c) on the next Business Day after being sent by recognized overnight
mail service specifying next business day delivery, in each case with delivery
charges pre-paid and addressed to the following addresses:

 

12

 

	
  If to Investor, to:

  	
   

  
	
   

  	
   

  
	
   

  	
  Pershing Square Capital
  Management, L.P.

  	
   

  
	
   

  	
  888 Seventh Avenue, 42nd
  Floor

  	
   

  
	
   

  	
  New York, New York 10019

  	
   

  
	
   

  	
  Attention:

  	
  William A. Ackman

  	
   

  
	
   

  	
   

  	
  Roy J. Katzovicz

  	
   

  
	
   

  	
  Facsimile:

  	
  (212) 286-1133

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  with a copy (which shall
  not constitute notice) to:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Sullivan &
  Cromwell LLP

  	
   

  
	
   

  	
  125 Broad Street

  	
   

  
	
   

  	
  New York, New York 10004

  	
   

  
	
   

  	
  Attention:

  	
  Andrew G. Dietderich, Esq.

  	
   

  
	
   

  	
   

  	
  Alan J. Sinsheimer, Esq.

  	
   

  
	
   

  	
  Facsimile:

  	
  (212) 558-3588

  	
   

  
	
   

  	
   

  
	
  If
  to Company, to:

  	
   

  
	
   

  	
   

  
	
   

  	
  The Howard Hughes Corporation

  	
   

  
	
   

  	
  13355 Noel Road, Suite 950

  	
   

  
	
   

  	
  Dallas, TX 75240

  	
   

  
	
   

  	
  Attention: General Counsel

  	
   

  
	
   

  	
  Facsimile: (214) 741-3021

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  with copies (which
  shall not constitute notice) to:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Weil,
  Gotshal & Manges LLP

  	
   

  
	
   

  	
  767 Fifth Avenue

  	
   

  
	
   

  	
  New York, NY 10153

  	
   

  
	
   

  	
  Attention:

  	
  Frederick S. Green, Esq.

  	
   

  
	
   

  	
   

  	
  Malcolm E. Landau, Esq.

  	
   

  
	
   

  	
  Facsimile:

  	
  (212) 310-8007

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Jones
  Day

  	
   

  
	
   

  	
  2727
  N. Harwood St.

  	
   

  
	
   

  	
  Dallas,
  Texas 75201

  	
   

  
	
   

  	
  Attention:

  	
  James
  E. O’Bannon

  	
   

  
	
   

  	
  Facsimile:

  	
  (214)
  969-5100

  	
   

  

 

SECTION 5.2                               Assignment; No
Third Party Beneficiaries. 
Neither this Agreement nor any of the rights, interests or obligations
under this Agreement may be assigned by any party without the prior written
consent of the other party.  This
Agreement (including the documents and instruments referred to in this
Agreement) is not intended to and does not 

 

13

 

confer upon any person other than the parties hereto
any rights or remedies under this Agreement.

 

SECTION 5.3                               Prior
Negotiations; Entire Agreement.  This Agreement (including the exhibits hereto
and the documents and instruments referred to in this Agreement) constitutes
the entire agreement of the parties hereto and supersedes all prior agreements,
arrangements or understandings, whether written or oral, between the parties
hereto with respect to the subject matter of this Agreement.

 

SECTION 5.4                               Governing Law;
Venue.  THIS AGREEMENT, AND ALL CLAIMS
OR CAUSES OF ACTION (WHETHER IN CONTRACT OR TORT) THAT MAY BE BASED UPON,
ARISE OUT OF OR RELATE TO THIS AGREEMENT OR THE NEGOTIATION, EXECUTION OR
PERFORMANCE OF THIS AGREEMENT WILL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF DELAWARE. 
BOTH PARTIES HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF, AND VENUE
IN, DELAWARE AND WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS.

 

SECTION 5.5                               Counterparts.  This Agreement may be executed in any number
of counterparts, all of which shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each of the
parties hereto, and delivered to the other party (including via facsimile or
other electronic transmission), it being understood that each party need not
sign the same counterpart.

 

SECTION 5.6                               Expenses.  Except as otherwise provided in this
Agreement, Investor and the Company shall each bear its own expenses
incurred in connection with the negotiation and execution of this Agreement and
each other agreement, document and instrument contemplated by this Agreement
and the consummation of the transactions contemplated hereby and thereby.

 

SECTION 5.7                               Waivers and
Amendments.  Subject to Section 5.2,
this Agreement may be amended, modified, superseded, cancelled, renewed or
extended, and the terms and conditions of this Agreement may be waived, only by
a written instrument signed by Investor and the Company (with the approval of a
majority of the Disinterested Directors) or, in the case of a waiver, by the
party waiving compliance, and subject, to the extent required, to the approval
of the Bankruptcy Court.  No delay on the
part of any party in exercising any right, power or privilege pursuant to this
Agreement shall operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege pursuant to this Agreement, nor
shall any single or partial exercise of any right, power or privilege pursuant
to this Agreement, preclude any other or further exercise thereof or the
exercise of any other right, power or privilege pursuant to this
Agreement.  The rights and remedies
provided pursuant to this Agreement are cumulative and are not exclusive of any
rights or remedies which any party otherwise may have at law or in equity.

 

14

 

SECTION 5.8                               Construction.

 

(a)                       The headings in
this Agreement are for reference purposes only and shall not in any way affect
the meaning or interpretation of this Agreement.

 

(b)                       Unless the
context otherwise requires, as used in this Agreement:  (i) “or” shall mean “and/or”; (ii) “including”
and its variants mean “including, without limitation” and its variants; (iii) words
defined in the singular have the parallel meaning in the plural and vice versa;
(iv) references to “written” or “in writing” include in visual electronic
form; (v) words of one gender shall be construed to apply to each gender;
and (vi) the terms “Article” and “Section” refer to the specified Article or
Section of this Agreement.

 

SECTION 5.9                               Severability.  If any term or other provision of this
Agreement is invalid, illegal, or incapable of being enforced by any law or
public policy, all other terms or provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party.  Upon
such determination that any term or other provision is invalid, illegal, or
incapable of being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of the parties
hereto as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.

 

SECTION 5.10                        Equitable
Relief.  It is hereby acknowledged that
irreparable harm would occur in the event that any of the provisions of this
Agreement were not performed fully by the parties hereto in accordance with the
terms specified herein, and that monetary damages are an inadequate remedy for
breach of this Agreement because of the difficulty of ascertaining and
quantifying the amount of damage that will be suffered by the parties hereto
relying hereon in the event that the undertakings and provisions contained in
this Agreement were breached or violated. 
Accordingly, each party hereto hereby agrees that each other party
hereto shall be entitled to an injunction or injunctions to restrain, enjoin
and prevent breaches of the undertakings and provisions hereof and to enforce
specifically the undertakings and provisions hereof in any court of the United
States or any state having jurisdiction over the matter; it being understood
that such remedies shall be in addition to, and not in lieu of, any other
rights and remedies available at law or in equity.

 

SECTION 5.11                        Successor
Securities.  The
provisions of this Agreement pertaining to shares of Common Stock shall apply
to all shares of Common Stock Beneficially Owned by any Investor Party and any
voting equity securities of the Company, regardless of class, series,
designation or par value, that are issued as a dividend on or in any other
distribution in respect of, or as a result of a reclassification (including a
change in par value) in respect of, shares of Common Stock or other shares of
the Company which, as provided by this section, are considered as shares of
Common Stock for purposes of this Agreement and shall also apply to any voting
equity security issued by any company that succeeds, by merger, consolidation,
a share exchange, a reorganization of the Company or any similar transaction,
to all or substantially all the business of the Company, or to the ownership
thereof, if such security was issued in exchange for or otherwise as
consideration for or in respect of shares of Common Stock 

 

15

 

(or other shares considered as shares of Common
Stock, as provided by this definition) in connection with such succession
transaction.

 

SECTION 5.12                        Voting
Procedures.  If, in
connection with any stockholder meeting or consent solicitation, Investor
or the Investor Parties are required under the terms of this Agreement to vote
in proportion to the Votes Cast, then the parties shall cooperate to determine
appropriate procedures and mechanics to facilitate such proportionate voting.

 

** REMAINDER OF PAGE INTENTIONALLY LEFT BLANK**

 

16

 

IN WITNESS WHEREOF, the
undersigned have caused this Agreement to be executed and delivered by each of
them or their respective officers thereunto duly authorized, all as of the date
first written above.

 

 

	
   

  	
  THE HOWARD HUGHES CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [INSERT
  NAMES OF INVESTORS]

  

 

[Signature
Page to Standstill Agreement]EXHIBIT 10.1

 

2003 EQUITY INCENTIVE PLAN

OF

DTS, INC.

 

1.                                  Purpose of this Plan

 

The purpose of this 2003
Equity Incentive Plan is to enhance the long-term stockholder value of
DTS, Inc. by offering opportunities to eligible individuals to participate
in the growth in value of the equity of DTS, Inc.

 

2.                                  Definitions and Rules of Interpretation

 

2.1                            Definitions

 

This Plan uses the following
defined terms:

 

(a)                                      “Administrator” means the Board, the
Committee, or any officer or employee of the Company to whom the Board or the
Committee delegates authority to administer this Plan.

 

(b)                                      “Affiliate” means a “parent” or “subsidiary”
(as each is defined in Section 424 of the Code) of the Company and any
other entity that the Board or Committee designates as an “Affiliate” for
purposes of this Plan.

 

(c)                                       “Applicable Law” means any and all laws of
whatever jurisdiction, within or without the United States, and the
rules of any stock exchange or quotation system on which Shares are listed
or quoted, applicable to the taking or refraining from taking of any action
under this Plan, including the administration of this Plan and the issuance or
transfer of Awards or Award Shares.

 

(d)                                      “Award” means a Stock
Award, SAR, Cash Award, or Option granted in accordance with the terms of this
Plan.

 

(e)                                       “Award Agreement” means the document
evidencing the grant of an Award.

 

(f)                                          “Award Shares” means Shares covered by an
outstanding Award or purchased under an Award.

 

(g)                                      “Awardee” means: (i) a person to
whom an Award has been granted, including a holder of a Substitute Award,
(ii) a person to whom an Award has been transferred in accordance with all
applicable requirements of Sections 6.5, 7(h), and 17.

 

(h)                                      “Board” means the Board of
Directors of the Company.

 

(i)                                         “Cash Award” means the right to receive
cash as described in Section 8.3.

 

(j)                                          “Change in Control” means any transaction or
event that the Board specifies as a Change in Control under Section 10.4.

 

(k)                                      “Code” means the Internal Revenue
Code of 1986.

 

(l)                                         “Committee” means a committee composed
of Company Directors appointed in accordance with the Company’s charter
documents and Section 4.

 

(m)                                    “Company” means DTS, Inc., a
Delaware corporation.

 

(n)                                      “Company Director” means a member of the
Board.

 

(o)                                      “Consultant” means an individual who, or
an employee of any entity that, provides bona fide services to the Company or
an Affiliate not in connection with the offer or sale of securities in a
capital-raising transaction, but who is not an Employee.

 

 

(p)                                      “Director” means a member of the Board
of Directors of the Company or an Affiliate.

 

(q)                                      “Divestiture” means any transaction or
event that the Board specifies as a Divestiture under Section 10.5.

 

(r)                                        “Domestic Relations Order” means a “domestic relations order” as
defined in, and otherwise meeting the requirements of,
Section 414(p) of the Code, except that reference to a “plan” in that
definition shall be to this Plan.

 

(s)                                        “Effective Date” means the first date
of the sale by the Company of shares of its capital stock in an initial public
offering pursuant to a registration statement on Form S-1 filed with the
SEC.

 

(t)                                         “Employee” means a regular employee of
the Company or an Affiliate, including an officer or Director, who is treated
as an employee in the personnel records of the Company or an Affiliate, but not
individuals who are classified by the Company or an Affiliate as:
(i) leased from or otherwise employed by a third party,
(ii) independent contractors, or (iii) intermittent or temporary
workers.  The Company’s or an Affiliate’s classification of an individual
as an “Employee” (or as not an “Employee”) for purposes of this Plan shall not
be altered retroactively even if that classification is changed retroactively
for another purpose as a result of an audit, litigation or otherwise.  An
Awardee shall not cease to be an Employee due to transfers between locations of
the Company, or between the Company and an Affiliate, or to any successor to
the Company or an Affiliate that assumes the Awardee’s Options under
Section 10.  Neither service as a Director nor receipt of a director’s
fee shall be sufficient to make a Director an “Employee”.

 

(u)                                      “Exchange Act” means the Securities
Exchange Act of 1934.

 

(v)                                       “Executive” means, if the Company has
any class of any equity security registered under Section 12 of the
Exchange Act, an individual who is subject to Section 16 of the Exchange
Act or who is a “covered employee” under Section 162(m) of the Code,
in either case because of the individual’s relationship with the Company or an
Affiliate.  If the Company does not have any class of any equity security
registered under Section 12 of the Exchange Act, “Executive” means any
(i) Director, (ii) officer elected or appointed by the Board, or
(iii) beneficial owner of more than 10% of any class of the Company’s
equity securities.

 

(w)                                    “Expiration Date” means, with respect to an
Award, the date stated in the Award Agreement as the expiration date of the
Award or, if no such date is stated in the Award Agreement, then the last day
of the maximum exercise period for the Award, disregarding the effect of an
Awardee’s Termination or any other event that would shorten that period.

 

(x)                                       “Fair Market Value” means the value of Shares
as determined under Section 18.2.

 

(y)                                       “Fundamental Transaction” means any
transaction or event described in Section 10.3.

 

(z)                                        “Grant Date” means the date the
Administrator approves the grant of an Award.  However, if the
Administrator specifies that an Award’s Grant Date is a future date or the date
on which a condition is satisfied, the Grant Date for such Award is that future
date or the date that the condition is satisfied.

 

(aa)                               “Incentive Stock Option” means an
Option intended to qualify as an incentive stock option under Section 422
of the Code and designated as an Incentive Stock Option in the Award Agreement
for that Option.

 

(bb)                               “Nonstatutory Option” means any
Option other than an Incentive Stock Option.

 

(cc)                                 “Non-Employee Director” means any
person who is a member of the Board but is not an Employee of the Company or
any Affiliate of the Company and has not been an Employee of the Company or any
Affiliate of the Company at any time during the preceding twelve months.
Service as a Director does not in itself constitute employment for purposes of
this definition.

 

(dd)                               “Objectively Determinable Performance Condition” shall mean a
performance condition (i) that is established (A) at the time an
Award is granted or (B)  no later than the earlier of (1) 90 days
after the beginning of the period of service to which it relates, or
(2) before the elapse of 25% of the period of service to which it relates,
(ii) that is uncertain of achievement at the time it is established, and
(iii) the achievement of which is determinable by a third party with
knowledge of the relevant facts.  Examples of measures that may be used in
Objectively Determinable Performance Conditions include net order dollars, net
profit dollars, net profit growth, net revenue dollars, revenue growth,
individual 

 

 

performance, earnings per
share, return on assets, return on equity, and other financial objectives,
objective customer satisfaction indicators and efficiency measures, each with
respect to the Company and/or an Affiliate or individual business unit.

 

(ee)                                 “Officer” means an officer of the
Company as defined in Rule 16a-1 adopted under the Exchange Act.

 

(ff)                                       “Option” means a right to purchase
Shares of the Company granted under this Plan.

 

(gg)                               “Option Price” means the price payable
under an Option for Shares, not including any amount payable in respect of
withholding or other taxes.

 

(hh)                               “Option Shares” means Shares covered by an
outstanding Option or purchased under an Option.

 

(ii)                                     “Plan” means this 2003 Equity
Incentive Plan of DTS, Inc.

 

(jj)                                       “Prior Plans” means
the Company’s 1997 Stock Option Plan and the 2002 Stock Option Plan in effect.

 

(kk)                               “Purchase Price” means the price payable
under a Stock Award for Shares, not including any amount payable in respect of
withholding or other taxes.

 

(ll)                                     “Rule 16b-3” means Rule 16b-3
adopted under Section 16(b) of the Exchange Act.

 

(mm)                           “SAR” or “Stock Appreciation Right” means a right
to receive cash based on a change in the Fair Market Value of a specific number
of Shares pursuant to an Award Agreement, as described in Section 8.1.

 

(nn)                               “Securities Act” means the Securities Act of
1933.

 

(oo)                               “Share” means a share of the common
stock of the Company or other securities substituted for the common stock under
Section 10.

 

(pp)                               “Stock Award” means an offer by the
Company to sell shares subject to certain restrictions pursuant to the Award
Agreement as described in Section 8.2.

 

(qq)                               “Substitute Award” means a Substitute Option,
Substitute SAR or Substitute Stock Award granted in accordance with the terms
of this Plan.

 

(rr)                                   “Substitute Option” means an Option granted in
substitution for, or upon the conversion of, an option granted by another
entity to purchase equity securities in the granting entity.

 

(ss)                                   “Substitute SAR” means a SAR granted in
substitution for, or upon the conversion of, a stock appreciation right granted
by another entity with respect to equity securities in the granting entity.

 

(tt)                                     “Substitute Stock Award” means a Stock
Award granted in substitution for, or upon the conversion of, a stock award
granted by another entity to purchase equity securities in the granting entity.

 

(uu)                               “Termination” means that the Awardee has
ceased to be, with or without any cause or reason, an Employee, Director or
Consultant.  However, unless so determined by the Administrator, or
otherwise provided in this Plan, “Termination” shall not include a change in
status from an Employee, Consultant or Director to another such status. 
An event that causes an Affiliate to cease being an Affiliate shall be treated
as the “Termination” of that Affiliate’s Employees, Directors, and Consultants.

 

2.2                            Rules of
Interpretation

 

Any reference to a “Section,”
without more, is to a Section of this Plan.  Captions and titles are
used for convenience in this Plan and shall not, by themselves, determine the
meaning of this Plan.  Except when otherwise indicated by the context, the
singular includes the plural and vice versa.  Any reference to a statute
is also a reference to the applicable rules and regulations adopted under
that statute.  Any reference to a statute, rule or regulation, or to
a section of a statute, 

 

 

rule or regulation, is
a reference to that statute, rule, regulation, or section as amended from time
to time, both before and after the Effective Date and including any successor
provisions.

 

3.                                      Shares Subject to this Plan; Term of this Plan

 

3.1                            Number of
Award Shares

 

The Shares issuable under
this Plan shall be authorized but unissued or reacquired Shares, including
Shares repurchased by the Company on the open market. The number of Shares
initially reserved for issuance over the term of this Plan shall not exceed
3,000,000 Shares.  Such reserve shall consist of (i) the number of
Shares available for issuance, as of the Effective Date, under the Prior Plans
as last approved by the Company’s stockholders, including the Shares subject to
outstanding options under the Prior Plans, plus (ii) those Shares issued
under the Prior Plans that are forfeited or repurchased by the Company or that
are issuable upon exercise of options granted pursuant to the Prior Plans that
expire or become unexercisable for any reason without having been exercised in
full after the Effective Date, plus (iii) an additional increase of
approximately 928,949 Shares to be approved by the Company’s stockholders prior
to the Effective Date.  The maximum number of Shares shall be cumulatively
increased on the first January 1 after the Effective Date and each
January 1 thereafter for 10 years, by a number of Shares equal to the
least of (a) 4% of the number of Shares issued and outstanding on the immediately
preceding December 31, (b) 1,500,000 Shares, and (c) a number of
Shares set by the Board.  When an Award is granted, the maximum number of
Shares that may be issued under this Plan shall be reduced by the number of
Shares covered by that Award.  However, if an Award later terminates or
expires without having been exercised in full, the maximum number of shares
that may be issued under this Plan shall be increased by the number of Shares
that were covered by, but not purchased under, that Award.  By contrast,
the repurchase of Shares by the Company shall not increase the maximum number
of Shares that may be issued under this Plan.  Notwithstanding anything in
this Plan to the contrary, at no time during the eighteen (18) months following
the Effective Date may the sum of the number of Shares subject to Awards under
this Plan and the number of Shares subject to options under the Prior Plans
exceed 15% of the outstanding Shares on a “fully diluted” basis.  For
the purposes of this Section 3.1, outstanding Shares on a “fully diluted”
basis shall be the number of Shares that is equal to (x) the number of
Shares issued and outstanding plus (y) all Shares subject to or
available for Awards or options under this Plan and the Prior Plans,
respectively, and 50% of the Shares then issuable upon the exercise of warrants
that were outstanding on the Effective Date of the Plan.

 

3.2                            Source of
Shares

 

Award Shares may be: 
(a) Shares that have never been issued, (b) Shares that have been
issued but are no longer outstanding, or (c) Shares that are outstanding
and are acquired to discharge the Company’s obligation to deliver Award Shares.

 

3.3                            Term of
this Plan

 

(a)                                      This Plan shall
be effective on, and Awards may be granted under this Plan on and after, the
earliest the date on which the Plan has been both adopted by the Board and
approved by the Company’s stockholders.

 

(b)                                      Subject to the
provisions of Section 14, Awards may be granted under this Plan for a
period of ten years from the earlier of the date on which the Board approves
this Plan and the date the Company’s stockholders approve this Plan. 
Accordingly, Awards may not be granted under this Plan after the earlier of
those dates.

 

4.                                  Administration

 

4.1                            General

 

(a)                                      The Board shall
have ultimate responsibility for administering this Plan.  The Board may
delegate certain of its responsibilities to a Committee, which shall consist of
at least two members of the Board.  The Board or the Committee may further
delegate its responsibilities to any Employee of the Company or any
Affiliate.  Where this Plan specifies that an action is to be taken or a
determination made by the Board, only the Board may take that action or make
that determination.  Where this Plan specifies that an action is to be
taken or a determination made by the Committee, only the Committee may take
that action or make that determination.  Where this Plan references the “Administrator,”
the action may be taken or determination made by the Board, the Committee, or
other Administrator.  However, only the Board or the Committee may approve
grants of Awards to Executives, and an Administrator other than the Board or
the Committee may grant Awards only within guidelines established by the Board
or Committee.  Moreover, all actions and determinations by any Administrator
are subject to the provisions of this Plan.

 

 

(b)                                      So long as the
Company has registered and outstanding a class of equity securities under
Section 12 of the Exchange Act, the Committee shall consist of Company
Directors who are “Non-Employee Directors” as defined in Rule 16b-3 and,
after the expiration of any transition period permitted by Treasury Regulations
Section 1.162-27(h)(3), who are “outside directors” as defined in
Section 162(m) of the Code.

 

4.2                            Authority
of the Board or the Committee

 

Subject to the other
provisions of this Plan, the Board or the Committee shall have the authority
to:

 

(a)                                      grant Awards,
including Substitute Awards;

 

(b)                                      determine the
Fair Market Value of Shares;

 

(c)                                       determine the
Option Price and the Purchase Price of Awards;

 

(d)                                      select the
Awardees;

 

(e)                                       determine the
times Awards are granted;

 

(f)                                          determine the
number of Shares subject to each Award;

 

(g)                                      determine the
methods of payment that may be used to purchase Award Shares;

 

(h)                                      determine the
methods of payment that may be used to satisfy withholding tax obligations;

 

(i)                                         determine the
other terms of each Award, including but not limited to the time or times at
which Awards may be exercised, whether and under what conditions an Award is
assignable, and whether an Option is a Nonstatutory Option or an Incentive
Stock Option;

 

(j)                                          modify or amend
any Award;

 

(k)                                      authorize any
person to sign any Award Agreement or other document related to this Plan on
behalf of the Company;

 

(l)                                         determine the
form of any Award Agreement or other document related to this Plan, and whether
that document, including signatures, may be in electronic form;

 

(m)                                    interpret this
Plan and any Award Agreement or document related to this Plan;

 

(n)                                      correct any
defect, remedy any omission, or reconcile any inconsistency in this Plan, any
Award Agreement or any other document related to this Plan;

 

(o)                                      adopt, amend,
and revoke rules and regulations under this Plan, including rules and
regulations relating to sub-plans and Plan addenda;

 

(p)                                      adopt, amend,
and revoke special rules and procedures which may be inconsistent with the
terms of this Plan, set forth (if the Administrator so chooses) in sub-plans
regarding (for example) the operation and administration of this Plan and the
terms of Awards, if and to the extent necessary or useful to accommodate
non-U.S. Applicable Laws and practices as they apply to Awards and Award Shares
held by, or granted or issued to, persons working or resident outside of the
United States or employed by Affiliates incorporated outside the United States;

 

(q)                                      determine
whether a transaction or event should be treated as a Change in Control, a
Divestiture or neither;

 

(r)                                        determine the
effect of a Fundamental Transaction and, if the Board determines that a
transaction or event should be treated as a Change in Control or a Divestiture,
then the effect of that Change in Control or Divestiture; and

 

(s)                                        make all other
determinations the Administrator deems necessary or advisable for the
administration 

 

 

of this Plan.

 

4.3                            Scope of
Discretion

 

Subject to the provisions of
this Section 4.3, on all matters for which this Plan confers the
authority, right or power on the Board, the Committee, or other Administrator
to make decisions, that body may make those decisions in its sole and absolute
discretion.  Those decisions will be final, binding and conclusive. 
In making its decisions, the Board, Committee or other Administrator need not
treat all persons eligible to receive Awards, all Awardees, all Awards or all
Award Shares the same way.  Notwithstanding anything herein to the
contrary, and except as provided in Section 14.3, the discretion of the
Board, Committee or other Administrator is subject to the specific provisions
and specific limitations of this Plan, as well as all rights conferred on
specific Awardees by Award Agreements and other agreements.

 

5.                                      Persons Eligible to Receive Awards

 

5.1                            Eligible
Individuals

 

Awards (including Substitute
Awards) may be granted to, and only to, Employees, Directors and Consultants,
including to prospective Employees, Directors and Consultants conditioned on
the beginning of their service for the Company or an Affiliate.  However, Incentive
Stock Options may only be granted to Employees, as provided in
Section 7(g).

 

5.2                            Section 162(m) Limitation

 

(a)                                      Options and SARs  Subject to the provisions of this
Section 5.2, for so long as the Company is a “publicly held corporation”
within the meaning of Section 162(m) of the Code: (i) no
Employee may be granted one or more SARs and Options within any fiscal year of
the Company under this Plan to purchase more than 1,500,000 Shares under
Options or to receive compensation calculated with reference to more than that
number of Shares under SARs, subject to adjustment pursuant to Section 10,
(ii) Options and SARs may be granted to an Executive only by the Committee
(and, notwithstanding anything to the contrary in Section 4.1(a), not by
the Board).  If an Option or SAR is cancelled without being exercised or
if the Option Price of an Option is reduced, that cancelled or repriced Option
or SAR shall continue to be counted against the limit on Awards that may be
granted to any individual under this Section 5.2.  Notwithstanding
anything herein to the contrary, a new Employee of the Company or an Affiliate
shall be eligible to receive up to a maximum of 2,000,000 Shares under Options
in the calendar year in which they commence employment, or such compensation
calculated with reference to such number of Shares under SARs, subject to
adjustment pursuant to Section 10.

 

(b)                                      Cash Awards and Stock Awards  Any Cash Award or
Stock Award intended as “qualified performance-based compensation” within the
meaning of Section 162(m) of the Code must vest or become exercisable
contingent on the achievement of one or more Objectively Determinable
Performance Conditions.  The Committee shall have the discretion to
determine the time and manner of compliance with Section 162(m) of
the Code.

 

6.                                  Terms and
Conditions of Option

 

The following
rules apply to all Options:

 

6.1                            Price

 

No Nonstatutory Option may
have an Option Price less than 85% of the Fair Market Value of the Shares on
the Grant Date.  No Option intended as “qualified incentive-based
compensation” within the meaning of Section 162(m) of the Code may
have an Option Price less than 100% of the Fair Market Value of the Shares on
the Grant Date.  In no event will the Option Price of any Option be less
than the par value of the Shares issuable under the Option if that is required
by Applicable Law.  The Option Price of an Incentive Stock Option shall be
subject to Section 7(f).

 

6.2                            Term

 

No Option shall be
exercisable after its Expiration Date.  No Option may have an Expiration
Date that is more than ten years after its Grant Date.  Additional
provisions regarding the term of Incentive Stock Options are provided in
Sections 7(a) and 7(e).

 

 

6.3                            Vesting

 

Options shall be
exercisable: (a) on the Grant Date, or (b) in accordance with a
schedule related to the Grant Date, the date the Optionee’s directorship,
employment or consultancy begins, or a different date specified in the Option Agreement.
 Additional provisions regarding the
vesting of Incentive Stock Options are provided in Section 7(c).  No
Option granted to an individual who is subject to the overtime pay provisions
of the Fair Labor Standards Act may be exercised before the expiration of six
months after the Grant Date.

 

6.4                            Form and
Method of Payment

 

(a)                                      The Board or
Committee shall determine the acceptable form and method of payment for
exercising an Option.

 

(b)                                      Acceptable
forms of payment for all Option Shares are cash, check or wire transfer,
denominated in U.S. dollars except as specified by the Administrator for
non-U.S. Employees or non-U.S. sub-plans.

 

(c)                                       In addition,
the Administrator may permit payment to be made by any of the following
methods:

 

(i)                                           other Shares,
or the designation of other Shares, which (A) are “mature” shares for
purposes of avoiding variable accounting treatment under generally accepted
accounting principles (generally mature shares are those that have been owned
by the Optionee for more than six months on the date of surrender), and
(B) have a Fair Market Value on the date of surrender equal to the Option
Price of the Shares as to which the Option is being exercised;

 

(ii)                                       provided that a
public market exists for the Shares, consideration received by the Company
under a procedure under which a licensed broker-dealer advances funds on behalf
of an Optionee or sells Option Shares on behalf of an Optionee (a “ 
Cashless Exercise Procedure  ”),
provided that if the Company extends or arranges for the extension of credit to
an Optionee under any Cashless Exercise Procedure, no Officer or Director may
participate in that Cashless Exercise Procedure;

 

(iii)                                   with respect
only to Optionees who are neither Officers nor Directors as of the date of
exercise, one or more promissory notes meeting the requirements of
Section 6.4(e) provided, however, that promissory notes may not be
used for any portion of an Award which is not vested at the time of exercise;

 

(iv)                                     cancellation of
any debt owed by the Company or any Affiliate to the Optionee by the Company
including without limitation waiver of compensation due or accrued for services
previously rendered to the Company; and

 

(v)                                         any combination
of the methods of payment permitted by any paragraph of this Section 6.4.

 

(d)                                      The
Administrator may also permit any other form or method of payment for Option
Shares permitted by Applicable Law.

 

(e)                                  The promissory
notes referred to in Section 6.4(c)(iii) shall be full
recourse.  Unless the Committee specifies otherwise after taking into
account any relevant accounting issues, the promissory notes shall bear
interest at a fair market value rate when the Option is exercised. 
Interest on the promissory notes shall also be at least sufficient to avoid
imputation of interest under Sections 483, 1274, and 7872 of the
Code.  The promissory notes and their administration shall at all times
comply with any applicable margin rules of the Federal Reserve.  The
promissory notes may also include such other terms as the Administrator
specifies.  Payment may not be made by promissory note by Officers or
Directors if Shares are registered under Section 12 of the Exchange Act.

 

6.5                            Nonassignability
of Options

 

Except as determined by the
Administrator, no Option shall be assignable or otherwise transferable by the
Optionee except by will or by the laws of descent and distribution. 
However, Options may be transferred and exercised in accordance with a Domestic
Relations Order and may be exercised by a guardian or conservator appointed to
act for the Optionee.  Incentive Stock Options may only be assigned in
compliance with Section 7(h).

 

6.6                            Substitute
Options

 

The Board may cause the
Company to grant Substitute Options in connection with the acquisition by the 

 

 

Company or an Affiliate of
equity securities of any entity (including by merger, tender offer, or other
similar transaction) or of all or a portion of the assets of any entity. 
Any such substitution shall be effective on the effective date of the
acquisition.  Substitute Options may be Nonstatutory Options or Incentive
Stock Options.  Unless and to the extent specified otherwise by the Board,
Substitute Options shall have the same terms and conditions as the options they
replace, except that (subject to the provisions of Section 10) Substitute
Options shall be Options to purchase Shares rather than equity securities of
the granting entity and shall have an Option Price determined by the Board.

 

6.7                            Repricings

 

In furtherance of, and not
in limitation of the provisions of Section 10, Options may be repriced,
replaced or regranted through cancellation or modification without stockholder
approval.

 

7.                                      Incentive Stock Options

 

The following
rules apply only to Incentive Stock Options and only to the extent these
rules are more restrictive than the rules that would otherwise apply
under this Plan.  With the consent of the Optionee, or where this Plan
provides that an action may be taken notwithstanding any other provision of
this Plan, the Administrator may deviate from the requirements of this Section,
notwithstanding that any Incentive Stock Option modified by the Administrator
will thereafter be treated as a Nonstatutory Option.

 

(a)                                      The Expiration
Date of an Incentive Stock Option shall not be later than ten years from its
Grant Date, with the result that no Incentive Stock Option may be exercised
after the expiration of ten years from its Grant Date.

 

(b)                                      No Incentive
Stock Option may be granted more than ten years from the date this Plan was
approved by the Board.

 

(c)                                       Options
intended to be incentive stock options under Section 422 of the Code that
are granted to any single Optionee under all incentive stock option plans of
the Company and its Affiliates, including incentive stock options granted under
this Plan, may not vest at a rate of more than $100,000 in Fair Market Value of
stock (measured on the grant dates of the options) during any calendar
year.  For this purpose, an option vests with respect to a given share of
stock the first time its holder may purchase that share, notwithstanding any
right of the Company to repurchase that share.  Unless the administrator
of that option plan specifies otherwise in the related agreement governing the
option, this vesting limitation shall be applied by, to the extent necessary to
satisfy this $100,000 rule, treating certain stock options that were intended
to be incentive stock options under Section 422 of the Code as
Nonstatutory Options.  The stock options or portions of stock options to
be reclassified as Nonstatutory Options are those with the highest option
prices, whether granted under this Plan or any other equity compensation plan
of the Company or any Affiliate that permits that treatment.  This
Section 7(c) shall not cause an Incentive Stock Option to vest before
its original vesting date or cause an Incentive Stock Option that has already
vested to cease to be vested.

 

(d)                                      In order for an
Incentive Stock Option to be exercised for any form of payment other than those
described in Section 6.4(b), that right must be stated at the time of
grant in the Option Agreement relating to that Incentive Stock Option.

 

(e)                                       Any Incentive
Stock Option granted to a Ten Percent Stockholder, must have an Expiration Date
that is not later than five years from its Grant Date, with the result that no
such Option may be exercised after the expiration of five years from the Grant
Date.  A “  Ten Percent Stockholder  ” is any person who, directly
or by attribution under Section 424(d) of the Code, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or of any Affiliate on the Grant Date.

 

(f)                                          The Option
Price of an Incentive Stock Option shall never be less than the Fair Market
Value of the Shares at the Grant Date.  The Option Price for the Shares
covered by an Incentive Stock Option granted to a Ten Percent Stockholder shall
never be less than 110% of the Fair Market Value of the Shares at the Grant
Date.

 

(g)                                      Incentive Stock
Options may be granted only to Employees.  If an Optionee changes status
from an Employee to a Consultant, that Optionee’s Incentive Stock Options
become Nonstatutory Options if not exercised within the time period described
in Section 7(i) (determined by treating that change in status as a
Termination solely for purposes of this Section 7(g)).

 

 

(h)                                      No rights under
an Incentive Stock Option may be transferred by the Optionee, other than by
will or the laws of descent and distribution.  During the life of the
Optionee, an Incentive Stock Option may be exercised only by the
Optionee.  The Company’s compliance with a Domestic Relations Order, or
the exercise of an Incentive Stock Option by a guardian or conservator
appointed to act for the Optionee, shall not violate this Section 7(h).

 

(i)                                         An Incentive
Stock Option shall be treated as a Nonstatutory Option if it remains
exercisable after, and is not exercised within, the three-month period
beginning with the Optionee’s Termination for any reason other than the
Optionee’s death or disability (as defined in Section 22(e) of the
Code).  In the case of Termination due to death, an Incentive Stock Option
shall continue to be treated as an Incentive Stock Option if it remains
exercisable after, and is not exercised within, the three-month period after
the Optionee’s Termination provided it is exercised before the Expiration
Date.  In the case of Termination due to disability, an Incentive Stock
Option shall be treated as a Nonstatutory Option if it remains exercisable
after, and is not exercised within, one year after the Optionee’s Termination.

 

(j)                                          An Incentive
Stock Option may only be modified by the Board.

 

8.                                      Stock Appreciation Rights, Stock Awards and Cash Awards

 

8.1                            Stock
Appreciation Rights

 

The following
rules apply to SARs:

 

(a)                                      General.  SARs may be granted
either alone, in addition to, or in tandem with other Awards granted under this
Plan. The Administrator may grant SARs to eligible participants subject to
terms and conditions not inconsistent with this Plan and determined by the
Administrator. The specific terms and conditions applicable to the Awardee
shall be provided for in the Award Agreement. SARs shall be exercisable, in
whole or in part, at such times as the Administrator shall specify in the Award
Agreement.  The grant or vesting of a SAR may be made contingent on the
achievement of Objectively Determinable Performance Conditions.

 

(b)                                      Exercise of SARs.  Upon the exercise of
an SAR, in whole or in part, an Awardee shall be entitled to a payment in an
amount equal to the excess of the Fair Market Value of a fixed number of Shares
covered by the exercised portion of the SAR on the date of exercise, over the
Fair Market Value of the Shares covered by the exercised portion of the SAR on
the Grant Date.  The amount due to the Awardee upon the exercise of a SAR
shall be paid in cash, Shares or a combination thereof, over the period or
periods specified in the Award Agreement.  An Award Agreement may place
limits on the amount that may be paid over any specified period or periods upon
the exercise of a SAR, on an aggregate basis or as to any Awardee.  A SAR
shall be considered exercised when the Company receives written notice of
exercise in accordance with the terms of the Award Agreement from the person
entitled to exercise the SAR.  If a SAR has been granted in tandem with an
Option, upon the exercise of the SAR, the number of shares that may be
purchased pursuant to the Option shall be reduced by the number of shares with
respect to which the SAR is exercised.

 

(c)                                       Nonassignability of SARs.  Except
as determined by the Administrator, no SAR shall be assignable or otherwise
transferable by the Awardee except by will or by the laws of descent and
distribution.  Notwithstanding anything herein to the contrary, SARs may
be transferred and exercised in accordance with a Domestic Relations Order.

 

(d)                                      Substitute SARs.  The Board may cause
the Company to grant Substitute SARs in connection with the acquisition by the
Company or an Affiliate of equity securities of any entity (including by
merger) or all or a portion of the assets of any entity.  Any such
substitution shall be effective on the effective date of the acquisition. 
Unless and to the extent specified otherwise by the Board, Substitute SARs
shall have the same terms and conditions as the options they replace, except
that (subject to the provisions of Section 10) Substitute SARs shall be
exercisable with respect to the Fair Market Value of Shares rather than equity
securities of the granting entity and shall be on terms that, as determined by
the Board in its sole and absolute discretion, properly reflects the
substitution.

 

(e)                                       Repricings.  A SAR may be
repriced, replaced or regranted, through cancellation or modification without
stockholder approval.

 

8.2                            Stock
Awards

 

The following
rules apply to all Stock Awards:

 

 

(a)                                      General.  The specific terms
and conditions of a Stock Award applicable to the Awardee shall be provided for
in the Award Agreement. The Award Agreement shall state the number of Shares
that the Awardee shall be entitled to receive or purchase, the terms and
conditions on which the Shares shall vest, the price to be paid and, if
applicable, the time within which the Awardee must accept such offer. The offer
shall be accepted by execution of the Award Agreement.  The Administrator
may require that all Shares subject to a right of repurchase or risk of
forfeiture be held in escrow until such repurchase right or risk of forfeiture
lapses.  The grant or vesting of a Stock Award may be made contingent on
the achievement of Objectively Determinable Performance Conditions.

 

(b)                                      Right of Repurchase.  If so provided in
the Award Agreement, Award Shares acquired pursuant to a Stock Award may be
subject to repurchase by the Company or an Affiliate if not vested in
accordance with the Award Agreement.

 

(c)                                       Form of Payment.  The Administrator shall
determine the acceptable form and method of payment for exercising a Stock
Award.  Acceptable forms of payment for all Award Shares are cash, check
or wire transfer, denominated in U.S. dollars except as specified by the
Administrator for non-U.S. Employees or non-U.S. sub-plans.  In addition,
the Administrator may permit payment to be made by any of the methods permitted
with respect to the exercise of Options pursuant to Section 6.4.

 

(d)                                      Nonassignability of Stock Awards.  Except as determined by the Administrator, no Stock Award shall
be assignable or otherwise transferable by the Awardee except by will or by the
laws of descent and distribution.  Notwithstanding anything to the
contrary herein, Stock Awards may be transferred and exercised in accordance
with a Domestic Relations Order.

 

(e)                                       Substitute Stock Award.  The
Board may cause the Company to grant Substitute Stock Awards in connection with
the acquisition by the Company or an Affiliate of equity securities of any
entity (including by merger) or all or a portion of the assets of any
entity.  Unless and to the extent specified otherwise by the Board,
Substitute Stock Awards shall have the same terms and conditions as the stock
awards they replace, except that (subject to the provisions of Section 10)
Substitute Stock Awards shall be Stock Awards to purchase Shares rather than
equity securities of the granting entity and shall have a Purchase Price that,
as determined by the Board in its sole and absolute discretion, properly
reflects the substitution.  Any such Substituted Stock Award shall be
effective on the effective date of the acquisition.

 

8.3                            Cash Awards

 

The following
rules apply to all Cash Awards:

 

Cash Awards may be granted
either alone, in addition to, or in tandem with other Awards granted under this
Plan. After the Administrator determines that it will offer a Cash Award, it
shall advise the Awardee, by means of an Award Agreement, of the terms,
conditions and restrictions related to the Cash Award.

 

9.                                  Exercise of
Awards

 

9.1                            In General

 

An Award shall be
exercisable in accordance with this Plan and the Award Agreement under which it
is granted.

 

9.2                            Time of
Exercise

 

Options and Stock Awards
shall be considered exercised when the Company receives: (a) written
notice of exercise from the person entitled to exercise the Option or Stock
Award, (b) full payment, or provision for payment, in a form and method
approved by the Administrator, for the Shares for which the Option or Stock
Award is being exercised, and (c) with respect to Nonstatutory Options,
payment, or provision for payment, in a form approved by the Administrator, of
all applicable withholding taxes due upon exercise.  An Award may not be
exercised for a fraction of a Share.  SARs shall be considered exercised
when the Company receives written notice of the exercise from the person
entitled to exercise the SAR.

 

9.3                            Issuance of
Award Shares

 

The Company shall issue
Award Shares in the name of the person properly exercising the Award.  If
the 

 

 

Awardee is that person and
so requests, the Award Shares shall be issued in the name of the Awardee and
the Awardee’s spouse.  The Company shall endeavor to issue Award Shares
promptly after an Award is exercised or after the Grant Date of a Stock Award,
as applicable.  Until Award Shares are actually issued, as evidenced by
the appropriate entry on the stock register of the Company or its transfer
agent, the Awardee will not have the rights of a stockholder with respect to
those Award Shares, even though the Awardee has completed all the steps
necessary to exercise the Award.  No adjustment shall be made for any
dividend, distribution, or other right for which the record date precedes the
date the Award Shares are issued, except as provided in Section 10.

 

9.4                            Termination

 

(a)                                      In General  Except as provided in
an Award Agreement or in writing by the Administrator, including in an Award
Agreement, and as otherwise provided in Sections 9.4(b), (c), (d) and
(e) after an Awardee’s Termination, the Awardee’s Awards shall be
exercisable to the extent (but only to the extent) they are vested on the date
of that Termination and only during the three months after the Termination, but
in no event after the Expiration Date.  To the extent the Awardee does not
exercise an Award within the time specified for exercise, the Award shall
automatically terminate.

 

(b)                                      Leaves of Absence  Unless otherwise
provided in the Award Agreement, no Award may be exercised more than three
months after the beginning of a leave of absence, other than a personal or
medical leave approved by an authorized representative of the Company with
employment guaranteed upon return.  Awards shall not continue to vest
during a leave of absence, unless otherwise determined by the Administrator
with respect to an approved personal or medical leave with employment
guaranteed upon return.

 

(c)                                       Death or Disability  Unless otherwise
provided by the Administrator, if an Awardee’s Termination is due to death or
disability (as determined by the Administrator with respect to all Awards other
than Incentive Stock Options and as defined by Section 22(e) of the
Code with respect to Incentive Stock Options), all Awards of that Awardee to
the extent exercisable at the date of that Termination may be exercised for one
year after that Termination, but in no event after the Expiration Date. 
In the case of Termination due to death, an Award may be exercised as provided
in Section 17.  In the case of Termination due to disability, if a
guardian or conservator has been appointed to act for the Awardee and been
granted this authority as part of that appointment, that guardian or
conservator may exercise the Award on behalf of the Awardee.  Death or
disability occurring after an Awardee’s Termination shall not cause the
Termination to be treated as having occurred due to death or disability. 
To the extent an Award is not so exercised within the time specified for its
exercise, the Award shall automatically terminate.

 

(d)                                      Divestiture  If an Awardee’s
Termination is due to a Divestiture, the Board may take any one or more of the
actions described in Section 10.3 or 10.4 with respect to the Awardee’s
Awards.

 

(e)                                       Termination for Cause  In the
discretion of the Administrator, which may be exercised on the date of grant,
or at a date later in time, if an Awardee’s Termination is due to Cause, all of
the Awardee’s Awards shall automatically terminate and cease to be exercisable
at the time of Termination and the Administrator may rescind any and all
exercises of Awards by the Awardee that occurred after the first event
constituting Cause.  “Cause” means employment-related dishonesty, fraud,
misconduct or disclosure or misuse of confidential information, or other
employment-related conduct that is likely to cause significant injury to the
Company, an Affiliate, or any of their respective employees, officers or
directors (including, without limitation, commission of a felony or similar
offense), in each case as determined by the Administrator.  “Cause” shall
not require that a civil judgment or criminal conviction have been entered
against or guilty plea shall have been made by the Awardee regarding any of the
matters referred to in the previous sentence.  Accordingly, the
Administrator shall be entitled to determine “Cause” based on the Administrator’s
good faith belief.  If the Awardee is criminally charged with a felony or
similar offense, that shall be a sufficient, but not a necessary, basis for
such a belief.

 

(f)                                          Administrator Discretion 
Notwithstanding the provisions of Section 9.4 (a)-(e), the Plan
Administrator shall have complete discretion, exercisable either at the time an
Award is granted or at any time while the Award remains outstanding, to:

 

(i)                                           Extend the
period of time for which the Award is to remain exercisable, following the
Awardee’s Termination, from the limited exercise period otherwise in effect for
that Award to such greater period of time as the Administrator shall deem
appropriate, but in no event beyond the Expiration Date; and/or

 

(ii)                                       Permit the
Award to be exercised, during the applicable post-Termination exercise period,
not only with respect to the number of vested Shares for which such Award may
be exercisable at the time of the 

 

 

Awardee’s Termination but
also with respect to one or more additional installments in which the Awardee would
have vested had the Awardee not been subject to Termination.

 

(g)                                      Consulting or Employment Relationship  Nothing
in this Plan or in any Award Agreement, and no Award or the fact that Award
Shares remain subject to repurchase rights, shall:  (A) interfere
with or limit the right of the Company or any Affiliate to terminate the
employment or consultancy of any Awardee at any time, whether with or without
cause or reason, and with or without the payment of severance or any other
compensation or payment, or (B) interfere with the application of any
provision in any of the Company’s or any Affiliate’s charter documents or
Applicable Law relating to the election, appointment, term of office, or
removal of a Director.

 

10.                           Certain
Transactions and Events

 

10.1                     In General

 

Except as provided in this
Section 10, no change in the capital structure of the Company, merger,
sale or other disposition of assets or a subsidiary, change in control,
issuance by the Company of shares of any class of securities or securities
convertible into shares of any class of securities, exchange or conversion of
securities, or other transaction or event shall require or be the occasion for
any adjustments of the type described in this Section 10.  Additional
provisions with respect to the foregoing transactions are set forth in
Section 14.3.

 

10.2                     Changes in Capital Structure

 

In the event of any stock
split, reverse stock split, recapitalization, combination or reclassification
of stock, stock dividend, spin-off, or similar change to the capital structure
of the Company (not including a Fundamental Transaction or Change in Control),
the Board shall make whatever adjustments it concludes are appropriate to:
(a) the number and type of Awards that may be granted under this Plan, (b) the
number and type of Options that may be granted to any individual under this
Plan, (c) the terms of any SAR, (d) the Purchase Price of any Stock
Award, (e) the Option Price and number and class of securities issuable
under each outstanding Option, and (f) the repurchase price of any
securities substituted for Award Shares that are subject to repurchase
rights.  The specific adjustments shall be determined by the Board. 
Unless the Board specifies otherwise, any securities issuable as a result of any
such adjustment shall be rounded down to the next lower whole security. 
The Board need not adopt the same rules for each Award or each Awardee.

 

10.3                     Fundamental Transactions

 

Except for grants to
Non-Employee Directors pursuant to Section 11 herein, in the event of
(a) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders
of the Company or their relative stock holdings and the Awards granted under
this Plan are assumed, converted or replaced by the successor corporation,
which assumption shall be binding on all Participants), (b) a merger in
which the Company is the surviving corporation but after which the stockholders
of the Company immediately prior to such merger (other than any stockholder
that merges, or which owns or controls another corporation that merges, with
the Company in such merger) cease to own their shares or other equity interest
in the Company, (c) the sale of all or substantially all of the assets of
the Company, or (d) the acquisition, sale, or transfer of more than 50% of
the outstanding shares of the Company by tender offer or similar transaction
(each, a “  Fundamental Transaction  
”), any or all outstanding Awards may be assumed, converted or replaced by the
successor corporation (if any), which assumption, conversion or replacement
shall be binding on all participants under this Plan.  In the alternative,
the successor corporation may substitute equivalent Awards or provide
substantially similar consideration to participants as was provided to
stockholders (after taking into account the existing provisions of the
Awards).  The successor corporation may also issue, in place of
outstanding Shares held by the participants, substantially similar shares or
other property subject to repurchase restrictions no less favorable to the
participant. In the event such successor corporation (if any) does not assume
or substitute Awards, as provided above, pursuant to a transaction described in
this Subsection 10.3, the vesting with respect to such Awards shall fully and
immediately accelerate or the repurchase rights of the Company shall fully and
immediately terminate, as the case may be, so that the Awards may be exercised
or the repurchase rights shall terminate before, or otherwise in connection
with the closing or completion of the Fundamental Transaction or event, but then
terminate.  Notwithstanding anything in this Plan to the contrary, the
Committee may, in its sole discretion, provide that the vesting of any or all
Award Shares subject to vesting or a right of repurchase shall accelerate or
lapse, as the case may be, upon a transaction described in this
Section 10.3. If the Committee exercises such discretion with respect to
Options, such Options shall become exercisable in full prior to the
consummation of such event at such time and on such conditions as the Committee
determines, and if such Options are not exercised prior to the consummation of
the Fundamental Transaction, they shall terminate at such time as determined by
the 

 

 

Committee.  Subject to
any greater rights granted to participants under the foregoing provisions of
this Section 10.3, in the event of the occurrence of any Fundamental
Transaction, any outstanding Awards shall be treated as provided in the
applicable agreement or plan of merger, consolidation, dissolution,
liquidation, or sale of assets.

 

10.4                     Changes of Control

 

The Board may also, but need
not, specify that other transactions or events constitute a “Change in Control ”. 
The Board may do that either before or after the transaction or event
occurs.  Examples of transactions or events that the Board may treat as
Changes of Control are: (a) any person or entity, including a “group” as
contemplated by Section 13(d)(3) of the Exchange Act, acquires
securities holding 30% or more of the total combined voting power or value of
the Company, or (b) as a result of or in connection with a contested
election of Company Directors, the persons who were Company Directors
immediately before the election cease to constitute a majority of the
Board.  In connection with a Change in Control, notwithstanding any other
provision of this Plan, the Board may, but need not, take any one or more of
the actions described in Section 10.3.  In addition, the Board may
extend the date for the exercise of Awards (but not beyond their original
Expiration Date).  The Board need not adopt the same rules for each
Award or each Awardee.  Notwithstanding anything in this Plan to the
contrary, in the event of a Termination of services for any reason other than
death, disability or Cause, within 18 months following the consummation of a
Fundamental Transaction or Change in Control, any Awards, assumed or
substituted in a Fundamental Transaction or Change in Control, which are
subject to vesting conditions and/or the right of repurchase in favor of the
Company or a successor entity, shall accelerate fully so that such Award Shares
are immediately exercisable upon Termination or, if subject to the right of
repurchase in favor of the Company, such repurchase rights shall lapse as of
the date of Termination. Such Awards shall be exercisable for a period of three
(3) months following termination.

 

10.5                     Divestiture

 

If the Company or an
Affiliate sells or otherwise transfers equity securities of an Affiliate to a
person or entity other than the Company or an Affiliate, or leases, exchanges
or transfers all or any portion of its assets to such a person or entity, then
the Board may specify that such transaction or event constitutes a “ 
Divestiture   ”.  In connection with a
Divestiture, notwithstanding any other provision of this Plan, the Board may,
but need not, take one or more of the actions described in Section 10.3 or
10.4 with respect to Awards or Award Shares held by, for example, Employees,
Directors or Consultants for whom that transaction or event results in a
Termination.  The Board need not adopt the same rules for each Award
or each Awardee.

 

10.6                     Dissolution

 

If
the Company adopts a plan of dissolution, the Board may cause Awards to be
fully vested and exercisable (but not after their Expiration Date) before the
dissolution is completed but contingent on its completion and may cause the
Company’s repurchase rights on Award Shares to lapse upon completion of the
dissolution.  The Board need not adopt the same rules for each Award
or each Awardee.  Notwithstanding anything herein to the contrary, in the
event of a dissolution of the Company, to the extent not exercised before the
earlier of the completion of the dissolution or their Expiration Date, Awards
shall terminate immediately prior to the dissolution.

 

10.7                     Cut-Back to Preserve Benefits

 

If the Administrator
determines that the net after-tax amount to be realized by any Awardee, taking
into account any accelerated vesting, termination of repurchase rights, or cash
payments to that Awardee in connection with any transaction or event set forth
in this Section 10 would be greater if one or more of those steps were not
taken or payments were not made with respect to that Awardee’s Awards or Award
Shares, then, at the election of the Awardee, to such extent, one or more of
those steps shall not be taken and payments shall not be made.

 

11.                               Automatic Option Grants to Non-Employee Directors and Non-Employee
Director Fee Option Grants

 

11.1                     Automatic Option Grants to Non-Employee Directors

 

(a)                                      Grant Dates  Option grants to Non-Employee Directors shall
be made on the dates specified below:

 

(i)                                           Each
Non-Employee Director who is then serving as a member of the Board on the
Effective Date (the “  Current Directors   ”)
and each Non-Employee Director who is first elected or appointed to the Board 

 

 

at any time after the
effective date of this Plan shall automatically be granted, on the date of such
initial election or appointment, a Nonstatutory Option to purchase 7,500 Shares
(the “  Initial Grant   ”).

 

(ii)                                       Commencing in
2004, on the date of each annual stockholders meeting, each individual who is
to continue to serve as a Non-Employee Director shall automatically be granted
a Nonstatutory Option to purchase 3,750 Shares (the “ 
Annual Grant  ”),
provided, however, that such individual has served as a Non-Employee Director
for at least six (6) months.

 

(b)                                      Exercise Price

 

(i)                                           The Option
Price shall be equal to one hundred percent (100%) of the Fair Market Value of
the Shares on the Option grant date.

 

(ii)                                       The Option
Price shall be payable in one or more of the alternative forms authorized
pursuant to Section 6.4.  Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the Option
Price must be made on the date of exercise.

 

(c)                                       Option Term   Each Option shall have a term of ten
(10) years measured from the Option grant date.

 

(d)                                      Exercise and Vesting of Options  Except as otherwise
determined by the whole Board, the Shares underlying each Option granted
pursuant to Section 11.1 shall vest and be exercisable as set forth below.

 

(i)                                           Initial Grant.  The Shares underlying each
Option issued pursuant to the Initial Grant shall vest and be exercisable as to
4.1666% of the Shares at the end of each full succeeding month from the date of
grant, rounded down to the nearest whole Share, for so long as the Non-Employee
Director continuously remains a Director of, or a Consultant to, the Company
provided, however, that the Shares underlying each Option issued to Current
Directors, pursuant to the Initial Grant, shall be fully vested and immediately
exercisable on the grant date.

 

(ii)                                       Annual Grant.  The Shares underlying each
Option issued pursuant to the Annual Grant shall vest and be exercisable as to
8.3333% of the Shares at the end of each full succeeding month from the date of
grant, rounded down to the nearest whole Share, for so long as the Non-Employee
Director continuously remains a Director of, or a Consultant to, the Company.

 

(e)                                       Termination of Board Service  The following
provisions shall govern the exercise of any Options held by the Awardee at the
time the Awardee ceases to serve as a Non-Employee Director:

 

(i)                                           In General  Except as otherwise
provided in Section 11.3, after cessation of service as a Director (the “ 
Cessation Date   ”), the Awardee’s Options shall be
exercisable to the extent (but only to the extent) they are vested on the
Cessation Date and only during the three months after such Cessation Date, but
in no event after the Expiration Date.  To the extent the Awardee does not
exercise an Option within the time specified for exercise, the Option shall
automatically terminate.

 

(ii)                                       Death or Disability  If an Awardee’s
cessation of service on the Board is due to death or disability (as determined
by the Board), all Options of that Awardee, to the extent exercisable upon such
Cessation Date, may be exercised for one year after the Cessation Date, but in
no event after the Expiration Date.  In the case of a cessation of service
due to death, an Option may be exercised as provided in Section 17. 
In the case of a cessation of service due to disability, if a guardian or
conservator has been appointed to act for the Awardee and been granted this
authority as part of that appointment, that guardian or conservator may
exercise the Option on behalf of the Awardee.  Death or disability
occurring after an Awardee’s cessation of service shall not cause the cessation
of service to be treated as having occurred due to death or disability. 
To the extent an Option is not so exercised within the time specified for its
exercise, the Option shall automatically terminate.

 

11.2                     Director Fee Option Grants

 

(a)                                      Option Grants.  The Board shall have the
sole and exclusive authority to determine the calendar year or years for which
the Director fee option grant program (the “  Director Fee
Option Program  ”) is to
be in effect.  For each such calendar year the program is in effect, each
Non-Employee Director may elect to apply all or any portion of the annual
retainer fee otherwise payable in cash, for his or her service on the Board for
that year, to the acquisition 

 

 

of a special Option grant
under this Director Fee Option Program.  Such election must be filed with
the Company’s Chief Financial Officer prior to first day of the calendar year
for which the annual retainer fee which is the subject of that election is
otherwise payable.  Each Non-Employee Director who files such a timely
election shall automatically be granted an Option under this Director Fee
Option Program on the first trading day in January in the calendar year
for which the annual retainer fee which is the subject of that election would
otherwise be payable in cash.

 

(b)                                      Option Terms  Each Option shall be a Nonstatutory Option
governed by the terms and conditions specified below.

 

(i)                                           Exercise Price

 

A.                                                 The Purchase
Price shall be thirty-three and one-third percent (33-1/3%) of the Fair Market
Value per Share on the Option grant date.

 

B.                                                 The Purchase
Price shall become immediately due upon exercise of the Option and shall be
payable in one or more of the alternative forms authorized pursuant to
Section 6.4 of this Plan.  Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the Purchase
Price must be made on the date that the Option is exercised.

 

(ii)                                       Number of Option Shares.  The
number of Shares subject to the Option shall be determined pursuant to the
following formula (rounded down to the nearest whole number):

 

X = A ÷ (B x 66-2/3%), where

 

X is the number of Option
Shares,

 

A is the portion of the
annual retainer fee subject to the Non-Employee Director’s election, and

 

B is the Fair Market Value
of a Share on the option grant date.

 

(iii)                                   Exercise and Term of Options  The
Option shall become exercisable in a series of twelve (12) equal monthly
installments upon the Awardee’s completion of each month of Board service over
the twelve (12)-month period measured from the grant date.  Each Option
shall have a maximum term of ten (10) years measured from the Option grant
date.

 

(iv)                                     Termination of Board Service  Should the
Awardee cease Board service for any reason (other than death or permanent
disability) while holding one or more Options under this Director Fee Option
Program, then each such Option shall remain exercisable, for any or all of the
Shares for which the Option is exercisable at the time of such cessation of
Board service, until the earlier of (x) the expiration of the ten
(10)-year Option term or (y) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.  However, each
Option held by the Awardee under this Director Fee Option Program at the time
of his or her cessation of Board service shall immediately terminate and cease
to remain outstanding with respect to any and all Shares for which the Option
is not otherwise at that time exercisable.

 

(v)                                         Death or Permanent Disability  Should
the Awardee’s service as a Board member cease by reason of death or permanent
disability, then each Option held by such Awardee under this Director Fee Option
Program shall immediately become exercisable for all the Shares at the time
subject to that Option, and the Option may be exercised for any or all of those
Shares as fully-vested Shares until the earlier of (x) the expiration of
the ten (10)-year option term or (y) the expiration of the three (3)-year
period measured from the date of such cessation of Board service.

 

Should the Awardee die after
cessation of his or her Board service but while holding one or more Options
under this Director Fee Option Program, then each such Option may be exercised,
for any or all of the shares for which the Option is exercisable at the time of
the Awardee’s cessation of Board service (less any Shares subsequently
purchased by the Awardee prior to death), by the personal representative of the
Awardee’s estate or by the person or persons to whom the Option is transferred
pursuant to the Awardee’s will or in accordance with the laws of descent and
distribution or by the designated beneficiary or beneficiaries of such
option.  Such right of exercise shall lapse, and the Option shall
terminate, upon the earlier of (xx) the expiration of the ten (10)-year Option
term or (yy) the three (3)-year period measured from the date of the Awardee’s
cessation of Board service.

 

 

11.3                     Certain Transactions and Events

 

(a)                                      In the event of
a Fundamental Transaction while the Awardee remains a Non-Employee Director,
the Shares at the time subject to each outstanding Option held by such Awardee
pursuant to Section 11, but not otherwise vested, shall automatically vest
in full so that each such Option shall, immediately prior to the effective date
of the Fundamental Transaction, become exercisable for all the Shares as fully
vested Shares and may be exercised for any or all of those vested Shares.
Immediately following the consummation of the Fundamental Transaction, each
Option shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or Affiliate thereof).

 

(b)                                      In the event of
a Change in Control while the Awardee remains a Non-Employee Director, the
Shares at the time subject to each outstanding Option held by such Awardee
pursuant to Section 11, but not otherwise vested, shall automatically vest
in full so that each such Option shall, immediately prior to the effective date
of the Change in Control, become exercisable for all the Shares as fully vested
Shares and may be exercised for any or all of those vested Shares. Each such
Option shall remain exercisable for such fully vested Shares until the expiration
or sooner termination of the Option term in connection with a Change in
Control.

 

(c)                                       Each Option
which is assumed in connection with a Fundamental Transaction shall be
appropriately adjusted, immediately after such Fundamental Transaction, to apply
to the number and class of securities which would have been issuable to the
Awardee in consummation of such Fundamental Transaction had the Option been
exercised immediately prior to such Fundamental Transaction. Appropriate
adjustments shall also be made to the Option Price payable per share under each
outstanding Option, provided the aggregate Option Price payable for such
securities shall remain the same. To the extent the actual holders of the
Company’s outstanding Common Stock receive cash consideration for their Common
Stock in consummation of the Fundamental Transaction, the successor corporation
may, in connection with the assumption of the outstanding Options granted
pursuant to Section 11, 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 Fundamental Transaction.

 

(d)                                      The grant of
Options pursuant to Section 11 shall in no 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)                                       The remaining
terms of each Option granted pursuant to Section 11 shall, as applicable,
be the same as terms in effect for Awards granted under this Plan. 
Notwithstanding the foregoing, the provisions of Section 9.4 and
Section 10 shall not apply to Options granted pursuant to Section 11.

 

11.4                     Limited Transferability of Options

 

Each Option granted pursuant
to Section 11 may be assigned in whole or in part during the Awardee’s
lifetime to one or more members of the Awardee’s family or to a trust
established exclusively for one or more such family members or to an entity in
which the Awardee is majority owner or to the Awardee ‘s former spouse, to the
extent such assignment is in connection with the Awardee ‘s estate or financial
plan or pursuant to a Domestic Relations Order. The assigned portion may only
be exercised by the person or persons who acquire a proprietary interest in the
Option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the Option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Administrator may deem appropriate. The Awardee may also designate one or
more persons as the beneficiary or beneficiaries of his or her outstanding
Options under Section 11, and those Options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Awardee ‘s death while holding those Options. Such beneficiary or
beneficiaries shall take the transferred Options subject to all the terms and
conditions of the applicable Award Agreement evidencing each such transferred
Option, including (without limitation) the limited time period during which the
Option may be exercised following the Awardee ‘s death.

 

12.                           Withholding
and Tax Reporting

 

12.1                     Tax Withholding Alternatives

 

(a)                                      General  Whenever Award Shares
are issued or become free of restrictions, the Company may require the Awardee
to remit to the Company an amount sufficient to satisfy any applicable tax
withholding requirement, whether the related tax is imposed on the Awardee or
the Company.  The Company shall have no obligation to deliver Award Shares
or release Award Shares from an escrow or permit a transfer of Award Shares
until the Awardee has 

 

 

satisfied those tax
withholding obligations.  Whenever payment in satisfaction of Awards is
made in cash, the payment will be reduced by an amount sufficient to satisfy
all tax withholding requirements.

 

(b)                                      Method of Payment  The Awardee shall pay
any required withholding using the forms of consideration described in Section 6.4(b),
except that, in the discretion of the Administrator, the Company may also
permit the Awardee to use any of the forms of payment described in
Section 6.4(c).  The Administrator, in its sole discretion, may also
permit Award Shares to be withheld to pay required withholding.  If the
Administrator permits Award Shares to be withheld, the Fair Market Value of the
Award Shares withheld, as determined as of the date of withholding, shall not
exceed the amount determined by the applicable minimum statutory withholding
rates.

 

12.2                     Reporting of Dispositions

 

Any holder of Option Shares
acquired under an Incentive Stock Option shall promptly notify the
Administrator, following such procedures as the Administrator may require, of
the sale or other disposition of any of those Option Shares if the disposition
occurs during:  (a) the longer of two years after the Grant Date of
the Incentive Stock Option and one year after the date the Incentive Stock
Option was exercised, or (b) such other period as the Administrator has
established.

 

13.                               Compliance with Law

 

The grant of Awards and the
issuance and subsequent transfer of Award Shares shall be subject to compliance
with all Applicable Law, including all applicable securities laws.  Awards
may not be exercised, and Award Shares may not be transferred, in violation of
Applicable Law.  Thus, for example, Awards may not be exercised
unless:  (a) a registration statement under the Securities Act is
then in effect with respect to the related Award Shares, or (b) in the
opinion of legal counsel to the Company, those Award Shares may be issued in
accordance with an applicable exemption from the registration requirements of
the Securities Act and any other applicable securities laws.  The failure
or inability of the Company to obtain from any regulatory body the authority
considered by the Company’s legal counsel to be necessary or useful for the
lawful issuance of any Award Shares or their subsequent transfer shall relieve
the Company of any liability for failing to issue those Award Shares or
permitting their transfer.  As a condition to the exercise of any Award or
the transfer of any Award Shares, the Company may require the Awardee to
satisfy any requirements or qualifications that may be necessary or appropriate
to comply with or evidence compliance with any Applicable Law.

 

14.                               Amendment or Termination of this Plan or Outstanding Awards

 

14.1                     Amendment and Termination

 

The Board may at any time
amend, suspend, or terminate this Plan.

 

14.2                     Stockholder Approval

 

The Company shall obtain the
approval of the Company’s stockholders for any amendment to this Plan if
stockholder approval is necessary or desirable to comply with any Applicable
Law or with the requirements applicable to the grant of Awards intended to be
Incentive Stock Options.  The Board may also, but need not, require that
the Company’s stockholders approve any other amendments to this Plan.

 

14.3                     Effect

 

No amendment, suspension, or
termination of this Plan, and no modification of any Award even in the absence
of an amendment, suspension, or termination of this Plan, shall impair any
existing contractual rights of any Awardee unless the affected Awardee consents
to the amendment, suspension, termination, or modification. 
Notwithstanding anything herein to the contrary, no such consent shall be
required if the Board determines, in its sole and absolute discretion, that the
amendment, suspension, termination, or modification:  (a) is required
or advisable in order for the Company, this Plan or the Award to satisfy
Applicable Law, to meet the requirements of any accounting standard or to avoid
any adverse accounting treatment, or (b) in connection with any
transaction or event described in Section 10, is in the best interests of
the Company or its stockholders.  The Board may, but need not, take the
tax or accounting consequences to affected Awardees into consideration in
acting under the preceding sentence.  Those decisions shall be final,
binding and conclusive.  Termination of this Plan shall not affect the Administrator’s
ability to exercise the powers granted to it under this Plan with respect to
Awards granted before the termination of Award Shares issued under such Awards
even if those Award Shares are issued after the termination.

 

 

15.                               Reserved Rights

 

15.1                     Nonexclusivity of this Plan

 

This Plan shall not limit
the power of the Company or any Affiliate to adopt other incentive arrangements
including, for example, the grant or issuance of stock options, stock, or other
equity-based rights under other plans.

 

15.2                     Unfunded Plan

 

This Plan shall be
unfunded.  Although bookkeeping accounts may be established with respect
to Awardees, any such accounts will be used merely as a convenience.  The
Company shall not be required to segregate any assets on account of this Plan,
the grant of Awards, or the issuance of Award Shares.  The Company and the
Administrator shall not be deemed to be a trustee of stock or cash to be
awarded under this Plan.  Any obligations of the Company to any Awardee
shall be based solely upon contracts entered into under this Plan, such as
Award Agreements.  No such obligations shall be deemed to be secured by
any pledge or other encumbrance on any assets of the Company.  Neither the
Company nor the Administrator shall be required to give any security or bond
for the performance of any such obligations.

 

16.                               Special Arrangements Regarding Award Shares

 

16.1                     Escrow of Stock Certificates

 

To enforce any restrictions
on Award Shares, the Administrator may require their holder to deposit the certificates
representing Award Shares, with stock powers or other transfer instruments
approved by the Administrator endorsed in blank, with the Company or an agent
of the Company to hold in escrow until the restrictions have lapsed or
terminated.  The Administrator may also cause a legend or legends
referencing the restrictions to be placed on the certificates.

 

16.2                     Repurchase Rights

 

(a)                                      General  If a Stock Award is
subject to vesting conditions, the Company shall have the right, during the
seven months after the Awardee’s Termination, to repurchase any or all of the
Award Shares that were unvested as of the date of that Termination.  The
repurchase price shall be determined by the Administrator in accordance with
this Section 16.2 which shall be either (i) the Purchase Price for
the Award Shares (minus the amount of any cash dividends paid or payable with
respect to the Award Shares for which the record date precedes the repurchase)
or (ii) the lower of (A) the Purchase Price for the Shares or (B) the
Fair Market Value of those Award Shares as of the date of the
Termination.  The repurchase price shall be paid in cash.  The
Company may assign this right of repurchase.

 

(b)                                      Procedure  The Company or its
assignee may choose to give the Awardee a written notice of exercise of its
repurchase rights under this Section 16.2.  However, the Company’s
failure to give such a notice shall not affect its rights to repurchase Award
Shares.  The Company must, however, tender the repurchase price during the
period specified in this Section 16.2 for exercising its repurchase rights
in order to exercise such rights.

 

17.                               Beneficiaries

 

An Awardee may file a
written designation of one or more beneficiaries who are to receive the Awardee’s
rights under the Awardee’s Awards after the Awardee’s death.  An Awardee
may change such a designation at any time by written notice.  If an
Awardee designates a beneficiary, the beneficiary may exercise the Awardee’s
Awards after the Awardee’s death.  If an Awardee dies when the Awardee has
no living beneficiary designated under this Plan, the Company shall allow the
executor or administrator of the Awardee’s estate to exercise the Award or, if
there is none, the person entitled to exercise the Option under the Awardee’s
will or the laws of descent and distribution.  In any case, no Award may
be exercised after its Expiration Date.

 

18.                               Miscellaneous

 

18.1                     Governing Law

 

This Plan, the Award
Agreements and all other agreements entered into under this Plan, and all
actions taken under this Plan or in connection with Awards or Award Shares,
shall be governed by the laws of the State of Delaware.

 

 

18.2                     Determination of Value

 

Fair
Market Value shall be determined as follows:

 

(a)                                      Listed Stock.  If the Shares are
traded on any established stock exchange or quoted on a national market system,
Fair Market Value shall be the closing sales price for the Shares as quoted on
that stock exchange or system for the date the value is to be determined (the “ 
Value Date   ”) as reported in    The
Wall Street Journal    or
a similar publication.  If no sales are reported as having occurred on the
Value Date, Fair Market Value shall be that closing sales price for the last
preceding trading day on which sales of Shares are reported as having
occurred.  If no sales are reported as having occurred during the five
trading days before the Value Date, Fair Market Value shall be the closing bid
for Shares on the Value Date.  If Shares are listed on multiple exchanges
or systems, Fair Market Value shall be based on sales or bid prices on the
primary exchange or system on which Shares are traded or quoted.

 

(b)                                      Stock Quoted by Securities Dealer  If
Shares are regularly quoted by a recognized securities dealer but selling
prices are not reported on any established stock exchange or quoted on a
national market system, Fair Market Value shall be the mean between the high
bid and low asked prices on the Value Date.  If no prices are quoted for
the Value Date, Fair Market Value shall be the mean between the high bid and low
asked prices on the last preceding trading day on which any bid and asked
prices were quoted.

 

(c)                                       No Established Market  If
Shares are not traded on any established stock exchange or quoted on a national
market system and are not quoted by a recognized securities dealer, the
Administrator (following guidelines established by the Board or Committee) will
determine Fair Market Value in good faith.  The Administrator will
consider the following factors, and any others it considers significant, in
determining Fair Market Value: (i) the price at which other securities of
the Company have been issued to purchasers other than Employees, Directors, or
Consultants, (ii) the Company’s stockholder’s equity, prospective earning
power, dividend-paying capacity, and non-operating assets, if any, and
(iii) any other relevant factors, including the economic outlook for the
Company and the Company’s industry, the Company’s position in that industry,
the Company’s goodwill and other intellectual property, and the values of
securities of other businesses in the same industry.

 

18.3                     Reservation of Shares

 

During the term of this
Plan, the Company shall at all times reserve and keep available such number of
Shares as are still issuable under this Plan.

 

18.4                     Electronic Communications

 

Any Award Agreement, notice
of exercise of an Award, or other document required or permitted by this Plan
may be delivered in writing or, to the extent determined by the Administrator,
electronically.  Signatures may also be electronic if permitted by the
Administrator.

 

18.5                     Notices

 

Unless the Administrator
specifies otherwise, any notice to the Company under any Option Agreement or
with respect to any Awards or Award Shares shall be in writing (or, if so
authorized by Section 18.4, communicated electronically), shall be
addressed to the Secretary of the Company, and shall only be effective when
received by the Secretary of the Company.

 

 

Amendment to

2003 Equity Incentive Plan

of DTS, Inc.

 

Notwithstanding the
provisions of Section 11 of the 2003 Equity Incentive Plan (the “Plan”) of
DTS, Inc. (the “
Company” ), the Plan was amended on May 9, 2005 to provide
as follows:

 

Any automatic option grant
to newly elected or appointed non-employee directors under the Plan made during
the period from May 19, 2005 to December 31, 2005 shall consist of an
option to purchase 30,000 shares of the Company’s common stock, vesting monthly
over a three year period starting on the date of the grant.

 

Any annual automatic option
grant to non-employee directors under the Plan made during the period from
May 19, 2005 to December 31, 2005 shall consist of an option to
purchase 10,000 shares of the Company’s common stock, vesting monthly over a
one year period starting on the date of the grant, provided that such
individual has served as a non-employee director for at least 6 months.

 

Any automatic option grant
to newly elected or appointed non-employee directors under the Plan made at any
time on or after January 1, 2006 shall consist of an option to purchase
15,000 shares of the Company’s common stock, vesting monthly over a three year
period starting on the date of the grant.

 

Any annual automatic option
grant to non-employee directors under the Plan made at any time on or after
January 1, 2006 shall consist of an option to purchase 5,000 shares of the
Company’s common stock, vesting monthly over a one year period starting on the
date of the grant, provided that such individual has served as a non-employee
director for at least 6 months.

 

Each non-employee director
first elected or appointed to the Board at any time on or after January 1,
2006 shall automatically be granted on the date of such initial election or appointment,
7,500 shares of restricted stock under the Plan, which shall vest over a period
of three years in equal installments at the end of each full month from the
date of the grant for so long as the non-employee director continuously remains
a director of, or a consultant to, the Company.

 

On the date of each annual
stockholders’ meeting held on or after January 1, 2006, each individual
who is to continue to serve as a non-employee director shall automatically be
granted 2,500 shares of restricted stock under the Plan, provided that such
individual has served as a non-employee director for at least 6 months. 
Such restricted stock shall vest over a period of one year in equal
installments at the end of each full month from the date of grant for so long
as the non-employee director continuously remains a director of, or a
consultant to, the Company.

 

None of the above-referenced
compensation shall be paid to any member of the Board (or committees thereof)
who is an employee of the Company.

 

 

Amendment to

2003 Equity Incentive Plan

of DTS, Inc.

 

The 2003 Equity Incentive
Plan of DTS, Inc., as amended on May 9, 2005, was further amended on
May 15, 2008, by adding a new Section 5.2(c). The new
Section 5.2(c) reads in its entirety as follows:

 

(c)                                 Cash Awards.  Subject to the
provisions of this Section 5.2, so long as the Company is a “publicly held
corporation” within the meaning of Code Section 162(m), no Employee may be
granted one or more Cash Awards within a single fiscal year of the Company
having an aggregate amount of more than $3,000,000, considered without regard
to any number of Options, SARs or Stock Awards that may have been granted or
awarded to such Employee during the applicable fiscal year. With respect to any
Cash Award that is granted with the intent of having it qualify as “qualified
performance-based compensation” under Code Section 162(m), such Cash
Awards may be granted to an Executive only by the Committee (and,
notwithstanding anything to the contrary in Section 4.1(a), not by the Board).
Any Cash Award intended as “qualified performance-based compensation” within
the meaning of Section 162(m) of the Code must be awarded, vest or
become exercisable contingent on the achievement of one or more Objectively
Determinable Performance Conditions. If a Cash Award is cancelled, the
cancelled Cash Award shall continue to be counted toward the foregoing
limitation.

 

 

Amendment to

2003 Equity Incentive Plan

of DTS, Inc.

 

Notwithstanding the
provisions of Section 11 of the 2003 Equity Incentive Plan (the “Plan”) of
DTS, Inc., as previously amended on May 9, 2005 and May 15,
2008, on February 19, 2009 Section 11 of the Plan was further amended
to provide as follows:

 

Any
annual automatic option grant to non-employee directors under the Plan made at
any time after February 19, 2009 shall consist of an option to purchase
7,500 shares of the Company’s common stock, vesting monthly over a one year
period starting on the date of the grant, provided that such individual has
served as a non-employee director for at least 6 months.

 

Each
non-employee director first elected or appointed to the Board at any time after
February 19, 2009 shall automatically be granted on the date of such
initial election or appointment, 5,000 shares of restricted stock under the
Plan, which shall vest over a period of three years in equal installments on
each annual anniversary of the date of grant for so long as the non-employee
director continuously remains a director of, or a consultant to, the Company.

 

Each
restricted stock award automatically granted to a non-employee director on the
date of each annual stockholders’ meeting shall vest in a single installment on
the one-year anniversary of the date of grant so long as the non-employee
director continuously remains a director of, or a consultant to, the Company.

 

Except as set forth above,
the terms and conditions of Section 11 of the Plan, as amended on
May 9, 2005, shall remain in effect.

 

The above-referenced equity
compensation shall not be paid to any member of the Board (or committees
thereof) who is an employee of the Company.

 

 

Amendment to

2003 Equity Incentive Plan

of DTS, Inc.

 

The 2003 Equity Incentive
Plan of DTS, Inc., as amended on May 9, 2005, May 15, 2008 and
February 19, 2009 (as amended, the “Plan”), was further amended on
February 15, 2010 to provide as follows:

 

1. 
Section 2.1(d) shall be amended in its entirety to read as follows:

 

(d)     “Award” means a
Stock Award, SAR, Cash Award, Option, or Restricted Stock Unit granted in
accordance with the terms of this Plan.

 

2. 
Section 2.1 shall be amended by the addition of a new
Section 2.11(vv) as follows:

 

(vv)   “Restricted Stock Unit”
means a right granted to a Participant pursuant to Section 8.4 to receive
on a future date a Share.

 

3. 
Section 8 of the Plan shall be amended by the addition of a new
Section 8.4 as follows:

 

8.4       The following rules apply to
Restricted Stock Units Awards:

 

Restricted Stock Units may
be granted under this Plan.  Restricted Stock Unit Awards shall be
evidenced by Award Agreements specifying the number of Restricted Stock Units
subject to the Award, in such form as the Administrator shall from time to time
establish.  Award Agreements evidencing Restricted Stock Units may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:

 

(a)    Grant of
Restricted Stock Unit Awards

 

Restricted Stock Unit Awards
may be granted upon such conditions as the Administrator shall determine,
including, without limitation, upon the attainment of one or more Objectively
Determinable Performance Conditions.

 

(b)   Purchase
Price

 

No monetary payment (other
than applicable tax withholding, if any) shall be required as a condition of
receiving a Restricted Stock Unit Award, the consideration for which shall be
services actually rendered to the Company or an Affiliate. 
Notwithstanding the foregoing, if required by applicable state corporate law,
the Participant shall furnish consideration in the form of cash or past
services having a value not less than the par value of the Shares issued upon
settlement of the Restricted Stock Unit Award.

 

(c)    Vesting

 

Restricted Stock Unit Awards
may (but need not) be made subject to vesting conditions based upon the
satisfaction of such service requirements, conditions, restrictions or
performance criteria set forth in the Award Agreement evidencing such Award.

 

(d)   Voting
Rights, Dividend Equivalent Rights and Distributions

 

Participants shall have no
voting rights with respect to Shares represented by Restricted Stock Units
until the date of the issuance of such Shares (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company).  However, the Award Agreement evidencing any Restricted Stock
Unit Award may provide that the Participant shall be entitled to dividend
equivalent rights with respect to the payment of cash dividends on Shares
during the period beginning on the date such Award is granted and ending, with
respect to each Share subject to the Award, on the earlier of the date the
Award is settled or the date on which it is terminated.  Such dividend
equivalent rights, if any, shall be paid by crediting the Participant with
additional whole Restricted Stock Units as of the date of payment of such cash
dividends on Shares.  The number of additional Restricted Stock Units
(rounded to the nearest whole number) to be so credited shall be determined by
dividing (i) the amount of cash dividends paid on such date with respect
to the number of Shares represented by the Restricted Stock Units previously
credited to the Participant by (ii) the Fair Market Value per Share on
such date.  

 

 

Such additional Restricted
Stock Units shall be subject to the same terms and conditions and shall be
settled in the same manner and at the same time as the Restricted Stock Units
originally subject to the Restricted Stock Unit Award.  In the event of a
dividend or distribution paid in Shares or other property or any other
adjustment made upon a change in the capital structure of the Company as
described in Section 10.2, appropriate adjustments shall be made in the
Participant’s Restricted Stock Unit Award so that it represents the right to
receive upon settlement any and all new, substituted or additional securities
or other property (other than regular, periodic cash dividends) to which the
Participant would be entitled by reason of the Shares issuable upon settlement
of the Award, and all such new, substituted or additional securities or other
property shall be immediately subject to the same vesting conditions as are
applicable to the Award.

 

(e)    Effect of
Termination of Service

 

Unless otherwise set forth
in the Award Agreement evidencing a Restricted Stock Unit Award, if a
Participant’s service terminates for any reason, whether voluntary or
involuntary (including the Participant’s death or disability), then the
Participant shall forfeit to the Company any Restricted Stock Units pursuant to
the Award which remain subject to vesting conditions as of the date of the
Participant’s termination of service.

 

(f)      Settlement
of Restricted Stock Unit Awards

 

The Company shall issue to a
Participant on the date on which Restricted Stock Units subject to the
Participant’s Restricted Stock Unit Award vest or on such other date set forth
in the Award Agreement one (1) Share (and/or any other new, substituted or
additional securities or other property pursuant to an adjustment described
above) for each Restricted Stock Unit then becoming vested or otherwise to be
settled on such date, subject to the withholding of applicable taxes, if
any.  If permitted by the Administrator, the Participant may elect,
consistent with the requirements of Section 409A of the Code, to defer
receipt of all or any portion of the Shares or other property otherwise
issuable to the Participant, and such deferred issuance date(s) and
amount(s) elected by the Participant shall be set forth in the Award
Agreement.

 

(g)   Nontransferability
of Restricted Stock Unit Awards

 

The right to receive Shares
pursuant to a Restricted Stock Unit Award shall not be subject in any manner to
anticipation, alienation, sale, exchange, transfer, assignment, pledge,
encumbrance, or garnishment by creditors of the Participant or the Participant’s
beneficiary, except transfer by will or by the laws of descent and
distribution.  All rights with respect to a Restricted Stock Unit Award
granted to a Participant hereunder shall be exercisable during his or her
lifetime only by such Participant or the Participant’s guardian or legal representative.

 

Except as set forth above,
the terms and conditions of the Plan, as amended hereby, shall remain in
effect.

 

 

Amendment to

2003 Equity Incentive Plan

of DTS, Inc.

 

Notwithstanding the
provisions of Section 11 of the 2003 Equity Incentive Plan (the “Plan”) of DTS, Inc.,
as previously amended on May 9, 2005, May 15, 2008, February 19,
2009 and February 15, 2010, on June 3, 2010 Section 11 of the
Plan was further amended to provide as follows:

 

Any
annual automatic option grant to non-employee directors under the Plan made at
any time after May 31, 2010 shall consist of an option to purchase 6,000
shares of the Company’s common stock, vesting monthly over a one year period
starting on the date of the grant, provided that such individual has served as
a non-employee director for at least 6 months. 
In addition, any such non-employee director shall receive a grant of
2,000 shares of restricted stock.   Each
restricted stock award automatically granted to a non-employee director on the
date of each annual stockholders’ meeting shall vest in a single installment on
the one-year anniversary of the date of grant so long as the non-employee
director continuously remains a director of, or a consultant to, the Company.

 

Each
non-employee director first elected or appointed to the Board at any time on or
after May 31, 2010 shall automatically be granted on the date of such
initial election or appointment, 3,000 shares of restricted stock under the
Plan, which shall vest over a period of three years in equal installments on
each annual anniversary of the date of grant for so long as the non-employee
director continuously remains a director of, or a consultant to, the
Company.  Further, such a non-employee
director shall also receive an option to purchase 9,000 shares of the Company’s
common stock, vesting monthly over a three year period starting on the date of
the grant.

 

Except as set forth above,
the terms and conditions of Section 11 of the Plan, as amended prior to
the date hereof, shall remain in effect.

 

The above-referenced equity
compensation shall not be paid to any member of the Board (or committees
thereof) who is an employee of the Company.

 

 

Amendments
to

2003
Equity Incentive Plan

of DTS, Inc.

 

The 2003 Equity Incentive
Plan of DTS, Inc. (the “Plan”), as amended on May 9, 2005, May 15,
2008, February 19, 2009, February 15, 2010, and June 3, 2010 is
further amended as of October 8, 2010 as follows:

 

1.                                       Existing Section 6.4(c)(v) is
hereby redesignated as Section 6.4(c)(vi) and the following shall be
added to the Plan as follows:

 

(v)           through a “Net
Exercise” procedure which shall be defined as delivery of a
properly executed exercise notice followed by a procedure pursuant to which
(1) the Company will reduce the number of Shares otherwise issuable to an
Awardee upon the exercise of an Option by the largest whole number of Shares
having a Fair Market Value that does not exceed the aggregate Option Price for
the Shares with respect to which the Option is exercised, and (2) the
Awardee shall pay to the Company in cash the remaining balance of such
aggregate Option Price not satisfied by such reduction in the number of whole
Shares to be issued.

 

2.                                       Section 10.2
of the Plan shall be deleted in its entirety and the following substituted in
its place:

 

10.2        Changes in Capital
Structure

 

Subject
to any required action of the stockholders of the Company and Sections 409A and
424 of the Code to the extent applicable, in the event of any stock split,
reverse stock split, recapitalization, combination or reclassification of
stock, stock dividend, spin-off or similar change to the capital structure of
the Company (not including a Fundamental Transaction or Change in Control), (a) the
number and type of Awards that may be granted under this Plan, (b) the
number and type of Options that may be granted to any individual under this
Plan, (c) the terms of any SAR, (d) the Purchase Price of any Stock
Award, (e) the Option Price and number and class of securities issuable
under each outstanding Option, and (f) the repurchase price of any
securities substituted for Award Shares that are subject to repurchase rights,
shall, without further action of the Board, be proportionately adjusted to
reflect such event.  Unless the Board
specifies otherwise, any securities issuable as a result of any such adjustment
shall be rounded down to the next lower whole security and the Option Price or
Purchase Price of any security subject to an Award shall be rounded up to the
nearest whole cent and in no event may the Option Price or Purchase Price under
any Award by decreased to an amount less than the par value.

 

3.                                       Section 11.2
of the Plan shall be deleted in its entirety.

 

4.                                       Section 18.2(c) of
the Plan shall be deleted in its entirety and the following substituted in its
place:

 

(c)           No Established Market.  If Shares are not traded on any established
stock exchange or quoted on a national market system and are not quoted by a
recognized securities dealer, the Administrator (following guidelines
established by the Board or Committee) will determine Fair Market Value in good
faith and in accordance with the provisions of Section 409A of the Code.

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