Document:

Exhibit 4.7

 

FORM OF WARRANT

 

THIS WARRANT (“WARRANT”)
AND THE WARRANT SHARES (AS DEFINED BELOW) HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AND HAVE BEEN (OR WILL BE, IN THE CASE OF THE WARRANT
SHARES) ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933.

 

No.            

 

THIS WARRANT SHALL BE VOID AFTER 5:00 P.M.
EASTERN TIME ON SEPTEMBER 30, 2010  (THE “EXPIRATION
DATE”).

 

LPATH, INC.

 

WARRANT TO
PURCHASE         SHARES OF

COMMON
STOCK, PAR VALUE $0.001 PER SHARE

 

For VALUE RECEIVED,                              
(“Warrantholder”),
is entitled to purchase, subject to the provisions of this Warrant, from Lpath,
Inc., a Nevada corporation (the “Company”), at any time not later than 5:00
P.M., Eastern Time, on the Expiration Date (as defined above), at an exercise
price per share equal to $1.50 (the exercise price in effect being herein
called the “Warrant
Price”),                   
shares (“Warrant Shares”)
of the Company’s Common Stock, par value $0.001 per share (“Common Stock”). The
number of Warrant Shares purchasable upon exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time as described
herein. This Warrant is being issued pursuant to that certain Common Stock and
Purchase Agreement, dated as of March 28, 2006, by and between the
Warrantholder and the Company (the “Purchase Agreement”).

 

Section 1.               Registration. The Company
shall maintain books for the transfer and registration of this Warrant. Upon
the initial issuance of this Warrant, the Company shall issue and register the
Warrant in the name of the Warrantholder.

 

Section 2.               Transfers. As provided
herein, this Warrant may be transferred only pursuant to a registration
statement filed under the Securities Act of 1933, as amended (the “Securities Act”), or
an exemption from such registration. Subject to such restrictions, the Company
shall transfer this Warrant from time to time upon the books to be maintained
by the Company for that purpose, upon surrender thereof for transfer properly
endorsed or accompanied by appropriate instructions for transfer and such other
documents as may be reasonably required 

 

 

by the Company, including, if
required by the Company, an opinion of its counsel to the effect that such
transfer is exempt from the registration requirements of the Securities Act, to
establish that such transfer is being made in accordance with the terms hereof,
and a new Warrant shall be issued to the transferee and the surrendered Warrant
shall be canceled by the Company.

 

Section 3.               Exercise of Warrant. Subject
and pursuant to the provisions hereof, including Section 3(b) below, the
exercise of Warrant(s) by Warrantholder shall be subject to the terms set forth
hereinafter.

 

(a)           The
Warrantholder may exercise this Warrant in whole or in part at any time prior
to its expiration upon surrender of the Warrant, together with delivery of the
duly executed Warrant exercise form attached hereto as Appendix A (the “Exercise Agreement”)
and payment by cash, certified check or wire transfer of funds in United States
Dollars for the aggregate Warrant Price for that number of Warrant Shares then
being purchased, to the Company during normal business hours on any business
day at the Company’s principal executive offices (or such other office or
agency of the Company as it may designate by notice to the Warrantholder). The
Warrant Shares so purchased shall be deemed to be issued to the Warrantholder
or the Warrantholder’s designee, as the record owner of such shares, as of the
close of business on the date on which all of the following has occurred:  (i) this Warrant shall have been surrendered
(or evidence of loss, theft or destruction thereof and security or indemnity
satisfactory to the Company), (ii) the Warrant Price shall have been paid and
(iii) the completed Exercise Agreement shall have been delivered. Certificates
for the Warrant Shares so purchased, representing the aggregate number of
shares specified in the Exercise Agreement, shall be delivered to the Warrantholder
within a reasonable time, not exceeding five (5) business days, after this
Warrant shall have been so exercised. The certificates so delivered shall be in
such denominations as may be requested by the Warrantholder and shall be
registered in the name of the Warrantholder or such other name as shall be
designated by the Warrantholder. If this Warrant shall have been exercised only
in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of certificates representing the Warrant
Shares purchased upon such exercise, deliver to the Warrantholder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised. As used herein, “business day” means a day, other
than a Saturday or Sunday, on which banks in New York City are open for the
general transaction of business. Each exercise hereof shall constitute the
re-affirmation by the Warrantholder that the representations and warranties
contained in Section 2.2 of the LTI Purchase Agreement are true and correct in
all material respects with respect to the Warrantholder as of the time of such
exercise.

 

Warrant Lpath Inc. March 2006

 

2

 

(b)           If at any time after one year from
the date of issuance of this Warrant there is no effective Registration
Statement registering the resale of the Warrant Shares by the Warrantholder at
a time when such Registration Statement is otherwise required to be effective
pursuant to the Registration Rights Agreement (as defined in Section 13 hereof)
(and subject to any suspension or blackout periods provided for therein), this
Warrant may also be exercised during such time by means of a “cashless
exercise” in which the Holder shall be entitled to receive a certificate for
the number of Warrant Shares equal to the quotient obtained by dividing
[(A-B)(X)] by (A), where:

 

(A)                  = the Closing
Price (as hereinafter defined) on the Trading Day immediately preceding the
date of such election;

 

(B)                    = the Warrant
Price of the Warrants, as adjusted; and

 

(X)                   = the number of
Warrant Shares issuable upon exercise of the Warrants in accordance with the
terms of this Warrant.

 

Notwithstanding the foregoing, no
Warrantholder shall be permitted to use the “cashless exercise” during an
Allowed Delay (as such term is defined in paragraph 2(c) of the Registration
Rights Agreement) that occurs during the period commencing on February 14 and
ending on March 1 of each calendar and that relates to the updating of the
Registration Statement. If such Allowed Delay continues after
March 1 of such calendar year, then the Warrantholder may use the cashless
exercise until such time as the Registration Statement has become effective
again.

 

Section 4.               Compliance with the Securities
Act of 1933. The Company may cause the legend set forth on the first page
of this Warrant to be set forth on each Warrant or similar legend on any
Warrant Shares issued upon exercise of this Warrant, unless counsel for the
Company is of the opinion as to any such security that such legend is
unnecessary.

 

Section 5.               Payment of Taxes. The
Company will pay any documentary stamp taxes attributable to the initial
issuance of Warrant Shares issuable upon the exercise of the Warrant; provided,
however, that the Company shall not be required to pay any tax or taxes
which may be payable in respect of any transfer involved in the issuance or
delivery of any certificates for Warrant Shares in a name other than that of
the Warrantholder in respect of which such shares are issued, and in such case,
the Company shall not be required to issue or deliver any certificate for
Warrant Shares or any Warrant until the person requesting the same has paid to
the Company the amount of such tax or has established to the Company’s
reasonable satisfaction that such tax has been paid. The Warrantholder shall be
responsible for income taxes due under federal, state or other law, if any such
tax is due.

 

Section 6.               Mutilated or Missing Warrants.
In case this Warrant shall be mutilated, lost, stolen, or destroyed, the
Company shall issue in exchange and substitution of and upon cancellation of
the mutilated Warrant, or in lieu of and substitution for the Warrant lost,
stolen or destroyed, a new Warrant of like tenor and for the purchase of a like
number of Warrant Shares, but only upon receipt of evidence reasonably
satisfactory to the Company and its legal counsel of such loss, theft or
destruction of the Warrant, and with respect to a lost, stolen or destroyed
Warrant, reasonable indemnity or bond with respect thereto, if requested by the
Company.

 

3

 

Section 7.               Reservation of Common Stock.
The Company hereby represents and warrants that there have been reserved, and
the Company shall at all applicable times keep reserved until issued (if
necessary) as contemplated by this Section 7, out of the authorized and
unissued shares of Common Stock, sufficient shares to provide for the exercise
of the rights of purchase represented by this Warrant. The Company agrees that
all Warrant Shares issued upon due exercise of the Warrant shall be, at the
time of delivery of the certificates for such Warrant Shares, duly authorized,
validly issued, fully paid and non-assessable shares of Common Stock of the
Company.

 

Section 8.               Adjustments.
Subject and pursuant to the provisions of this Section 8, the Warrant Price and
number of Warrant Shares subject to this Warrant shall be subject to adjustment
from time to time as set forth hereinafter.

 

(a)           If
the Company shall, at any time or from time to time while this Warrant is
outstanding, pay a dividend or make a distribution on its Common Stock in
shares of Common Stock, subdivide its outstanding shares of Common Stock into a
greater number of shares or combine its outstanding shares of Common Stock into
a smaller number of shares or issue by reclassification of its outstanding
shares of Common Stock any shares of its capital stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then the number of Warrant Shares
purchasable upon exercise of the Warrant and the Warrant Price in effect
immediately prior to the date upon which such change shall become effective,
shall be adjusted by the Company so that the Warrantholder thereafter
exercising the Warrant shall be entitled to receive the number of shares of
Common Stock or other capital stock which the Warrantholder would have received
if the Warrant had been exercised immediately prior to such event upon payment
of a Warrant Price that has been adjusted to equal the product of (A) the
Warrant Price in effect immediately prior to such adjustment multiplied by
(B) a fraction, the numerator of which is equal to the number of Warrant Shares
purchasable pursuant hereto immediately prior to such adjustment and the
denominator of which is the number of Warrant Shares or other securities of the
Company resulting from such adjustment. An adjustment made pursuant to this
paragraph shall become effective immediately after the effective date of such
event.

 

(b)           If
any capital reorganization, reclassification of the capital stock of the
Company, consolidation or merger of the Company with another corporation in
which the Company is not the survivor, or sale, transfer or other disposition
of all or substantially all of the Company’s assets to another corporation
shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger, sale, transfer or other disposition,
lawful and adequate provision shall be made whereby each Warrantholder shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions herein specified and in lieu of the Warrant Shares
immediately theretofore issuable upon exercise of the Warrant, such shares of
stock, securities or assets as would have been issuable or payable with respect
to or in exchange for a number of Warrant Shares equal to the number of Warrant
Shares immediately theretofore issuable upon exercise of this Warrant had such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition not taken place, and in any such case appropriate provision
shall be made with respect to the rights and interests of each Warrantholder to
the end that the provisions hereof (including, without limitation, provision
for adjustment of the Warrant Price) shall thereafter be applicable, as nearly
equivalent as may be practicable in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof. 

 

4

 

The Company shall not effect
any such consolidation, merger, sale, transfer or other disposition unless
prior to or simultaneously with the consummation thereof the successor
corporation (if other than the Company) resulting from such consolidation or
merger, or the corporation purchasing or otherwise acquiring such assets or
other appropriate corporation or entity shall assume the obligation to deliver
to the Warrantholder, at the last address of the Warrantholder appearing on the
books of the Company, such shares of stock, securities or assets as, in
accordance with the foregoing provisions, the Warrantholder may be entitled to
purchase, and the other obligations under this Warrant. The provisions of this
paragraph (b) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales, transfers or other
dispositions.

 

(c)           In
case the Company shall fix a payment date for the making of a distribution to
all holders of Common Stock (including any such distribution made in connection
with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness or assets (other than cash dividends
or cash distributions payable out of consolidated earnings or earned surplus or
dividends or distributions referred to in Section 8(a)), or subscription rights
or warrants, the Warrant Price to be in effect after such payment date shall be
determined by multiplying the Warrant Price in effect immediately prior to such
payment date by a fraction, the numerator of which shall be the total number of
shares of Common Stock outstanding multiplied by the Market Price (as defined
below) per share of Common Stock immediately prior to such payment date, less
the fair market value (as determined by the Company’s Board of Directors in
good faith) of said assets or evidences of indebtedness so distributed, or of
such subscription rights or warrants, and the denominator of which shall be the
total number of shares of Common Stock outstanding multiplied by such Market
Price per share of Common Stock immediately prior to such payment date. “Market Price” as of a
particular date (the “Valuation
Date”) shall mean the following: (a) if the Common Stock is then
listed on a national stock exchange, the closing sale price of one share of
Common Stock on such exchange on the last trading day prior to the Valuation
Date; (b) if the Common Stock is then quoted on The Nasdaq Stock Market, Inc. (“Nasdaq”)
(whether through the National Market System, the SmallCapMarket or the OTC
Bulletin Board), the closing sale price of one share of Common Stock on Nasdaq
on the last trading day prior to the Valuation Date or, if no such closing sale
price is available, the average of the high bid and the low asked price quoted
on Nasdaq on the last trading day prior to the Valuation Date; or (c) if the
Common Stock is not then listed on a national stock exchange or quoted on
Nasdaq, the fair market value of one share of Common Stock as of the Valuation
Date, shall be determined in good faith by the Board of Directors of the
Company and the Warrantholder. If the Common Stock is not then listed on a
national securities exchange or quoted on Nasdaq, the Board of Directors of the
Company shall respond promptly, in writing, to an inquiry by the Warrantholder
prior to the exercise hereunder as to the fair market value of a share of
Common Stock as determined by the Board of Directors of the Company. In the
event that the Board of Directors of the Company and the Warrantholder are
unable to agree upon the fair market value in respect of subpart (c) hereof,
the Company and the Warrantholder shall jointly select an appraiser, who is
experienced in such matters. The decision of such appraiser shall be final and
conclusive, and the cost of such appraiser shall be borne equally by the
Company and the Warrantholder. Such adjustment shall be made successively
whenever such a payment date is fixed.

 

(d)           An
adjustment to the Warrant Price shall become effective immediately after the
payment date in the case of each dividend or distribution and immediately after
the effective date of each other event which requires an adjustment.

 

5

 

(e)           In
the event that, as a result of an adjustment made pursuant to this Section 8,
the Warrantholder shall become entitled to receive any shares of capital stock
of the Company other than shares of Common Stock, the number of such other
shares so receivable upon exercise of this Warrant shall be subject thereafter
to adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the Warrant Shares contained
in this Warrant.

 

Section 9.               Fractional
Interest. The Company shall not be required to issue fractions of Warrant
Shares upon the exercise of this Warrant. If any fractional share of Common
Stock would, except for the provisions of the first sentence of this Section 9,
be deliverable upon such exercise, the Company, in lieu of delivering such
fractional share, shall pay to the exercising Warrantholder an amount in cash
equal to the Market Price of such fractional share of Common Stock on the date
of exercise.

 

Section 10.             Benefits.
Nothing in this Warrant shall be construed to give any person, firm or
corporation (other than the Company and the Warrantholder) any legal or
equitable right, remedy or claim, it being agreed that this Warrant shall be
for the sole and exclusive benefit of the Company and the Warrantholder.

 

Section 11.             Notices
to Warrantholder. Upon the happening of any event requiring an adjustment
of the Warrant Price, the Company shall promptly give written notice thereof to
the Warrantholder at the address appearing in the records of the Company,
stating the adjusted Warrant Price and the adjusted number of Warrant Shares
resulting from such event and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based. Failure to give
such notice to the Warrantholder or any defect therein shall not affect the
legality or validity of the subject adjustment.

 

Section 12.             Notices.
Unless otherwise provided, any notice required or permitted under this Warrant
shall be given in writing and shall be deemed effectively given as hereinafter
described (i) if given by personal delivery, then such notice shall be deemed
given upon such delivery, (ii) if given by Email or facsimile, then such notice
shall be deemed given upon receipt of confirmation of delivery or complete
transmittal, (iii) if given by mail, then such notice shall be deemed given
upon the earlier of (A) receipt of such notice by the recipient or (B) three
days after such notice is deposited in first class mail, postage prepaid, and
(iv) if given by an internationally recognized overnight air courier, then such
notice shall be deemed given one business day after delivery to such carrier. All
notices shall be addressed as follows: if to the Warrantholder, at its address
as set forth in the Company’s books and records and, if to the Company, at the
address as follows, or at such other address as the Warrantholder or the
Company may designate by ten days’ advance written notice to the other:

 

If to the Company:

 

6335
Ferris Square

Suite
A

San
Diego, CA 92121

Attention:  Controller

Fax:  (858) 678-0900

 

6

 

With a copy to:

 

Eilenberg & Krause LLP

11 East 44th Street, 17th Floor

New York, NY 10017

Attention.: Wesley J. Paul, Esq.

Fax:  (212) 986-2399

 

Section 13.             Registration
Rights. The initial Warrantholder is entitled to the benefit of certain
registration rights with respect to the Warrant Shares issued and issuable upon
the exercise of this Warrant as provided in the Registration Rights Agreement,
dated as of March 28, 2006, by and among the Company, the Warrantholder and the
other investors listed therein; and any subsequent Warrantholder may be
entitled to such rights.

 

Section 16.             Successors.
All the covenants and provisions hereof by or for the benefit of the
Warrantholder shall bind and inure to the benefit of its respective successors
and assigns hereunder.

 

Section 17.             Governing
Law; Consent to Jurisdiction; Waiver of Jury Trial. This Warrant shall be
governed by, and construed in accordance with, the internal laws of the State
of California, without reference to the choice of law provisions thereof. The
Company and, by accepting this Warrant, the Warrantholder, each irrevocably
submits to the exclusive jurisdiction of the state and Federal courts of the
State of California located in San Diego County for the purpose of any suit,
action, proceeding or judgment relating to or arising out of this Warrant and
the transactions contemplated hereby. Service of process in connection with any
such suit, action or proceeding may be served on each party hereto anywhere in
the world by the same methods as are specified for the giving of notices under
this Warrant. The Company and, by accepting this Warrant, the Warrantholder,
each irrevocably consents to the jurisdiction of any such court in any such
suit, action or proceeding and to the laying of venue in such court. The
Company and, by accepting this Warrant, the Warrantholder, each irrevocably
waives any objection to the laying of venue of any such suit, action or
proceeding brought in such courts and irrevocably waives any claim that any
such suit, action or proceeding brought in any such court has been brought in
an inconvenient forum. EACH OF THE COMPANY AND,
BY ITS ACCEPTANCE HEREOF, THE WARRANTHOLDER HEREBY WAIVES ANY RIGHT TO REQUEST
A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS WARRANT AND REPRESENTS
THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

 

Section 18.             No
Rights as Stockholder. Prior to the exercise of this Warrant, the
Warrantholder shall not have or exercise any rights as a stockholder of the
Company by virtue of its ownership of this Warrant.

 

Section 19.             Amendment;
Waiver. This Warrant is one of a series of Warrants of like tenor issued by
the Company pursuant to other purchase agreements with the same terms as the
Purchase Agreement and initially covering an aggregate of 334,813 shares of
Common Stock (collectively, the “Company Warrants”). Any term of this Warrant
may be amended or waived (including the adjustment provisions included in
Section 8 of this Warrant) upon the written 

 

7

 

consent of the Company and the
holders of Company Warrants representing at least 50% of the number of shares
of Common Stock then subject to all outstanding Company Warrants (the “Majority Holders”); provided,
that (x) any such amendment or waiver must apply to all Company Warrants; and
(y) the number of Warrant Shares subject to this Warrant, the Warrant Price and
the Expiration Date may not be amended, and the right to exercise this Warrant
may not be altered or waived, without the written consent of the Warrantholder.

 

Section 20.             Section
Headings. The section headings in this Warrant are for the convenience of
the Company and the Warrantholder and in no way alter, modify, amend, limit or
restrict the provisions hereof.

 

[Signature appears on the next page]

 

8

 

IN WITNESS
WHEREOF, the Company has caused this Warrant to be duly executed, as of the 28th
day of March, 2006.

 

	
   

  	
  LPATH, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
     /s/  Scott
  Pancoast

  	
   

  
	
   

  	
  Name:

  	
   Scott Pancoast

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
					

 

9

 

APPENDIX A

LPATH, INC.—WARRANT EXERCISE FORM

 

To Lpath, Inc.:

 

The undersigned hereby irrevocably elects to
exercise the right of purchase represented by the within Warrant (“Warrant”)
for, and to purchase thereunder by the payment of the Warrant Price and
surrender of the
Warrant,                      
shares of Common Stock (“Warrant Shares”) provided for therein, and requests
that certificates for the Warrant Shares be issued as follows:

 

	
   

  	
   

  	
   

  
	
   

  	
  Name

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  City, State and Zip
  Code

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Federal Tax ID or Social Security No.

  
	
   

  
	
   

  	
  and delivered by

  	
  (certified mail to the above address, or

  
	
   

  	
   

  	
  to such other address (specify):

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  ).

  
									

 

and, if the number of Warrant Shares shall not be all the Warrant
Shares purchasable upon exercise of the Warrant, that a new Warrant for the
balance of the Warrant Shares purchasable upon exercise of this Warrant be
registered in the name of the undersigned Warrantholder or the undersigned’s
Assignee as below indicated and delivered to the address stated below.

 

Dated:                                        ,
200     

 

	
  Note: The signature must correspond with

  	
  Signature:

  	
   

  
	
  the name of the Warrantholder as written

  	
   

  
	
  on the first page of the Warrant in every

  	
   

  	
   

  
	
  particular, without alteration or
  enlargement

  	
   

  	
  Name (please print)

  
	
  or any change whatever, unless the Warrant

  	
   

  	
   

  
	
  has been assigned.

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  City, State and Zip Code

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Federal Identification No. or

  	
   

  
	
   

  	
   

  	
  Social Security No.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Assignee:Exhibit 10.3.1

 

Note: Redacted portions have been marked with [***]. The
redacted portions are subject to a request for confidential treatment that has
been filed with the Securities and Exchange Commission.

 

FEDERAL HOME LOAN BANK OF BOSTON

2006 EXECUTIVE INCENTIVE PLAN

February 2006 

 

Purpose

 

The
Federal Home Loan Bank of Boston (Bank) has established an Executive Incentive
Plan (EIP) to:

 

•                  promote achievement of the Bank’s financial plan and
strategic objectives as spelled out in the 2006
Strategic Business Plan;

•                  provide total annual compensation (i.e., salary plus
incentive) that is competitive with other financial institutions in the
employment markets in which the Bank competes, including other Federal Home
Loan Banks; and

•                  facilitate the retention and commitment of corporate
officers.

 

Bank’s Objectives for 2006

 

The focus of the Bank’s
2006 Strategic Business Plan is summarized in two words: profitable growth. The
Bank is targeting steady growth in business with members in terms of both
advances and mortgages. While the Bank’s focus will be profitable growth, we
will continue to enhance the Bank’s operational infrastructure, and we will
maintain and reinforce the Bank’s commitment to conservative and prudent risk
management and compliance.

 

Also for 2006, the Bank
has identified three all-encompassing long-term strategic goals that
demonstrate our commitment to the Bank’s mission, vision, the needs of its
stakeholders, and the well-being of the New England region:

 

1.               to
foster a member-centric organization;

2.               to
maintain trust and confidence among stakeholders; and

3.               to
harness the power of technology to maintain maximum efficiency and
productivity.

 

The goals in the 2006
incentive plan are designed to reinforce the focus of the Bank’s 2006 Strategic
Business Plan.

 

 

The incentive goals are
summarized in the following table with more detail following:

 

	
   

  	
   

  	
  Weight

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Goal

  	
   

  	
  Pres.

  	
   

  	
  1

  	
   

  	
  2

  	
   

  	
  Threshold

  	
   

  	
  Target

  	
   

  	
  Excess

  	
   

  
	
  Pre-tax ROE (Adjusted for Net Prepayment Fees) Spread
  to LIBOR

  	
   

  	
  15

  	
  %

  	
  20

  	
  %

  	
  25

  	
  %

  	
  300 basis points

  	
   

  	
  400 basis points

  	
   

  	
  500 basis points

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Percentage Growth in Average Member Advances (net of
  CDA and NEF) and MPF Balances 2006 Over 2005 With National, Growth-Oriented,
  and Insurance Company Accounts*

  	
   

  	
  10

  	
  %

  	
  10

  	
  %

  	
  10

  	
  %

  	
  10 percent

  	
   

  	
  15 percent

  	
   

  	
  20 percent

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Percentage Growth in Average Member Advances (net of
  CDA and NEF) and MPF Balances 2006 Over 2005 With Community Bank and Credit
  Union Accounts

  	
   

  	
  10

  	
  %

  	
  10

  	
  %

  	
  10

  	
  %

  	
  3 percent

  	
   

  	
  5 percent

  	
   

  	
  8 percent

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Percentage Growth in Targeted Mission-Related
  Advances Programs (CDA and NEF) 2006 Over 2005

  	
   

  	
  10

  	
  %

  	
  10

  	
  %

  	
  10

  	
  %

  	
  5 percent

  	
   

  	
  10 percent

  	
   

  	
  15 percent

  	
   

  

 

*
Excluding Bank of America advances.

 

 

	
   

  	
   

  	
  Weight

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Goal

  	
   

  	
  Pres.

  	
   

  	
  1

  	
   

  	
  2

  	
   

  	
  Threshold

  	
   

  	
  Target

  	
   

  	
  Excess

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Examination
  Results

  	
   

  	
  15

  	
  %

  	
  15

  	
  %

  	
  15

  	
  %

  	
  N.A.

  	
   

  	
  “Fair” rating in 2006 exam report

  	
   

  	
  “Satisfactory” rating in 2006 exam report

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operational
  Component

  	
   

  	
  10

  	
  %

  	
  15

  	
  %

  	
  20

  	
  %

  	
  As defined

  	
   

  	
  As defined

  	
   

  	
  As defined

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Discretionary
  Component

  	
   

  	
  30

  	
  %

  	
  20

  	
  %

  	
  10

  	
  %

  	
  As documented by supervisor

  	
   

  	
  As documented by supervisor

  	
   

  	
  As documented by supervisor

  	
   

  

 

Profitability Goal

 

	
  2006 Goal:

  	
   

  	
  Pre-tax ROE (Adjusted for Net Prepayment
  Fees) Spread to LIBOR

  
	
  Weight:

  	
   

  	
  President: 15
  percent; Tier 1: 20 percent; Tier 2: 25 percent

  
	
  Threshold:

  	
   

  	
  300 basis points

  
	
  Target:

  	
   

  	
  400 basis points

  
	
  Excess:

  	
   

  	
  500 basis points

  

 

The
metric will be the spread by which the Bank’s pre-tax (i.e., pre-REFCorp and
pre-AHP) ROE (adjusted for net prepayment fees) exceeds the daily average of
the bond-equivalent yield of three-month LIBOR. The projection for this metric
in the 2006 Strategic Business Plan’s base case is 399 basis points.

 

The difference between “ROE” and “ROE Adjusted for Net Prepayment Fees”
is that the latter defers the net effect of prepayment fee income from advances
or investments and associated debt retirement and hedge unwind expenses over
the expected remaining lives of the assets that were prepaid. The exclusion of
prepayment fee income and associated debt retirement and swap unwind expense
from the core ROE metric removes the potential for “windfall” compensation in
the event of heavy prepayment fee income and removes a conflict with the
objective of prudent asset-liability management by excluding the otherwise punitive
cost of debt retirement and swap unwind expense.

 

The
metric is not distorted by the general level of interest rates (which affects
both dollar earnings and prepayment speeds on advances), and it is independent
of the Bank’s asset size. It also eliminates a tax bias associated with REFCorp
and AHP. It does, however, implicitly factor in operating efficiencies, since
projected core ROE will be impaired to the extent the Bank’s budget is
exceeded.

 

 

Growth Goals

 

	
  2006 Goal:

  	
   

  	
  Growth in Member Advances and MPF with National,
  Growth-Oriented, and Insurance Company Accounts*

  
	
  Weight:

  	
   

  	
  President: 10 percent; Tier 1: 10
  percent; Tier 2: 10 percent

  
	
  Threshold:

  	
   

  	
  10 percent

  
	
  Target:

  	
   

  	
  15 percent

  
	
  Excess:

  	
   

  	
  20
  percent

  
	
   

  	
   

  	
   

  
	
  2006 Goal:

  	
   

  	
  Growth in Member
  Advances and MPF with Community Bank and Credit Union Accounts

  
	
  Weight:

  	
   

  	
  President: 10 percent; Tier 1: 10
  percent; Tier 2: 10 percent

  
	
  Threshold:

  	
   

  	
  3
  percent

  
	
  Target:

  	
   

  	
  5
  percent

  
	
  Excess:

  	
   

  	
  8
  percent

  
	
   

  	
   

  	
   

  
	
  2006 Goal:

  	
   

  	
  Growth in Targeted
  Mission-Related Advances Programs

  
	
  Weight:

  	
   

  	
  President: 10 percent; Tier 1: 10
  percent; Tier 2: 10 percent

  
	
  Threshold:

  	
   

  	
  5 percent

  
	
  Target:

  	
   

  	
  10 percent

  
	
  Excess:

  	
   

  	
  15
  percent

  

 

In the 2006 Strategic
Business Plan, average member advances and Mortgage Partnership Finance (MPF)
loans are projected to increase substantially between 2005 and 2006. To achieve
the projected level of growth, management is developing a strategy in 2006 that
seeks to develop value propositions for five distinct segments of the
membership:

 

1.               National
accounts,

2.               Growth-oriented
institutions,

3.               Community
banks,

4.               Credit
unions, and

5.               Insurance
companies.

 

* Excluding
Bank of America advances.

 

 

For purposes of the 2006
EIP, those five segments have been aggregated into two groups with similar
characteristics. A growth target based on advances and MPF has been established
for each group.(i)  The table below shows the starting and target ending
balances for these two groups:

 

	
  $Billions

  	
   

  	
  2005 Average Advances

  (Net of CDA and NEF)

  and MPF Base

  	
   

  	
  Target Growth

  	
   

  	
  Projected 2006 Average

  Advances (Net of CDA

  and NEF) and MPF

  	
   

  
	
  National,
  Growth-Oriented, and Insurance Company Accounts*

  	
   

  	
  $

  	
  30.1 billion

  	
   

  	
  15 percent

  	
   

  	
  $

  	
  34.6 billion

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Community Bank
  and Credit Union Accounts

  	
   

  	
  $

  	
  7.6 billion

  	
   

  	
  5 percent

  	
   

  	
  $

  	
  8.0 billion

  	
   

  

 

The Bank
currently holds a 63 percent market share of the wholesale funding used by
national accounts, excluding Bank of America, and a 83 percent market share of
wholesale funding used by growth oriented institutions. The Bank will
aggressively seek to expand its marketshare in 2006 through pricing, product
development and streamlining internal policies and procedures. In addition, the
Bank is expanding its efforts to reach the insurance industry with products
that address their business needs. These institutions do not access the
traditional wholesale funding market used by banks. Bank of America balances
are incorporated into the Bank’s 2006 Strategic Business Plan, but have been
removed from the EIP to focus incentives on opportunities for growth of the
Bank’s average advances levels. Bank of America contributed significantly to
this growth in 2005.

 

In contrast, the Bank
enjoys a nearly 100 percent market share of wholesale funding used by community
institutions and credit unions. Growth in advances from this segment will be
dependent on the Bank’s ability to help members expand their own market share
pursuant to their own business plans. The Bank will also compete for funding
increasingly being diversified into brokered CD and repurchase agreements.

 

Management expects
continued steady growth in the MPF program during the year, in spite of a
continuing slowdown in the housing market and growth in mortgage products that
are not eligible for sale into MPF. Growth will be generated through existing
participating financial institutions (PFIs) and recruitment of new PFIs. The
Bank’s largest PFI is expected to remain the largest seller.

 

The focus of the
mission-related metric will be to expand member lending activities in the
communities they serve through the Bank’s Community Development Advances (CDA)
and New England Fund (NEF) advances.(ii)

 

* Excluding
Bank of America advances.

 

 

The actual average CDA
and NEF advances balance for 2005 was $1.40 billion. A ten percent increase
would grow average mission-related advances to $1.54 billion. This increase
would be driven by relatively small advances disbursements. The average CDA
disbursement for housing-related purposes is projected to average $4.4 million
and economic development $4.0 million in 2006.

 

Bank staff will actively
use the outreach and education tools available to achieve the goal, including
the successful Community Development Consult program, funding strategies,
training programs, and publication of examples of successful initiatives.

 

Exam Goal

 

	
  2006 Goal:

  	
   

  	
  Examination Result

  
	
  Weights:

  	
   

  	
  President: 15 percent; Tier 1: 15 percent; Tier 2: 15
  percent

  
	
  Threshold:

  	
   

  	
  None

  
	
  Target:

  	
   

  	
  “Fair” rating in 2006 exam report

  
	
  Excess:

  	
   

  	
  “Satisfactory” rating in 2006 exam report

  

 

In 2006 exam report, the Federal Housing Finance Board
(Finance Board) will rate the Bank “satisfactory,” “fair,” “marginal,” or “unsatisfactory.”  A payment on this goal will be made at target
if the Bank’s rating is “fair.”  A “satisfactory”
rating will result in an excess payout on this goal.

 

Operational Component

 

	
  Weights:

  	
   

  	
  President: 10 percent; Tier 1: 15 percent; Tier 2: 20
  percent

  
	
  Threshold:

  	
   

  	
  As defined below

  
	
  Target:

  	
   

  	
  As defined below

  
	
  Excess:

  	
   

  	
  As defined below

  

 

Payments awarded under the Operational Component to
the EIP participants will be based on the Bank’s achievements on the following
key Bank-wide initiatives, which support the Bank’s all-encompassing three
strategic goals:

 

To foster a
member-centric organization

 

Implement a new member
segmentation strategy and develop value propositions for each segment –

•                  Threshold:
Define segment criteria; develop segment data base; form cross-functional
teams; schedule and conduct member interviews; and complete insurance
company research and initiative value proposition development.

•                  Target:
Complete value propositions for four segments (national accounts, growth
institutions, credit unions and insurance companies); present business cases to
executive steering committee; and begin implementation of approved value
propositions.

 

 

•                  Excess:
Implement targeted communication strategies for a minimum of three segments;
and integrate marketing research and marketing communications functions by
using research data to drive communication strategies.

 

Enhance
collateral policies –

•                  Threshold: Research on optimum collateral haircuts for
the Bank is completed by management by year-end 2006. Submit recommendation to
remove the Bank’s prioritization requirement to FHFB for review. If approved by
the FHFB, communicate to members that the Bank’s prioritization requirement has
been rescinded.

•                  Target: 
Management’s recommendations regarding optimum collateral haircuts are
completed and presented to our board. Revise the Products Policy as necessary,
and communicate any changes to the Policy to our members.

•                  Excess:  Bank
generates $500 million new advances business as a result of enhanced collateral
policies.

 

Maintain trust and
confidence among stakeholders 

 

Ensure Sarbanes-Oxley
compliance –

•                  Threshold: Complete all
Sarbanes-Oxley Section 404 initial documentation and begin management
testing. Comply with Sarbanes Section 302 certifications requirements.

•                  Target: Complete all
Sarbanes-Oxley Section 404 initial documentation, begin management
testing, update documentation, and remediate internal control gaps identified
through management testing. Comply with Sarbanes Section 302
certifications requirements.

•                  Excess: Complete all
Sarbanes-Oxley Section 404 initial documentation, complete management
testing, update documentation, and remediate internal control gaps identified.
Comply with Sarbanes Section 302 certifications requirements.

 

Complete study of
compensation philosophy –

•                  Threshold:
N.A.

•                  Target: Proposal and costs
presented to the Personnel Committee no later than the March 2006 meeting;
recommendations for changes and implementation presented to Personnel Committee
no later than the August 2006 meeting.

•                  Excess:  Implementation
plan finalized based on agreed-to recommendations and complete implementation
of those changes between August and December 2006.

 

 

To harness the power of
technology to maintain maximum efficiency and productivity

 

Summit(1)  –

•                  Threshold: Complete software
upgrade, develop plans for derivatives phase and requirements for MBS phase by June 30,
2006.

•                  Target: Upgrade complete,
derivatives phase implemented, and MBS project plan complete by November 30,
2006.

•                  Excess: Upgrade complete, derivatives phase implemented, and
MBS phase in testing by December 31, 2006.

 

Discretionary Component

 

	
  Weights:

  	
   

  	
  President: 30 percent; Tier 1: 20
  percent; Tier 2: 10 percent

  
	
  Threshold:

  	
   

  	
  As defined by manager/supervisor

  
	
  Target:

  	
   

  	
  As defined by manager/supervisor

  
	
  Excess:

  	
   

  	
  As defined by manager/supervisor

  

 

This is a subjective goal that a manager/supervisor
can award based on a participant’s leadership, work ethic, attitude, or other
such similar intangible attribute that contributes to the Bank’s success. Managers/supervisors
need to provide reasonable documentation that states the basis for whatever
award is recommended under the discretionary component.

 

Incentive Potential

 

Eligible
employees will be assigned an incentive award potential expressed as a
percentage of the incumbent’s base salary in effect at year-end 2006 as
follows:

 

	
   

  	
   

  	
  Incentive as a Percent of Salary

  	
   

  
	
   

  	
   

  	
  Threshold

  	
   

  	
  Target

  	
   

  	
  Excess

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  President

  	
   

  	
  25.00

  	
  %

  	
  35.00

  	
  %

  	
  50.00

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Tier I

  	
   

  	
  18.75

  	
  %

  	
  25.00

  	
  %

  	
  37.50

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Tier II

  	
   

  	
  15.00

  	
  %

  	
  20.00

  	
  %

  	
  30.00

  	
  %

  

 

(1) The
Summit Project Plan for subsequent phases is currently under review, and will
be completed by March 31. The timing of deliverable phases may be
changed as a result of this review. In this event, management will report any
project plan changes to the board of directors at the April 2006 meeting,
and will request conforming amendments to this objective of the Executive
Incentive Plan.

 

 

2006 Participation

 

The
following individuals are participants in the EIP for 2006:(iii)

 

	
  President

  	
   

  	
  Tier I

  	
   

  	
  Tier II

  
	
  Michael A. Jessee

  	
   

  	
  Edward Dumas

  	
   

  	
  [***]

  
	
   

  	
   

  	
  M. Susan Elliott

  	
   

  	
   

  
	
   

  	
   

  	
  John T. Eller

  	
   

  	
   

  
	
   

  	
   

  	
  William Hamilton

  	
   

  	
   

  
	
   

  	
   

  	
  Ellen McLaughlin

  	
   

  	
   

  
	
   

  	
   

  	
  Frank Nitkiewicz

  	
   

  	
   

  
	
   

  	
   

  	
  Bill Oakley

  	
   

  	
   

  
	
   

  	
   

  	
  Michael L. Wilson

  	
   

  	
   

  

 

EIP Administration

 

The EIP
is administered by the Personnel Committee of the Board of Directors
(Committee), which shall have full power and binding authority to construe,
interpret, and administer the EIP, and to adjust it during or at the end of the
calendar year covered by the EIP for extraordinary circumstances. Extraordinary
circumstances may include changes in business strategy, termination or
commencement of business lines, impact of severe economic fluctuations,
significant growth or consolidation of the membership base, or significant
regulatory or other changes impacting the Bank or Bank System.

 

The
Committee reserves the right at any time to amend, suspend or terminate the EIP
in whole or in part, for any reason, and without the consent of any EIP
participant.

 

The Bank’s
President and Chief Executive Officer will determine participation in the EIP
with the concurrence of the Committee.

 

EIP awards
shall not be considered earned or payable, in whole or in part, to any
participant for any reason until they are finally determined by the Bank’s
President and Chief Executive Officer with the concurrence of the Committee
following the end of the plan year. Moreover, unless otherwise specifically
determined by the President and Chief Executive Officer with the concurrence of
the Committee, a participant will be entitled to payment of an award only if
the participant is employed on the date of payment of the award. However, any
individual hired or promoted into an eligible position during the plan year who
is granted an award shall have any such incentive award prorated based on
months of EIP participation, providing he/she has served a minimum of six months
in that role and otherwise satisfies the EIP’s requirements.

 

 

Except as
set forth in the following paragraph, any EIP participant who terminates
employment for any reason, whether voluntarily or involuntarily, before the end
of the plan year, defined as the period January 1, 2006 through December 31,
2006, shall not be entitled to any award, except as otherwise determined by the
Bank’s President and Chief Executive Officer, with the concurrence of the
Committee, at their sole discretion.

 

EIP
participants who terminate employment with the Bank by reason of death or
disability prior to the conclusion of the plan year will receive a pro rata
payment of any incentive award determined by the Bank’s President and Chief
Executive Officer, with the concurrence of the Committee, based on the months
of completed service as an EIP participant during the year. Beneficiaries of
such payments will be the same as identified in the Bank’s group insurance
plan.

 

The Bank may make
such provisions, as it deems appropriate, for withholding payroll taxes in
connection with payment of EIP awards.

 

The Bank also has several
other incentive programs for staff at the Bank designed to motivate employees
to become more innovative and productive. The Bank’s President is responsible
for the administration of each of these programs and has the authority to
construe, implement, and administer programs, as appropriate.

 

(i) Average Advances
and MPF Balances are defined as the average daily balance of advances (net of
CDA and NEF) plus the average monthend balance of MPF. Under MPF, opportunities
for participations with other MPF Banks will count toward the goal. If a member
merges into a non-member, the merged entity’s balances will be excluded from
the calculation for 2006 and the average balance for 2005. If, for example, a
community bank member is merged into a national account member, all of the
merged member’s balances for 2005 and to the 2006 merger date will be included
in the national account member group. The 2005 year-end average numbers exclude
Bank of America and all institutions that were merged or acquired through January 2,
2006. The 2005 MPF assets include all participations.

(ii) This goal is
measured using the following advance product types: 822, 873, 877, 878, 879, 903,
904, and 914.

(iii) All corporate
officers are listed as EIP participants with one exception: [***], [***]. [***]
is a participant in the Bank’s Sales Incentive Plan and is eligible for an
incentive award equivalent to a Tier II participant in the EIP.

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