Document:

Exhibit 10.1

 

PLACEMENT
AGENT AGREEMENT

 

August 27, 2009

 

B.
Riley & Co., LLC

11100
Santa Monica Blvd.

Suite 800

Los Angeles, CA 90025

 

Ladies and Gentlemen:

 

1.             Introduction. 
Kratos Defense & Security Solutions, Inc., a Delaware
corporation (the “Company”),
proposes, pursuant to the terms of this Placement Agent Agreement (this “Agreement”) to sell to certain
institutional investors (the “Purchasers”) up
to an aggregate of 26,000,000 shares (the “Shares”) of
common stock, $0.001 par value per share (the “Common Stock”), of the Company. The Company hereby confirms
that B. Riley & Co., LLC is acting as the exclusive placement agent
(the “Placement Agent”) in accordance with
the terms and conditions hereof.

 

2.             Agreement to
Act as Placement Agent; Placement of Shares.  On the basis of the representations,
warranties and agreements of the Company herein contained, and subject to all
the terms and conditions of
this Agreement:

 

(a)           The
Company hereby authorizes the Placement Agent to act as its exclusive agent to
solicit offers for the purchase of all or part of the Shares from the Company
in connection with the proposed offering of the Shares (the “Offering”). 
Until the Closing Date (as defined in Section 4 hereof), the
Company shall not, without the prior written consent of the Placement Agent,
solicit or accept offers to purchase Shares otherwise than through the
Placement Agent.

 

(b)           The
Company hereby acknowledges that the Placement Agent, as an agent of the
Company, shall use its reasonable best efforts to solicit offers from potential
purchasers to purchase the Shares from the Company on the terms and subject to
the conditions set forth in the Prospectus (as defined below).  The Placement Agent has no authority to bind
the Company with respective to any prospective offer to purchase the
Shares.  The Placement Agent shall use
commercially reasonable efforts to assist the Company in obtaining performance
by each Purchaser whose offer to purchase Shares was solicited by the Placement
Agent and accepted by the Company, but the Placement Agent shall not, except as
otherwise provided in this Agreement, be obligated to disclose the identity of
any potential purchaser or have any liability to the Company in the event any
such purchase is not consummated for any reason.  Under no circumstances will the Placement
Agent be obligated to underwrite or purchase any Shares for its own accounts
and, in soliciting offers to purchase the Shares, the Placement Agent shall act
solely as the Company’s agent and not as a principal.  Notwithstanding the foregoing, it is
understood and agreed that the Placement Agent (or its affiliates) may, solely
at their discretion and without any obligation to do so, purchase Shares as a
principal.

 

 

(c)           Subject
to the provisions of this Section 2, offers for the purchase of
Shares shall be solicited by the Placement Agent as agent for the Company at
such times and in such amounts as the Placement Agent deems advisable.  The Placement Agent shall communicate to the
Company, orally or in writing, each reasonable offer to purchase Shares
received by it as agent of the Company. 
The Company shall have the sole right to accept offers to purchase the
Shares and may reject any such offer, in whole or in part.  The Placement Agent shall have the right, in
its discretion reasonably exercised, without notice to the Company, to reject
any offer to purchase Shares received by it, in whole or in part, and any such
rejection shall not be deemed a breach of this Agreement.

 

(d)           The
Shares are being sold to the Purchasers at a price of $0.72 per share.

 

(e)           As
compensation for services rendered, on the Closing Date, the Company shall pay
to the Placement Agent by wire transfer of immediately available funds to an
account or accounts designated by the Placement Agent, an aggregate amount
equal to 5% of the aggregate gross proceeds received by the Company from the
sale of the Shares on such Closing Date.

 

(f)            No
Shares which the Company has agreed to sell pursuant to this Agreement shall be
deemed to have been purchased and paid for, or sold by the Company, until such
Shares shall have been delivered to the Purchaser thereof against payment by
such Purchaser.  If the Company shall
default in its obligations to deliver Shares to a Purchaser whose offer it has
accepted, the Company shall indemnify and hold the Placement Agent harmless
against any loss, claim, damage or expense arising from or as a result of such
default by the Company in accordance with Section 8 herein.

 

3.             Representations
and Warranties of the Company.  The Company represents and warrants to, and
agrees with, the Placement Agent that:

 

(a)           The
Company has prepared and filed in conformity with the requirements of the
Securities Act of 1933, as amended (the “Securities
Act”), and published rules and regulations thereunder (the “Rules and Regulations”) adopted by the
Securities and Exchange Commission (the “Commission”)
a “shelf” Registration Statement (as hereinafter defined) on Form S-3
(File No. 333-161340), which was declared effective by the Commission as
of August 21, 2009 (the “Effective Date”),
including a base prospectus relating to the securities registered pursuant to
such Registration Statement (the “Base
Prospectus”), and such amendments and supplements thereto as may
have been required to the date of this Agreement.  The term “Registration
Statement” as used in this Agreement means the registration
statement (including all exhibits, financial schedules and all documents and
information deemed to be a part of the Registration Statement pursuant to Rule 430A
of the Rules and Regulations), as amended and/or supplemented to the date
of this Agreement, including the Base Prospectus.  The Registration Statement is effective under
the Securities Act and no stop order preventing or suspending the effectiveness
of the Registration Statement or suspending or preventing the use of the
Prospectus (as defined below) has been issued by the Commission and no
proceedings for that purpose have been instituted or are threatened by the
Commission.  

 

2

 

The Company, if required by the Rules and Regulations of the
Commission, will file the Prospectus, with the Commission pursuant to Rule 424(b) of
the Rules and Regulations.  The term
“Prospectus” as used in this Agreement
means the prospectus, in the form in which it is to be filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations,
or, if the prospectus is not to be filed with the Commission pursuant to Rule 424(b),
the prospectus in the form included as part of the Registration Statement as of
the Effective Date, except that if any revised prospectus or prospectus
supplement shall be provided to the Placement Agent by the Company for use in
connection with the Offering and sale of the Shares which differs from the
Prospectus (whether or not such revised prospectus or prospectus supplement is
required to be filed by the Company pursuant to Rule 424(b) of the Rules and
Regulations), the term “Prospectus”
shall refer to such revised prospectus or prospectus supplement, as the case
may be, from and after the time it is first provided to the Placement Agent for
such use.  Any reference herein to the
Registration Statement or the Prospectus shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to
Item 12 of Form S-3 which were filed under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”),
on or before the last to occur of the Effective Date, or the date of the
Prospectus, and any reference herein to the terms “amend,” “amendment,” or “supplement”
with respect to the Registration Statement or the Prospectus shall be deemed to
refer to and include (i) the filing of any document under the Exchange Act
after the Effective Date or the date of the Prospectus, as the case may be,
which is incorporated by reference and (ii) any such document so
filed.  If the Company has filed an
abbreviated registration statement to register additional securities pursuant
to Rule 462(b) under the Rules and Regulations (the “462(b) Registration Statement”), then
any reference herein to the Registration Statement shall also be deemed to
include such 462(b) Registration Statement.

 

(b)           As
of the Applicable Time (as defined below) and as of the Closing Date, neither (i) any
General Use Free Writing Prospectus (as defined below) issued at or prior to
the Applicable Time, and the Pricing Prospectus (as defined below), all
considered together (collectively, the “General
Disclosure Package”), (ii) any individual Limited Use Free Writing
Prospectus (as defined below) issued at or prior to the Applicable Time, nor (iii) the
bona fide electronic road show, if any, (as defined in Rule 433(h)(5) of
the Rules and Regulations), that has been made available without
restriction to any person, when considered together with the General Disclosure
Package, included or will include, any untrue statement of a material fact or
omitted or as of the Closing Date will omit, to state a material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as
to information contained in or omitted from any Issuer Free Writing Prospectus,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of the Placement Agent specifically for inclusion
therein, which information the parties hereto agree is limited to the “Placement Agent’s Information” which
is defined as the information set forth in Section 16.  As used in this paragraph (b) and
elsewhere in this Agreement:

 

“Applicable Time” means 8:30 P.M., New
York time, on the date of this Agreement.

 

“General Use Free Writing Prospectus” means
any Issuer Free Writing Prospectus.

 

3

 

“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Rules and
Regulations relating to the Shares in the form filed or required to be filed
with the Commission or, if not required to be filed, in the form retained in
the Company’s records pursuant to Rule 433(g) of the Rules and
Regulations.

 

“Limited Use Free Writing Prospectuses” means
any Issuer Free Writing Prospectus that is not a General Use Free Writing
Prospectus.

 

“Pricing Prospectus” means the Base Prospectus
as amended and supplemented immediately prior to the Applicable Time, including
any document incorporated by reference therein and any prospectus supplement
deemed to be a part thereof.

 

(c)           No
order preventing or suspending the use of any Issuer Free Writing Prospectus or
the Prospectus relating to the Offering has been issued by the Commission, and
no proceeding for that purpose or pursuant to Section 8A of the Securities
Act has been instituted or threatened by the Commission.

 

(d)           At
the time the Registration Statement became effective, at the date of this
Agreement and at the Closing Date, the Registration Statement conformed and
will conform in all material respects to the requirements of the Securities Act
and the Rules and Regulations and did not and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading; the
Prospectus, at the time the Prospectus became effective and at the Closing
Date, conformed and will conform in all material respects to the requirements
of the Securities Act and the Rules and Regulations and did not and will
not contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however, that the foregoing
representations and warranties in this paragraph (d) shall not
apply to information contained in or omitted from the Registration Statement or
the Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Placement Agent specifically
for inclusion therein, which information the parties hereto agree is limited to
the Placement Agent’s Information.

 

(e)           Each
Issuer Free Writing Prospectus, if any, as of its issue date and at all
subsequent times through the completion of the public offer and sale of the
Shares or until any earlier date that the Company notified or notifies the
Placement Agent as described in Section 5(c), did not, does not and
will not include any information that conflicted, conflicts or will conflict
with the information contained in the Registration Statement, Pricing
Prospectus or the Prospectus, including any document incorporated by reference
therein and any prospectus supplement deemed to be a part thereof that has not
been superseded or modified, or includes an untrue statement of a material fact
or omitted or would omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  The foregoing sentence does not apply to
statements in or omissions from any Issuer Free Writing Prospectus in reliance
upon, and in conformity with, written information furnished to the Company by
or on behalf of the Placement 

 

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Agent specifically for inclusion therein, which information the parties
hereto agree is limited to the Placement Agent’s Information.

 

(f)            The
documents incorporated by reference in the Prospectus, when they became
effective or were filed with the Commission, as the case may be, conformed in
all material respects to the requirements of the Securities Act or the Exchange
Act, as applicable, the Rules and Regulations and the rules and
regulations of the Commission under the Exchange Act and none of such documents
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and any further documents so filed and incorporated by reference in
the Prospectus, when such documents become effective or are filed with the
Commission, as the case may be, will conform in all material respects to the
requirements of the Securities Act or the Exchange Act, as applicable, the Rules and
Regulations and the rules and regulations of the Commission under the
Exchange Act and will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.

 

(g)           The
Company is not an “ineligible issuer” in connection with the Offering pursuant
to Rules 164, 405 and 433 under the Securities Act.  The Company has not, directly or indirectly,
distributed and will not distribute any offering material in connection with
the Offering other than the Prospectus and other materials, if any, permitted
under the Securities Act and consistent with Section 5(b).  The Company will file with the Commission all
Issuer Free Writing Prospectuses (other than a “road show,” as defined in Rule 433(d)(8) of
the Rules and Regulations), if any, in the time and manner required under Rules 163(b)(2) and
433(d) of the Rules and Regulations.

 

(h)           Each
of the Company and its Subsidiaries has been duly organized and is validly
existing as a corporation or other legal entity in good standing (or the
foreign equivalent thereof) under the laws of its jurisdiction of incorporation
or organization.  Each of the Company and
its Subsidiaries is duly qualified to do business and is in good standing as a
foreign corporation or other legal entity in each jurisdiction in which its ownership
or lease of its properties or the conduct of its business requires such
qualification and has all power and authority (corporate or other) necessary to
own or hold its properties and to conduct the businesses in which each is
engaged, except where the failure to so qualify or have such power or authority
would not (i) have, singularly or in the aggregate, a material adverse
effect on the condition (financial or otherwise), results of operations, assets
or business of the Company and its Subsidiaries, taken as a whole, or (ii) impair
in any material respect the ability of the Company to perform its obligations
under this Agreement or to consummate any transactions contemplated by this
Agreement, the General Disclosure Package or the Prospectus (any such effect as
described in clauses (i) or (ii), a “Material
Adverse Effect”). The Company owns or controls, directly or
indirectly, only the corporations, partnerships, or other entities listed on Schedule
A attached hereto (each a “Subsidiary”
and, collectively, the “Subsidiaries”)

 

5

 

(i)            The
Company has the full right, power and authority to enter into this Agreement
and to perform and to discharge its obligations hereunder; and this Agreement
has been duly authorized, executed and delivered by the Company, and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms.

 

(j)            The
shares of Common Stock to be issued and sold by the Company to the Purchasers
have been duly and validly authorized and the shares of Common Stock, when
issued and delivered against payment therefor as provided herein will be duly
and validly issued, fully paid and non-assessable and free of any preemptive or
similar rights and will conform to the description thereof contained in the General
Disclosure Package and the Prospectus.

 

(k)           The
authorized capital stock of the Company conforms as to legal matters to the
description thereof contained in each of the General Disclosure Package and the
Prospectus.  The shares of Common Stock
outstanding prior to the issuance of the Shares have been duly authorized and
are validly issued, fully paid and non-assessable.  Since the date provided in the General
Disclosure Package, the Company has not issued any equity securities, other
than Common Stock issued pursuant to the exercise of stock options or
settlement of restricted stock units previously outstanding under the Company’s
equity compensation plans or the issuance of Common Stock pursuant to employee
stock purchase plans.  All of the Company’s
options, warrants and other rights to purchase or exchange any securities for
shares of the Company’s capital stock have been duly authorized and validly
issued and were issued in compliance in all material respects with United
States federal and applicable state securities laws.  None of the outstanding shares of Common
Stock was issued in violation of any preemptive rights, rights of first refusal
or other similar rights to subscribe for or purchase securities of the Company.

 

(l)            The
membership interests, capital stock, partnership interests or other
similar equity interests, as applicable, of each Subsidiary have been duly
authorized and validly issued, are fully paid and nonassessable and, except to
the extent set forth in the General Disclosure Package, are owned by the
Company directly, free and clear of any claim, lien, encumbrance, security
interest, restriction upon voting or transfer or any other claim of any third
party.

 

(m)          The
execution, delivery and performance of this Agreement by the Company, the issue
and sale of the Shares by the Company and the consummation of the transactions
contemplated hereby and thereby will not (with or without notice or lapse of
time or both) conflict with or result in a breach or violation of any of the
terms or provisions of, constitute a default under, give rise to any right of
termination or other right or the cancellation or acceleration of any right or
obligation or loss of a benefit under or pursuant to, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound or to which any of the property or assets of the
Company or any of its Subsidiaries is subject, nor will such actions result in
any violation of the provisions of the charter or by-laws (or analogous
governing instruments, as applicable) of the Company or any of its Subsidiaries
or any law, statute, 

 

6

 

rule, regulation, judgment, order or decree of any court or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its Subsidiaries or any of their properties or assets.

 

(n)           The
execution and delivery by the Company of, and the performance by the Company of
its obligations under, this Agreement will not contravene any provision of (i) applicable
law; (ii) the certificate of incorporation or by-laws (or analogous
organizational documents) of the Company or any of its Subsidiaries; (iii) any
agreement or other instrument binding upon the Company or any of its
Subsidiaries that is material to the Company and its Subsidiaries, taken as a
whole; or (iv) any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Company or any of its Subsidiaries
except, in the cases of clauses (i) and (iii) above for any such
contravention that would not have a Material Adverse Effect, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its
obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states or the by-laws, rules and
regulations of the Financial Industry Regulatory Authority (“FINRA”) and the NASDAQ Global Market in
connection with the offer and sale of the Shares.

 

(o)           Grant
Thornton LLP, who have audited certain financial statements and related
schedules included or incorporated by reference in the Registration Statement,
the General Disclosure Package and the Prospectus, is an independent registered
public accounting firm as required by the Securities Act and the Rules and
Regulations and the Public Company Accounting Oversight Board (United States)
(the “PCAOB”).  Except as pre-approved in accordance with the
requirements set forth in Section 10A of the Exchange Act, Grant Thornton
LLP has not been engaged by the Company to perform any “prohibited activities”
(as defined in Section 10A of the Exchange Act).

 

(p)           The
financial statements, together with the related notes and schedules, included
or incorporated by reference in the General Disclosure Package, the Prospectus
and in the Registration Statement fairly present the financial position and the
results of operations and changes in financial position of the Company and its
consolidated Subsidiaries and other consolidated entities at the respective
dates or for the respective periods therein specified.  Such statements and related notes and
schedules have been prepared in accordance with the generally accepted
accounting principles in the United States (“GAAP”)
applied on a consistent basis throughout the periods involved except as may be
set forth in the related notes included or incorporated by reference in the
General Disclosure Package.  The
financial statements, together with the related notes and schedules, included
or incorporated by reference in the General Disclosure Package and the Prospectus
comply in all material respects with the Securities Act, the Exchange Act, and
the Rules and Regulations and the rules and regulations under the
Exchange Act.  No other financial
statements or supporting schedules or exhibits are required by the Securities
Act or the Rules and Regulations to be described, or included or
incorporated by reference in the Registration Statement, the General Disclosure
Package or the Prospectus.  There is no
pro forma or as adjusted financial information which is required to be included
in the Registration Statement, the General Disclosure Package, or the 

 

7

 

Prospectus or a document incorporated by reference therein in
accordance with the Securities Act and the Rules and Regulations which has
not been included or incorporated as so required.

 

(q)           There
has not occurred any material adverse change, or any development involving a
prospective material adverse change, in the condition, financial or otherwise,
or in the earnings, business or operations of the Company and its Subsidiaries,
taken as a whole, otherwise than as set forth or contemplated in the General
Disclosure Package.

 

(r)            There
is no legal or governmental proceeding, action, suit or claim pending or, to
the Company’s knowledge, threatened to which the Company or any of its
Subsidiaries is a party or to which any of the properties or assets of the
Company or any of its Subsidiaries is subject (i) other than proceedings
accurately described in all material respects in the General Disclosure Package
or proceedings that would not have a Material Adverse Effect on the Company and
its Subsidiaries, taken as a whole, or (ii) that are required to be
described in the Registration Statement, the General Disclosure Package or the
Prospectus and are not so described; and there are no statutes, regulations,
contracts or other documents to which the Company or any of its Subsidiaries is
subject or by which the Company or any of its Subsidiaries is bound that are
required to be described in the Registration Statement, the General Disclosure
Package or the Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required.

 

(s)           Neither
the Company nor any of its Subsidiaries is or, after giving effect to the
Offering of the Shares and the application of the proceeds thereof as described
in the General Disclosure Package and the Prospectus, will become an “investment
company” within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations of the Commission thereunder.

 

(t)            Neither
the Company, its Subsidiaries nor any of the Company’s or its Subsidiaries’
officers, directors or affiliates has bid for or purchased, for any account in
which it or any of its affiliated purchasers has a beneficial interest, any
Shares, or attempted to induce any person to purchase any Shares; and has not,
and has not caused its affiliated purchasers to, make bids or purchased for the
purpose of creating actual, or apparent, active trading in or of raising the price
of the Shares.

 

(u)           Neither the
Company nor its Subsidiaries own any real property.  The Company and its Subsidiaries have good
and marketable title to all personal property owned by them which is material
to the business of the Company and its Subsidiaries, taken as a whole, in each
case free and clear of all liens, encumbrances and defects of title except such
as are described in the General Disclosure Package would not individually or in
the aggregate have a Material Adverse Effect; and any real property and
buildings held under lease by the Company and its Subsidiaries are held by them
under valid, subsisting and enforceable leases except such as are described in
the General Disclosure Package or would not have a Material Adverse Effect.

 

(v)           Except as
disclosed in the General Disclosure Package, neither the Company nor any of its
Subsidiaries is in violation of any statute, rule, regulation, 

 

8

 

decision or order of any governmental agency or body or any court,
relating to the use, disposal or release of hazardous or toxic substances or
relating to the protection or restoration of the environment or human exposure
to hazardous or toxic substances (collectively, “Environmental
Laws”), operates any real property contaminated with any substance
that is subject to any Environmental Laws, is liable for any off-site disposal
or contamination pursuant to any Environmental Laws, or is subject to any claim
relating to any Environmental Laws, which violation, contamination, liability
or claim would individually or in the aggregate have a Material Adverse Effect;
and the Company is not aware of any pending investigation which might lead to
such a claim.

 

(w)          The
Company and its Subsidiaries own or possess, or have the right to use, adequate
trademarks, trade names and other rights to inventions, know-how, patents,
copyrights, confidential information and other intellectual property
(collectively, “Intellectual Property Rights”)
necessary to conduct the business now operated by them, or presently employed
by them, and have not received any notice of infringement of or conflict with
asserted rights of others with respect to any Intellectual Property Rights,
except such as will not individually or in the aggregate have a Material
Adverse Effect.

 

(x)            Neither
the Company nor any of its Subsidiaries, nor to its knowledge, any director,
officer, employee or other person associated with or acting on behalf of the
Company or any of its Subsidiaries has:  (i) used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) caused the Company or any of its
Subsidiaries to be in violation of any provision of the United States Foreign
Corrupt Practices Act of 1977; or (iv) made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment other than with respect to
the activities set forth in that certain press release issued by the Company on
July 7, 2009, as to which the Company makes no representation.

 

(y)           The
Company and its Subsidiaries maintain a system of internal accounting and other
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management’s general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management’s general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.  Except as described in the
General Disclosure Package, since the end of the Company’s most recent audited
fiscal year, there has been (A) no material weakness in the Company’s
internal control over financial reporting (whether or not remediated) and (B) no
change in the Company’s internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

 

9

 

(z)            No
relationship, direct or indirect, exists between or among the Company and any
of its Subsidiaries, on the one hand, and the directors, officers, stockholders
(or analogous interest holders), customers or suppliers of the Company or any
of its Subsidiaries or any of their affiliates, on the other hand, which is
required to be described in the General Disclosure Package or the Prospectus or
a document incorporated by reference therein and which is not so described.

 

(aa)         No
person or entity has the right to require registration of shares of Common
Stock or other securities of the Company or any of its Subsidiaries under the
Securities Act because of the filing or effectiveness of the Registration Statement
or otherwise.

 

(bb)         Neither
the Company nor any of its Subsidiaries is a party to any contract, agreement
or understanding with any person (other than this Agreement and any letter of
understanding between the Company and the Placement Agent) that would give rise
to a valid claim against the Company or the Placement Agent for a brokerage
commission, finder’s fee or like payment in connection with the offering and
sale of the Shares or any transaction contemplated by this Agreement, the
Registration Statement, the General Disclosure Package or the Prospectus.

 

(cc)         No
forward-looking statement (within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act) contained in either
the General Disclosure Package or the Prospectus has been made or reaffirmed
without a reasonable basis or has been disclosed other than in good faith.

 

(dd)         The
Company is subject to and in compliance in all material respects with the
reporting requirements of Section 13 or Section 15(d) of the
Exchange Act. As of the filing date of the Registration Statement, the Company
was eligible to file a “shelf” Registration Statement on Form S-3 with the
Commission.  The Common Stock is
registered pursuant to Section 12(b) of the Exchange Act and is
listed on the NASDAQ Global Select Market, and the Company has taken no action
designed to, or reasonably likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from the NASDAQ Global Select Market, nor has the Company received any
notification that the Commission or FINRA is contemplating terminating such
registration or listing.  No consent,
approval, authorization or order of, or filing, notification or registration
with, the NASDAQ Global Select Market is required for the listing and trading
of the shares of Common Stock on the NASDAQ Global Select Market, except such
as will have been obtained on or prior to the Closing Date.

 

(ee)         The
Company is in compliance in all material respects with all applicable
provisions of the Sarbanes-Oxley Act of 2002 and all applicable rules and
regulations promulgated thereunder or implementing the provisions thereof that
are then in effect.

 

(ff)           The
statistical and market related data included in the General Disclosure Package
are based on or derived from sources that the Company believes to be reliable
and accurate, and such data agree with the sources from which they are derived.

 

10

 

(gg)         Neither
the Company nor any Subsidiary directly or indirectly controls, is controlled
by, or is under common control with, or is an associated person (within the
meaning of Article I, Section 1(ee) of the By-laws of FINRA) of, any
member firm of FINRA.

 

(hh)         No
approval of the stockholders of the Company under the rules and
regulations of NASDAQ (including Rule 5635 of the NASDAQ Global
Marketplace Rules) is required for the Company to issue and deliver the Shares
to the Purchasers.

 

(ii)           Except
as described in the General Disclosure Package, the Company has not sold,
issued or distributed any shares of Common Stock during the six-month period
preceding the date hereof, including any sales pursuant to Rule 144A
under, or Regulation D or S of, the Securities Act, other than shares issued
pursuant to employee benefit plans, qualified equity compensation plans or
other employee compensation plans or pursuant to outstanding options, rights or
warrants.

 

Any
certificate signed by or on behalf of the Company and delivered to the
Placement Agent or to counsel for the Placement Agent shall be deemed to be a
representation and warranty by the Company to the Placement Agent and the
Purchasers as to the matters covered thereby.

 

4.             The Closing.  The time and date of closing and delivery of
the documents required to be delivered to the Placement Agent pursuant to Sections
5 and 7 hereof shall be at 7:00 A.M., Pacific time, on September 2,
2009 (the “Closing Date”) at the
offices of Paul, Hastings, Janofsky & Walker LLP, 4747 Executive
Drive, 12th Floor, San Diego, CA 92121.

 

5.             Further
Covenants and Agreements of the Company.  The Company covenants and agrees with the
Placement Agent and, as applicable, with the Purchasers as follows:

 

(a)           To prepare the Rule 462(b) Registration
Statement, if necessary, in a form approved by the Placement Agent and file
such Rule 462(b) Registration Statement with the Commission on the
date hereof; to prepare the Prospectus in a form approved by the Placement
Agent containing information previously omitted at the time of effectiveness of
the Registration Statement in reliance on rules 430A, 430B and 430C and to
file such Prospectus pursuant to Rule 424(b) of the Rules and
Regulations not later than the second business day following the execution and
delivery of this Agreement or, if applicable, such earlier time as may be
required by Rule 430A of the Rules and Regulations; to notify the
Placement Agent promptly of the Company’s intention to file or prepare any
supplement or amendment to any Registration Statement or to the Prospectus in
connection with this Offering and to provide a draft of any such amendment or
supplement to the Registration Statement, the General Disclosure Package or to
the Prospectus to the Placement Agent for review within an amount of time that
is reasonably practical under the circumstances and prior to filing; to advise
the Placement Agent, promptly after it receives notice thereof, of the time
when any amendment to any Registration Statement has been filed in connection
with the Offering or becomes effective or any supplement to the General
Disclosure Package or the Prospectus or any amended Prospectus has been filed
and to furnish the Placement Agent with copies 

 

11

 

thereof; to file within the time periods prescribed by the Exchange
Act, including any extension thereof, all material required to be filed by the
Company with the Commission pursuant to Rule 433(d) or 163(b)(2), as
the case may be; to advise the Placement Agent, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Issuer Free Writing Prospectus or
the Prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening of any
proceeding for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement, the General Disclosure
Package or the Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or suspending the use
of any Issuer Free Writing Prospectus or the Prospectus or suspending any such
qualification, and promptly to use its best efforts to obtain the withdrawal of
such order.

 

(b)           That,
unless it obtains the prior consent of the Placement Agent, it has not made and
will not make any offer relating to the Shares that would constitute a “free
writing prospectus” as defined in Rule 405 of the Rules and
Regulations unless the prior written consent of the Placement Agent has been
received (each, a “Permitted Free Writing
Prospectus”).  The Company
represents that it has treated and agrees that it will treat each Permitted
Free Writing Prospectus as an Issuer Free Writing Prospectus, and that it has
and will comply with the requirements of Rules 164 and 433 of the Rules and
Regulations applicable to any Issuer Free Writing Prospectus, including the
requirements relating to timely filing with the Commission, legending and
record keeping.

 

(c)           If
at any time prior to the expiration of nine (9) months after the date when
a Prospectus relating to the Shares is required to be delivered under the
Securities Act, any event occurs or condition exists as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, or the Registration Statement, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading,
or if for any other reason it is necessary at 
any time to amend or supplement any Registration Statement or the
Prospectus to comply with the Securities Act or the Exchange Act, the Company
will promptly notify the Placement Agent, and upon the Placement Agent’s
request, the Company will promptly prepare and file with the Commission, at the
Company’s expense, an amendment to the Registration Statement or an amendment
or supplement to the Prospectus that corrects such statement or omission or
effects such compliance.  The Company
consents to the use of the Prospectus or any amendment or supplement thereto by
the Placement Agent.

 

(d)           To
the extent not available on the Commission’s EDGAR system, to make generally
available to its stockholders as soon as practicable, but in any event not
later than eighteen (18) months after the effective date of each Registration
Statement (as defined in Rule 158(c) of the Rules and
Regulations), an earnings statement of the Company and its consolidated
Subsidiaries (which need not be audited) complying with 

 

12

 

Section 11(a) of the Securities Act and the Rules and
Regulations (including, at the option of the Company, Rule 158).

 

(e)           To
take promptly from time to time such actions as the Placement Agent may
reasonably request to qualify the Shares for offering and sale under the
securities or Blue Sky laws of such jurisdictions (domestic or foreign) as the
Placement Agent may designate and to continue such qualifications in effect,
and to comply with such laws, for so long as required to permit the offer and
sale of Shares in such jurisdictions; provided
that the Company and its Subsidiaries shall not be obligated to
qualify as foreign corporations in any jurisdiction in which they are not so
qualified or to file a general consent to service of process in any
jurisdiction.

 

(f)            That
the Company will not, for a period of one hundred eighty (180) days from the
date of the Prospectus, (the “Lock-Up Period”)
without the prior written consent of the Placement Agent, directly or
indirectly offer, sell, assign, transfer, pledge, contract to sell, or
otherwise dispose of, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, other than (i) the
Company’s sale of the Shares hereunder, (ii) the issuance of Common Stock
or any equity awards (including the issuance of Common Stock upon exercise or
settlement of such equity awards) pursuant to the Company’s employee benefit
plans, stock option and employee stock purchase plans or other employee
compensation plans as such plans are in existence on the date hereof and
described in the Prospectus, (iii) the issuance of Common Stock pursuant
to the vesting or exercises of options, restricted stock units, warrants or
rights outstanding on the date hereof, and (iv) the issuance of Common
Stock or securities convertible into or exercisable or exchangeable for Common
Stock (and the issuance of Common Stock pursuant to the terms of such
securities convertible into or exercisable or exchangeable for Common Stock) in
connection with strategic transactions involving the Company and other
entities, including without limitation, merger, acquisition, joint venture,
licensing, collaboration, manufacturing, development, marketing, co-promotion
or distribution arrangements.  The
Company will cause each executive officer listed in Schedule B to
furnish to the Placement Agent, prior to the Closing Date, a letter,
substantially in the form of Exhibit A hereto, pursuant to which
each such person shall agree, among other things, not to directly or indirectly
offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose
of, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, not to engage in any swap or
other agreement or arrangement that transfers, in whole or in part, directly or
indirectly, the economic risk of ownership of Common Stock or any such
securities, during the period  of ninety
(90) days from the date of the Prospectus, without the prior written consent of
the Placement Agent.  The Company also
agrees that during such period, the Company will not file any registration
statement, preliminary prospectus or prospectus, or any amendment or supplement
thereto, under the Securities Act for any such transaction or which registers,
or offers for sale, Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, except for registration
statements on Form S-8 relating to employee benefit plans and registration
statements registering securities issued by the Company pursuant to (iv) above.  The Company hereby agrees that (A) if it
issues an earnings release or material news, or if a material event relating to
the Company occurs, during the last seventeen 

 

13

 

days of the Lock-Up Period, or (B) if prior to the expiration of
the Lock-Up Period, the Company announces that it will release earnings results
during the sixteen-day period beginning on the last day of the Lock-Up Period,
the restrictions imposed by this paragraph (f) shall continue to
apply until the expiration of the eighteen-day period beginning on the issuance
of the earnings release or the occurrence of the material news or material
event.

 

(g)           To
supply the Placement Agent with copies of all correspondence to and from, and
all documents issued to and by, the Commission in connection with the
registration of the Shares under the Securities Act or the Registration
Statement or the Prospectus, or any amendment or supplement thereto or document
incorporated by reference therein.

 

(h)           Prior
to the Closing Date, not to issue any press release or other communication
directly or indirectly or hold any press conference without the prior consent
of the Placement Agent.

 

(i)            Until
the Placement Agent shall have notified the Company of the completion of the
Offering of the Shares, that the Company will not, and will cause its
affiliated purchasers (as defined in Regulation M under the Exchange Act) not
to, either alone or with one or more other persons, bid for or purchase, for
any account in which it or any of its affiliated purchasers has a beneficial
interest, any Shares, or attempt to induce any person to purchase any Shares;
and not to, and to cause its affiliated purchasers not to, make bids or
purchase for the purpose of creating actual, or apparent, active trading in or
of raising the price of the Shares.

 

(j)            Not
to take any action prior to the Closing Date which would require the Prospectus
to be amended or supplemented pursuant to Section 5.

 

(k)           To
apply the net proceeds from the sale of the Shares as set forth in the
Registration Statement, the General Disclosure Package and the Prospectus under
the heading “Use of Proceeds.”

 

(l)            To
use its best efforts to list, effect and maintain, subject to notice of
issuance, the Common Stock on the NASDAQ Global Select Market.

 

(m)          To
use its best efforts to assist the Placement Agent with any filings with FINRA
and obtaining any required clearance from FINRA as to the amount of
compensation allowable or payable to the Placement Agent.

 

(n)           To
use its best efforts to do and perform all things required to be done or
performed under this Agreement by the Company prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares.

 

6.             Payment of
Expenses.  The Company
agrees to pay, or reimburse if paid by the Placement Agent, whether or not the
transactions contemplated hereby are consummated or this Agreement is
terminated: (a) the costs incident to the authorization, issuance, sale
and delivery of the Shares to the Purchasers and any taxes payable in that
connection; (b) the costs incident to 

 

14

 

the registration of the
Shares under the Securities Act; (c) the costs incident to the
preparation, printing and distribution of the Registration Statement, the Base
Prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package,
the Prospectus, any amendments, supplements and exhibits thereto or any
document incorporated by reference therein; (d) the reasonable and
documented fees and expenses incurred in connection with securing any required
review by FINRA and any filings made with FINRA; (e) any applicable
listing, quotation or other fees; (f) the fees and expenses (including
related fees and expenses of counsel for the Placement Agent) of qualifying the
Shares under the securities laws of the several jurisdictions as provided in Section 5(e) and
of preparing, printing and distributing wrappers and blue sky memoranda; (g) all
fees and expenses of the registrar and transfer agent of the Shares; and (h) all
other costs and expenses of the Company and the Placement Agent incident to the
Offering of the Shares by, or the performance of the obligations of, the
Company and the Placement Agent under this Agreement (including, without
limitation, the fees and expenses of the Company’s counsel, Placement Agent’s
counsel and the Company’s independent accountants and the travel and other
reasonable expenses incurred by Company and the Placement Agent’s personnel in
connection with any “road show” including, without limitation, any expenses
advanced by the Placement Agent on the Company’s behalf (which will be promptly
reimbursed)). For the avoidance of doubt, the Company agrees to reimburse the
Placement Agent’s reasonable out-of-pocket expenses, including the reasonable
legal fees of Paul, Hastings, Janofsky & Walker, LLP, counsel to the
Placement Agent, whether or not the Offering is consummated; provided that, with the exception of
reasonable legal fees, the Company shall not be liable to the Placement Agent
for amounts in excess of $50,000 without prior written consent of the Company.

 

7.             Conditions
to the Obligations of the Placement Agent and the Purchasers, and the Sale of
the Shares.  The
respective obligations of the Placement Agent hereunder, and the closing of the
sale of the Shares, are subject to the accuracy, when made and as of the Applicable
Time and on the Closing Date, of the representations and warranties of the
Company contained herein, to the accuracy of the statements of the Company made
in any certificates pursuant to the provisions hereof, to the performance by
the Company of its obligations hereunder, and to each of the following
additional terms and conditions:

 

(a)           No
stop order suspending the effectiveness of the Registration Statement or any
part thereof, preventing or suspending the use of any Base Prospectus, the
Prospectus or any Permitted Free Writing Prospectus or any part thereof shall
have been issued and no proceedings for that purpose or pursuant to Section 8A
under the Securities Act shall have been initiated or threatened by the
Commission, and all requests for additional information on the part of the
Commission (to be included or incorporated by reference in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of the Placement Agent; the Rule 462(b) Registration
Statement, if any, each Issuer Free Writing Prospectus, if any, and the
Prospectus shall have been filed with the Commission within the applicable time
period prescribed for such filing by, and in compliance with, the Rules and
Regulations and in accordance with Section 5(a), and the Rule 462(b) Registration
Statement, if any, shall have become effective immediately upon its filing with
the Commission; and FINRA shall have raised no objection to the fairness and
reasonableness of the terms of this Agreement or the transactions contemplated
hereby.

 

15

 

(b)           The
Placement Agent shall not have discovered and disclosed to the Company on or
prior to the Closing Date that the Registration Statement or any amendment or
supplement thereto contains an untrue statement of a fact which, in the opinion
of counsel for the Placement Agent, is material or omits to state any fact
which, in the opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading, or that
the General Disclosure Package, any Issuer Free Writing Prospectus or the
Prospectus or any amendment or supplement thereto contains an untrue statement
of fact which, in the opinion of such counsel, is material or omits to state
any fact which, in the opinion of such counsel, is material and is necessary in
order to make the statements, in the light of the circumstances in which they
were made, not misleading.

 

(c)           All
corporate proceedings and other legal matters incident to the authorization,
form and validity of each of this Agreement, the Shares, the Registration
Statement, the General Disclosure Package, each Issuer Free Writing Prospectus,
if any, and the Prospectus and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be reasonably
satisfactory in all material respects to counsel for the Placement Agent, and
the Company shall have furnished to such counsel all documents and information
that they may reasonably request.

 

(d)           Morrison &
Foerster LLP shall have furnished to the Placement Agent, such counsel’s
written opinion, as counsel to the Company, addressed to the Placement Agent
and dated the Closing Date, in the form agreed as of the date hereof.

 

(e)           The
Company shall have furnished to the Placement Agent and the Purchasers a
certificate, dated the Closing Date, of its Chief Executive Officer and its
Chief Financial Officer stating that (i) since the effective date of the
Registration Statement, no event has occurred which should have been set forth
in a supplement or amendment to the Registration Statement, the General
Disclosure Package or the Prospectus, (ii) to the best of their knowledge
after reasonable investigation, as of the Closing Date, the representations and
warranties of the Company in this Agreement are true and correct in all
material respects, except that any such representation or warranty shall be
true and correct in all respects where such representation or warranty is
qualified with respect to materiality, and the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to the Closing Date, and (iii) there has
not been, subsequent to the date of the most recent unaudited financial
statements included or incorporated by reference in the General Disclosure
Package, any material adverse change in the financial position or results of
operations of the Company and its Subsidiaries, taken as a whole, or any change
or development that, singly or in the aggregate, would involve a material
adverse change or a prospective material adverse change, in or affecting the
condition (financial or otherwise), results of operations, business, assets or
prospects of the Company and its Subsidiaries taken as a whole, except as set
forth in the Prospectus.

 

(f)            Since
the date of the latest audited financial statements included in the General
Disclosure Package or incorporated by reference in the General Disclosure
Package as of the date hereof, (i) neither the Company nor any of its
Subsidiaries shall 

 

16

 

have sustained any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth in the General Disclosure Package, and (ii) there
shall not have been any change in the capital stock or long-term debt of the
Company nor any of its Subsidiaries, or any change, or any development
involving a prospective change, in or affecting the business, general affairs,
management, financial position, stockholders’ equity, results of operations or
prospects of the Company and its Subsidiaries, taken as a whole, otherwise than
as set forth in the General Disclosure Package, the effect of which, in any
such case described in clause (i) or (ii) of this paragraph (f),
is, in the judgment of the Placement Agent, so material and adverse as to make
it impracticable or inadvisable to proceed with the sale or delivery of the
Shares on the terms and in the manner contemplated in the General Disclosure
Package.

 

(g)           No
action shall have been taken and no law, statute, rule, regulation or order
shall have been enacted, adopted or issued by any governmental agency or body
which would prevent the issuance or sale of the Shares or materially and
adversely affect the business or operations of the Company and its
Subsidiaries, taken as a whole; and no injunction, restraining order or order
of any other nature by any United States federal or state court of competent
jurisdiction shall have been issued which would prevent the issuance or sale of
the Shares or materially and adversely affect the business or operations of the
Company or its Subsidiaries, taken as a whole.

 

(h)           Subsequent
to the execution and delivery of this Agreement there shall not have occurred
any of the following: (i) trading in securities generally on the New York
Stock Exchange or the NASDAQ Stock Market or in the over-the-counter market, or
trading in any securities of the Company on any exchange or in the
over-the-counter market, shall have been suspended or materially limited, or
minimum or maximum prices or maximum range for prices shall have been
established on any such exchange or such market by the Commission, by such
exchange or market or by any other regulatory body or governmental authority
having jurisdiction; (ii) a banking moratorium shall have been declared by
United States federal or state authorities or a material disruption has
occurred in commercial banking or securities settlement or clearance services
in the United States; (iii) the United States shall have become engaged in
hostilities, or the subject of an act of terrorism, or there shall have been an
outbreak of or escalation in hostilities involving the United States, or there
shall have been a declaration of a national emergency or war by the United
States; or (iv) there shall have occurred such a material adverse change
in general economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States shall be
such) as to make it, in the judgment of the Placement Agent, impracticable or inadvisable
to proceed with the sale or delivery of the Shares on the terms and in the
manner contemplated in the General Disclosure Package and the Prospectus.

 

(i)            The
Company shall have filed a listing of additional shares notification with the
NASDAQ Global Select Market in connection with the Offering, and shall have
received no objections thereto from the NASDAQ Global Select Market.

 

17

 

(j)            The
Placement Agent shall have received the written agreements, substantially in
the form of Exhibit A hereto, of the executive officers of the
Company listed in Schedule B to this Agreement.

 

(k)           Prior
to the Closing Date, the Company shall have furnished to the Placement Agent
such further information, opinions, certificates, letters or documents as the
Placement Agent shall have reasonably requested, including a Secretary’s
Certificate.

 

All opinions, letters, evidence and certificates
mentioned above or elsewhere in this Agreement shall be deemed to be in
compliance with the provisions hereof only if they are in form and substance
reasonably satisfactory to counsel for the Placement Agent.

 

8.             Indemnification
and Contribution.

 

(a)           The
Company shall indemnify and hold harmless the Placement Agent, each of its
affiliates and each of its and their respective directors, officers, members,
employees, representatives and agents and their respective affiliates, and each
person, if any, who controls such Placement Agent within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act (collectively the “Placement Agent Indemnified Parties,” and
each a “Placement Agent Indemnified Party”)
against any loss, claim, damage, expense or liability whatsoever (or any
action, investigation or proceeding in respect thereof), joint or several, to
which such Placement Agent Indemnified Party may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, expense,
liability, action, investigation or proceeding arises out of or is based upon (A) any
untrue statement or alleged untrue statement of a material fact contained in
any Issuer Free Writing Prospectus, any “issuer information” filed or required
to be filed pursuant to Rule 433(d) of the Rules and
Regulations, any Registration Statement or the Prospectus, or in any amendment
or supplement thereto or document incorporated by reference therein, (B) the
omission or alleged omission to state in any Issuer Free Writing Prospectus,
any “issuer information” filed or required to be filed pursuant to Rule 433(d) of
the Rules and Regulations, any Registration Statement or the Prospectus,
or in any amendment or supplement thereto or document incorporated by reference
therein, a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (C) any breach of the
representations and warranties of the Company contained herein or failure of
the Company to perform its obligations hereunder or pursuant to any law, and
shall reimburse the Placement Agent Indemnified Party promptly upon demand for
any legal fees or other expenses reasonably incurred by such Placement Agent
Indemnified Party in connection with investigating, or preparing to defend, or
defending against, or appearing as a third party witness in respect of, or
otherwise incurred in connection with, any such loss, claim, damage, expense,
liability, action, investigation or proceeding, as such fees and expenses are
incurred; provided, however, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, expense or liability arises out of or is based upon an
untrue statement or alleged untrue statement in, or omission or alleged
omission from, any Registration Statement or the Prospectus, or any such amendment
or supplement thereto, or any Issuer Free Writing Prospectus made in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of the Placement Agent 

 

18

 

specifically for use therein, which information the parties hereto
agree is limited to the Placement Agent’s Information.  This indemnity agreement is not exclusive and
will be in addition to any liability, which the Company may otherwise have and
shall not limit any rights or remedies which may otherwise be available at law
or in equity to each Placement Agent Indemnified Party.

 

(b)           The
Placement Agent shall indemnify and hold harmless the Company and its
directors, its officers who signed the Registration Statement and each person,
if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act (collectively the “Company Indemnified Parties” and each a “Company Indemnified Party”) against any
loss, claim, damage, expense or liability whatsoever (or any action,
investigation or proceeding in respect thereof), joint or several, to which
such Company Indemnified Party may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, expense, liability, action,
investigation or proceeding arises out of or is based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in any
Issuer Free Writing Prospectus, any “issuer information” filed or required to be
filed pursuant to Rule 433(d) of the Rules and Regulations, any
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or (ii) the omission or alleged omission to state in any Issuer
Free Writing Prospectus, any “issuer information” filed or required to be filed
pursuant to Rule 433(d) of the Rules and Regulations, any
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, a material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that the
untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to the Company by or on behalf of the Placement Agent specifically for use
therein, which information the parties hereto agree is limited to the Placement
Agent’s Information, and shall reimburse the Company Indemnified Parties for
any legal or other expenses reasonably incurred by such party in connection
with investigating or preparing to defend or defending against or appearing as
third party witness in connection with any such loss, claim, damage, liability,
action, investigation or proceeding, as such fees and expenses are incurred.  This indemnity agreement is not exclusive and
will be in addition to any liability which the Placement Agent might otherwise
have and shall not limit any rights or remedies which may otherwise be
available under this Agreement, at law or in equity to the Company Indemnified
Parties.  Notwithstanding the provisions
of this Section 8(b), in no event shall any indemnity by the
Placement Agent under this Section 8(b) exceed the total
compensation received by such Placement Agent in accordance with Section 2(e).

 

(c)           Promptly
after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, the indemnified party shall, if a
claim in respect thereof is to be made against an indemnifying party under this
Section 8, notify such indemnifying party in writing of the
commencement of that action; provided,
however, that the failure to notify the indemnifying party shall not
relieve it from any liability which it may have under this Section 8
except to the extent it has been materially prejudiced by such failure; and, provided, further, that the failure to
notify an indemnifying party shall not relieve it from any liability which it
may have to an 

 

19

 

indemnified party otherwise than under this Section 8.  If any such action shall be brought against
an indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it wishes, jointly with any other similarly notified indemnifying party,
to assume the defense of such action with counsel reasonably satisfactory to
the indemnified party (which counsel shall not, except with the written consent
of the indemnified party, be counsel to the indemnifying party).  After notice from the indemnifying party to
the indemnified party of its election to assume the defense of such action,
except as provided herein, the indemnifying party shall not be liable to the
indemnified party under Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
of such action other than reasonable costs of investigation; provided, however, that any indemnified
party shall have the right to employ separate counsel in any such action and to
participate in the defense of such action but the fees and expenses of such
counsel (other than reasonable costs of investigation which shall remain the
expense of the Company) shall be at the expense of such indemnified party
unless (i) in the case of a Placement Agent Indemnified Party, the
employment thereof has been specifically authorized in writing by the Company
in the case of a claim for indemnification under Section 8(a) or
Section 2(f), or (ii) such indemnified party shall have been
advised by its counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party, or (iii) the indemnifying party has failed to assume
the defense of such action and employ counsel reasonably satisfactory to the
indemnified party within a reasonable period of time after notice of the
commencement of the action or the indemnifying party does not diligently defend
the action after assumption of the defense, in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of (or, in the case of a
failure to diligently defend the action after assumption of the defense, to
continue to defend) such action on behalf of such indemnified party and the
indemnifying party shall be responsible for legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
of such action; provided, however,
that the indemnifying party shall not, in connection with any one such action
or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys at any time for all such indemnified parties (in addition to any
local counsel), which firm shall be designated in writing by the Placement
Agent if the indemnified parties under this Section 8 consist of
any Placement Agent Indemnified Party or by the Company if the indemnified
parties under this Section 8 consist of any Company Indemnified
Parties.  Subject to this Section 8(c),
the amount payable by an indemnifying party under Section 8 shall
include, but not be limited to, (x) reasonable legal fees and expenses of
counsel to the indemnified party and any other expenses in investigating, or
preparing to defend or defending against, or appearing as a third party witness
in respect of, or otherwise incurred in connection with, any action,
investigation, proceeding or claim, and (y) all amounts paid in settlement
of any of the foregoing.  No indemnifying
party shall, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of judgment with respect to any
pending or threatened action or any claim

 

20

 

whatsoever, in respect of which indemnification or contribution could
be sought under this Section 8 (whether or not the indemnified
parties are actual or potential parties thereto), unless such settlement,
compromise or consent (i) includes an unconditional release of each
indemnified party in form and substance reasonably satisfactory to such
indemnified party from all liability arising out of such action or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.  Subject to the provisions of the following
sentence, no indemnifying party shall be liable for settlement of any pending
or threatened action or any claim whatsoever that is effected without its
written consent (which consent shall not be unreasonably withheld or delayed),
but if settled with its written consent, or if its consent has been
unreasonably withheld or delayed, or if there be a judgment for the plaintiff
in any such matter, the indemnifying party agrees to indemnify and hold
harmless any indemnified party from and against any loss or liability by reason
of such settlement or judgment.  In
addition, if at any time an indemnified party shall have requested that an
indemnifying party reimburse the indemnified party for reasonable fees and
expenses of counsel, such indemnifying party agrees that it shall be liable for
any settlement of the nature contemplated herein effected without its written
consent if (i) such settlement is entered into more than forty-five (45)
days after receipt by such indemnifying party of the request for reimbursement,
(ii) such indemnifying party shall have received notice of the terms of
such settlement at least thirty (30) days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed
such indemnified party in accordance with such request prior to the date of
such settlement.

 

(d)           If
the indemnification provided for in this Section 8 is unavailable
or insufficient to hold harmless an indemnified party under Section 8(a) or
Section 8(b), then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid, payable or
otherwise incurred by such indemnified party as a result of such loss, claim,
damage, expense or liability (or any action, investigation or proceeding in
respect thereof), as incurred, (i) in such proportion as shall be
appropriate to reflect the relative benefits received by the Company on the one
hand and the Placement Agent on the other hand from the ) Offering of the
Shares, or (ii) if the allocation provided by clause (i) of this Section 8(d) is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) of this Section 8(d) but
also the relative fault of the Company on the one hand and the Placement Agent
on the other with respect to the statements, omissions, acts or failures to act
which resulted in such loss, claim, damage, expense or liability (or any
action, investigation or proceeding in respect thereof) as well as any other
relevant equitable considerations.  The
relative benefits received by the Company on the one hand and the Placement
Agent on the other with respect to such Offering shall be deemed to be in the
same proportion as the total net proceeds from the Offering of the Shares
purchased under this Agreement (before deducting expenses) received by the
Company bear to the total compensation received by the Placement Agent in connection
with the Offering, in each case as set forth in the table on the cover page of
the Prospectus.  The relative fault of
the Company on the one hand and the Placement Agent on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact 

 

21

 

relates to information supplied by the Company on the one hand or the
Placement Agent on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement, omission, act or failure to act; provided that the parties
hereto agree that the written information furnished to the Company by or on
behalf of the Placement Agent for use in any Registration Statement or the
Prospectus, or in any amendment or supplement thereto, consists solely of the
Placement Agent’s Information.  The
Company and the Placement Agent agree that it would not be just and equitable
if contributions pursuant to this Section 8(d) were to be
determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to herein.  The amount paid or payable by an indemnified
party as a result of the loss, claim, damage, expense, liability, action,
investigation or proceeding referred to above in this Section 8(d) shall
be deemed to include, for purposes of this Section 8(d), any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating, preparing to defend or defending against or appearing as a
third party witness in respect of, or otherwise incurred in connection with,
any such loss, claim, damage, expense, liability, action, investigation or
proceeding.  Notwithstanding the
provisions of this Section 8(d), the Placement Agent shall not be
required to contribute any amount in excess of the total compensation received
by the Placement Agent in accordance with Section 2(e) less
the amount of any damages which the Placement Agent has otherwise paid or
become liable to pay by reason of any untrue or alleged untrue statement,
omission or alleged omission, act or alleged act or failure to act or alleged
failure to act.  No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.

 

9.             Termination.  The obligations of the
Placement Agent and the Purchasers hereunder may be terminated by the Placement
Agent, in its absolute discretion by notice given to the Company prior to
delivery of and payment for the Shares if, prior to that time, any of the
events described in Section 7(f), Section 7(g) or Section 7(h) have
occurred or if the Purchasers shall decline to purchase the Shares for any
reason permitted under this Agreement.

 

10.          Absence of
Fiduciary Relationship.  The Company acknowledges and agrees that:

 

(a)           the Placement Agent’s responsibility to the Company is
solely contractual in nature, the Placement Agent has been retained solely to
act as placement agent in connection with the Offering and no fiduciary,
advisory or agency relationship between the Company and the Placement Agent has
been created in respect of any of the transactions contemplated by this
Agreement, irrespective of whether the Placement Agent has advised or is
advising the Company on other matters;

 

(b)           the
price of the Shares set forth in this Agreement was established by the Company
following discussions and arms-length negotiations with the Placement Agent,
and the Company is capable of evaluating and understanding, and understands and
accepts, the terms, risks and conditions of the transactions contemplated by
this Agreement;

 

22

 

(c)           it
has been advised that the Placement Agent and its affiliates are engaged in a
broad range of transactions which may involve interests that differ from those
of the Company and that the Placement Agent has no obligation to disclose such
interests and transactions to the Company by virtue of any fiduciary, advisory
or agency relationship; and

 

(d)           it
waives, to the fullest extent permitted by law, any claims it may have against
the Placement Agent for breach of fiduciary duty or alleged breach of fiduciary
duty and agrees that the Placement Agent shall have no liability (whether
direct or indirect) to the Company in respect of such a fiduciary duty claim or
to any person asserting a fiduciary duty claim on behalf of or in right of the
Company, including stockholders, employees or creditors of the Company.

 

11.          Successors;
Persons Entitled to Benefit of Agreement.  This Agreement shall inure
to the benefit of and be binding upon the Placement Agent, the Company, and
their respective successors and assigns. 
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, other than the persons mentioned in the preceding
sentence, any legal or equitable right, remedy or claim under or in respect of
this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no other person;
except that the representations, warranties, covenants, agreements and
indemnities of the Company contained in this Agreement shall also be for the
benefit of the Placement Agent Indemnified Parties and the indemnities of the
Placement Agent shall be for the benefit of the Company Indemnified Parties.

 

12.          Survival of
Indemnities, Representations, Warranties, Etc.  The respective indemnities,
covenants, agreements, representations, warranties and other statements of the
Company and the Placement Agent, as set forth in this Agreement or made by them
respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation made by or on behalf of the Placement Agent,
the Company, the Purchasers or any person controlling any of them and shall
survive delivery of and payment for the Shares. 
Notwithstanding any termination of this Agreement, including without
limitation any termination pursuant to Section 9, the indemnity and
contribution agreements contained in Section 8 and the covenants,
representations, warranties set forth in this Agreement shall not terminate and
shall remain in full force and effect at all times.

 

13.          Notices.  All statements, requests,
notices and agreements hereunder shall be in writing, and:

 

(a)           if
to the Placement Agent, shall be delivered or sent by mail, facsimile
transmission, overnight courier or email to B. Riley & Co., LLC,
Attention: Tom Kelleher, 11100 Santa Monica Blvd., Suite 800, Los Angeles,
CA, 90025; and

 

(b)           if
to the Company, shall be delivered or sent by mail, facsimile transmission,
overnight courier or email to Kratos Defense & Security Solutions, Inc.,
Attention: Chief Financial Officer, 4810 Eastgate Mall, San Diego, CA 92121.

 

23

 

14.          Definition of
Certain Terms.  For purposes of this
Agreement “business day” means any
day on which the NASDAQ Stock Market is open for trading.

 

15.          Governing Law,
Agent for Service and Jurisdiction.  This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York, including without limitation Section 5-1401 of the New
York General Obligations Law.  No
legal proceeding may be commenced, prosecuted or continued in any court other
than the courts of the State of New York located in the City and County of New
York or in the United States District Court for the Southern District of New
York, which courts shall have jurisdiction over the adjudication of such matters,
and the Company and the Placement Agent each hereby consent to the jurisdiction
of such courts and personal service with respect thereto.  The Company and the Placement Agent each
hereby consent to personal jurisdiction, service and venue in any court in
which any legal proceeding arising out of or in any way relating to this
Agreement is brought by any third party against the Company or the Placement
Agent.  The Company and the Placement
Agent each hereby waive all right to trial by jury in any legal proceeding
(whether based upon contract, tort or otherwise) in any way arising out of or
relating to this Agreement.  The Company
agrees that a final judgment in any such legal proceeding brought in any such
court shall be conclusive and binding upon the Company and the Placement Agent
and may be enforced in any other courts in the jurisdiction of which the
Company is or may be subject, by suit upon such judgment.

 

16.          Placement Agent’s Information.  The parties hereto
acknowledge and agree that, for all purposes of this Agreement, the Placement
Agent’s Information consists solely of the following information in the
Prospectus: the second sentence of the third paragraph on the front cover of
the Prospectus Supplement and the second and fourth sentences in the section
entitled “Plan of Distribution.”

 

17.          Partial Unenforceability.  The invalidity or
unenforceability of any section, paragraph, clause or provision of this
Agreement shall not affect the validity or enforceability of any other section,
paragraph, clause or provision hereof. 
If any section, paragraph, clause or provision of this Agreement is for
any reason determined to be invalid or unenforceable, there shall be deemed to
be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.

 

18.          General.  This Agreement constitutes
the entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.  In this Agreement, the masculine, feminine
and neuter genders and the singular and the plural include one another.  The section headings in this Agreement are
for the convenience of the parties only and will not affect the construction or
interpretation of this Agreement.  This
Agreement may be amended or modified, and the observance of any term of this
Agreement may be waived, only by a writing signed by the Company and the
Placement Agent.

 

19.          Counterparts.  This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the
same effect as if the signatures thereto and hereto were upon the same
instrument and such signatures may be delivered by facsimile.

 

24

 

If the foregoing is in accordance with your
understanding of the agreement between the Company and the Placement Agent,
kindly indicate your acceptance in the space provided for that purpose below.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  KRATOS DEFENSE &
  SECURITY SOLUTIONS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Laura L. Siegal

  
	
   

  	
  Name:

  	
  Laura L. Siegal

  
	
   

  	
  Its:

  	
  Vice President,
  Corporate Controller and Secretary

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Accepted as of the date
  first above written:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  B. RILEY & CO., LLC

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Tom Kelleher

  	
   

  	
   

  
	
  Name:

  	
  Tom Kelleher

  	
   

  	
   

  
	
  Its:

  	
  Chief Executive Officer

  	
   

  	
   

  

 

 

SCHEDULE A

 

List of Subsidiaries

 

	
  Subsidiary Name

  	
   

  	
  Jurisdiction of

  Organization

  	
   

  	
  Type of Entity

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Digital
  Fusion, Inc.

  	
   

  	
  Delaware

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Kratos Commercial
  Solutions, Inc.

  	
   

  	
  Delaware

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Kratos Government
  Solutions, Inc.

  	
   

  	
  Delaware

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SYS

  	
   

  	
  California

  	
   

  	
  Corporation

  

 

 

SCHEDULE B

 

List of
Officers Subject to Section 5(f)

 

Eric DeMarco

 

Deanna Lund

 

 

EXHIBIT A

 

Form of
Lock-Up Agreement

 

September 2, 2009

 

B. Riley & Co., LLC

11100 Santa Monica Blvd.

Suite 800

Los
Angeles, CA 90025

 

	
   

  	
  Re:

  	
  Kratos
  Defense & Security Solutions, Inc. - Public Offering of Shares

  

 

Ladies and Gentlemen:

 

In order to induce B. Riley & Co., LLC (“B. Riley”) to enter into a placement agent
agreement with Kratos Defense & Security Solutions, Inc., a
Delaware corporation (the “Company”),
with respect to the public offering (the “Offering”)
of shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), the undersigned hereby
agrees that for a period (the “lock-up period”)
of ninety (90) days following the date of the final prospectus supplement filed
by the Company with the Securities and Exchange Commission in connection with
such Offering (the “Prospectus Supplement”),
the undersigned will not, without the prior written consent of B. Riley,
directly or indirectly, (i) offer, sell, assign, transfer, pledge,
contract to sell, or otherwise dispose of, any shares of Common Stock or
securities convertible into or exercisable or exchangeable for Common Stock
(including, without limitation, shares of Common Stock or any such securities
which may be deemed to be beneficially owned by the undersigned in accordance
with the rules and regulations promulgated under the Securities Exchange
Act of 1934, as the same may be amended or supplemented from time to time (such
shares or securities, the “Beneficially Owned
Shares”)), (ii) enter into any swap, hedge or other agreement
or arrangement that transfers in whole or in part, the economic risk of
ownership of any Beneficially Owned Shares, Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock, or (iii) engage
in any short selling of any Beneficially Owned Shares, Common Stock or
securities convertible into or exercisable or exchangeable for Common
Stock.  The foregoing sentence shall not
apply to (a) transactions relating to any Beneficially Owned Shares,
Common Stock or securities convertible into or exercisable or exchangeable for
Common Stock acquired from the Company in the Offering or in open market
transactions after the completion of the Offering, (b) transfers of any
Beneficially Owned Shares, Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock as a bona fide gift, (c) in the case of a natural person,
transfers of any Beneficially Owned Shares, Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock by will or
intestate succession or to any trust or partnership for the direct or indirect
benefit of the undersigned or any member of the immediate family of the
undersigned, (d) in the case of a non-natural person, distributions of any
Beneficially Owned Shares, Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock to general or limited partners or
stockholders or members of the undersigned, (e) in the case of a
non-natural person, transfers of any Beneficially Owned Shares, Common Stock or
securities convertible into or exercisable or exchangeable for Common Stock (A) in

 

 

connection with the sale or
other bona fide transfer in a
single transaction of all or substantially all of the undersigned’s capital
stock, partnership interests, membership interests or other similar equity
interests, as the case may be, or all or substantially all of the undersigned’s
assets, in any such case not undertaken for the purpose of avoiding the
restrictions imposed by this Agreement or (B) to another corporation,
partnership, limited liability company or other business entity so long as the
transferee is an affiliate of the undersigned and such transfer is not for
value, (f) the “net” exercise of outstanding options or warrants to
purchase Common Stock in accordance with their terms, or (g) transfers
pursuant to a sale or an offer to purchase 100% of the outstanding Common
Stock, whether pursuant to a merger, tender offer or otherwise, to a third
party or group of third parties; provided
that in the case of any transfer or distribution pursuant to clause
(b), (c), (d) or (e), each donee, pledgee, distributee or transferee shall
sign and deliver a lock-up agreement substantially in the form of this
Agreement; and provided, further, that any Common Stock acquired
upon the net exercise of options or warrants described in clause (f) above
shall be subject to the restrictions imposed by this Agreement.  For the purposes of this paragraph, “immediate family” shall mean spouse,
domestic partner, lineal descendant (including adopted children), father, mother,
brother or sister of the transferor.

 

If (i) the Company issues an earnings release
or material news or a material event relating to the Company occurs during the
last seventeen days of the lock-up period, or (ii) prior to the expiration
of the lock-up period, the Company announces that it will release earnings
results during the sixteen-day period beginning on the last day of the lock-up
period, the restrictions imposed by this Agreement shall continue to apply
until the expiration of the eighteen-day period beginning on the issuance of
the earnings release or the occurrence of the material news or material event.

 

In addition, the undersigned hereby waives, from the
date hereof until the expiration of the ninety (90) day period following the
date of the Prospectus Supplement, any and all rights, if any, to request or
demand registration pursuant to the Securities Act of 1933, as amended, of any
shares of Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock that are registered in the name of the
undersigned or that are Beneficially Owned Shares.  In order to enable the aforesaid covenants to
be enforced, the undersigned hereby consents to the placing of legends and/or
stop transfer orders with the transfer agent of the Common Stock with respect
to any shares of Common Stock, securities convertible into or exercisable or
exchangeable for Common Stock or Beneficially Owned Shares.

 

If (i) the Company notifies B. Riley in writing
that it does not intend to proceed with the Offering, (ii) for any reason
the Offering is terminated prior to the payment for and delivery of the Common
Stock or (iii) the Offering shall not have been completed by October 31,
2009, then upon the occurrence of any such event, this Agreement shall immediately
be terminated and the undersigned shall be released from its obligations
hereunder.

 

	
   

  	
  [Signatory]

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Its:

  	
   

  

 

2Exhibit 10(D)

 

TARGET CORPORATION

LONG-TERM INCENTIVE PLAN

(As amended and restated on May 28, 2009)

 

ARTICLE I

ESTABLISHMENT OF THE PLAN

 

1.1           PLAN NAME.  This plan is known as the “Target Corporation
Long-Term Incentive Plan” (hereinafter called the “Plan”).

 

1.2           PURPOSE. 
The purpose of the Plan is to advance the performance and long-term
growth of the Company by offering long-term incentives to directors and
employees of the Company and its Subsidiaries and such other Participants who
the Plan Committee determines will contribute to such performance and growth
inuring to the benefit of the shareholders of the Company.  This Plan is also intended to facilitate
recruiting and retaining personnel of outstanding ability.

 

ARTICLE II

DEFINITIONS

 

2.1           AWARD.  An “Award” is a grant of Stock Options, Stock
Appreciation Rights, Dividend Equivalents, Performance Awards, Restricted Stock
or Restricted Stock Units under the Plan.

 

2.2           BOARD.  The “Board” is the Board of Directors of the
Company.

 

2.3           CASH PROCEEDS.  “Cash Proceeds” means the cash actually
received by the Company for the purchase price payable upon exercise of a Stock
Option plus the maximum tax benefit that could be realized by the Company as a
result of the exercise of such Stock Options, which tax benefit shall be
determined by multiplying (a) the amount that is deductible as a result of
any such Stock Option exercise (currently equal to the amount upon which the
Participant’s tax withholding obligation is calculated), times (b) the
maximum federal corporate income tax rate for the year of exercise.  To the extent a Participant pays the exercise
price and/or withholding taxes with shares, Cash Proceeds shall not be
calculated with respect to the amounts so paid.

 

2.4           CHANGE IN CONTROL.  A “Change in Control” shall be deemed to have
occurred if:

 

(a)           50% or more of the directors of the Company shall be
persons other than persons

 

(i)            for whose
election proxies shall have been solicited by the Board, or

 

1

 

(ii)           who are then serving as directors appointed by the
Board to fill vacancies on the Board caused by death or resignation (but not by
removal) or to fill newly-created directorships, or

 

(b)           30% or more of
the outstanding voting power of the Voting Stock of the Company is acquired or
beneficially owned (as defined in Article IV of the Restated Articles of
Incorporation, as amended, of the Company) by any person (as defined in Article IV
of the Restated Articles of Incorporation, as amended, of the Company), other
than an entity resulting from a Business Combination in which clauses (x) and
(y) of Section 2.4(c) apply, or

 

(c)           the
consummation of a merger or consolidation of the Company with or into another
entity, a statutory share exchange, a sale or other disposition (in one
transaction or a series of transactions) of all or substantially all of the
Company’s assets or a similar business combination (each, a “Business
Combination”), in each case unless, immediately following such Business
Combination, (x) all or substantially all of the beneficial owners of the
Company’s Voting Stock immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 60% of the voting power of
the then outstanding shares of voting stock (or comparable voting equity
interests) of the surviving or acquiring entity resulting from such Business
Combination (including such beneficial ownership of an entity that, as a result
of such transaction, owns the Company or all or substantially all of the Company’s
assets either directly or through one or more subsidiaries), in substantially
the same proportions (as compared to the other beneficial owners of the Company’s
Voting Stock immediately prior to such Business Combination) as their
beneficial ownership of the Company’s Voting Stock immediately prior to such
Business Combination, and (y) no person (as defined in Article IV of
the Restated Articles of Incorporation, as amended, of the Company)
beneficially owns, directly or indirectly, 30% or more of the voting power of
the outstanding voting stock (or comparable equity interests) of the surviving
or acquiring entity (other than a direct or indirect parent entity of the
surviving or acquiring entity, that, after giving effect to the Business
Combination, beneficially owns, directly or indirectly, 100% of the outstanding
voting stock (or comparable equity interests) of the surviving or acquiring
entity), or

 

(d)           approval by the
shareholders of a definitive agreement or plan to liquidate or dissolve the Company.

 

For
purposes of this Section 2.4, “Voting Stock” has the same meaning as
defined in Article IV of the Restated Articles of Incorporation, as
amended, of the Company.

 

2

 

2.5           CODE.  The “Code” is the Internal Revenue Code of
1986, as amended, and rules and regulations thereunder, as now in force or
as hereafter amended.

 

2.6           COMPANY.  The “Company” is Target Corporation, a
Minnesota corporation, and any successor thereof.

 

2.7           COMMON STOCK.  “Common Stock” is the common stock, $.0833
par value per share (as such par value may be adjusted from time to time) of
the Company.

 

2.8           DATE OF GRANT.  The “Date of Grant” of an Award is the date
designated in the resolution by the Plan Committee as the date of an Award,
which shall not be earlier than the date of the resolution and action thereon
by the Plan Committee.  In the absence of
a designated date or a fixed method of computing such date being specifically
set forth in the Plan Committee’s resolution, then the Date of Grant shall be
the date of the Plan Committee’s resolution or action.

 

2.9           DIVIDEND EQUIVALENT.  A “Dividend Equivalent” is a right to receive
an amount equal to the regular cash dividend paid on one share of Common
Stock.  Dividend Equivalents may only be
granted in connection with the grant of an Award that is based on but does not
consist of shares of Common Stock (whether or not restricted).  The number of Dividend Equivalents so granted
shall not exceed the number of related stock-based rights.  (For example, the number of Dividend
Equivalents granted in connection with a grant of Stock Appreciation Rights may
equal the number of such Stock Appreciation Rights, even though the number of
shares actually paid upon exercise of those Stock Appreciation Rights
necessarily will be less than the number of Stock Appreciation Rights and
Dividend Equivalents granted.)  Dividend
Equivalents shall be subject to such terms and conditions as may be established
by the Plan Committee, but they shall expire no later than the date on which
their related stock-based rights are either exercised, expire or are forfeited
(whichever occurs first).  The amounts
payable due to a grant of Dividend Equivalents may be paid in cash, either
currently or deferred, or converted into shares of Common Stock, as determined
by the Plan Committee.

 

2.10         EXCHANGE
ACT.  The “Exchange Act” is the
Securities Exchange Act of 1934, as amended, and rules and regulations
thereunder, as now in force or as hereafter amended.

 

2.11         FAIR MARKET VALUE.

 

(a)           Solely for purposes of
determining the exercise price of a Stock Option or Stock Appreciation Right, “Fair
Market Value” of a share of Common Stock on any date is the Volume Weighted
Average Price for such stock as reported for such stock by Bloomberg L.P. on
such date, or in the absence of such report the Volume Weighted Average Price
for such stock as reported for such stock by the New York Stock Exchange on
such date or, if no sale has been recorded by Bloomberg L.P. or the New York
Stock 

 

3

 

Exchange on such date, then on the last preceding
date on which any such sale shall have been made in the order of primacy
indicated above.

 

(b)           For all other purposes of
the Plan, “Fair Market Value” of a share of Common Stock shall be the amount
determined by the Company using such criteria as it shall determine, in its
sole discretion, to be appropriate for valuation.

 

2.12         INCENTIVE STOCK
OPTIONS.  An “Incentive Stock Option” is
a Stock Option that is intended to qualify as an “incentive stock option” under
Section 422 of the Code.

 

2.13         NON-QUALIFIED OPTIONS.  A “Non-Qualified Option” is a Stock Option
that is not intended to qualify as an “incentive stock option” under Section 422
of the Code.

 

2.14         PARTICIPANT.  A “Participant” is a person who has been
designated as such by the Plan Committee and granted an Award under this Plan
pursuant to Article III hereof.

 

2.15         PERFORMANCE GOALS.  “Performance Goals” are the performance
conditions, if any, established pursuant to Section 4.1 hereof by the Plan
Committee in connection with an Award.

 

2.16         PERFORMANCE PERIOD.  The “Performance Period” with respect to a
Performance Award is a period of not less than one calendar year or one fiscal
year of the Company, beginning not earlier than the year in which such
Performance Award is granted, which may be referred to herein and by the Plan
Committee by use of the calendar or fiscal year in which a particular
Performance Period commences.

 

2.17         PERFORMANCE AWARD.  A “Performance Award” is any of: a number of
shares of Common Stock subject to Performance Goals (“Performance Shares”), a
right to receive a number of shares of Common Stock subject to Performance
Goals (“Performance Share Units”), or a cash amount subject to Performance
Goals (“Performance Units”), determined (in all cases) in accordance with Article IV
of this Plan based on the extent to which the applicable Performance Goals are
achieved.  A Performance Award shall be
of no value to a Participant unless and until earned in accordance with Article IV
hereof.

 

2.18         PLAN COMMITTEE.  The “Plan Committee” is the committee
described in Section 8.1 hereof.

 

2.19         PLAN YEAR.  The “Plan Year” shall be a fiscal year of the
Company falling within the term of this Plan.

 

4

 

2.20         RESTRICTED STOCK.  “Restricted Stock” is Common Stock granted
subject to terms and conditions, including a risk of forfeiture, established by
the Plan Committee pursuant to Article VI of this Plan.

 

2.21         RESTRICTED STOCK UNIT.  A “Restricted Stock Unit” is a right to
receive one share of Common Stock at a future date that has been granted
subject to terms and conditions, including a risk of forfeiture, established by
the Plan Committee pursuant to Article VI of this Plan.

 

2.22         STOCK APPRECIATION
RIGHT.  A “Stock Appreciation Right” is a
right to receive, upon exercise of that right, an amount, which may be paid in
cash, shares of Common Stock or a combination thereof in the discretion of the
Plan Committee, equal to the difference between the Fair Market Value of one
share of Common Stock as of the date of exercise and the exercise price for
that right as determined by the Plan Committee on or before the Date of Grant.  Stock Appreciation Rights may be granted in
tandem with Stock Options or other Awards or may be freestanding.

 

2.23         STOCK OPTION.  A “Stock Option” is a right to purchase from
the Company at any time not more than ten years following the Date of Grant,
one share of Common Stock for an exercise price not less than the Fair Market
Value of a share of Common Stock on the Date of Grant, subject to such terms
and conditions established pursuant to Article V hereof.  Stock Options may be either Non-Qualified
Options or Incentive Stock Options.

 

2.24         SUBSIDIARY CORPORATION.   The
terms “Subsidiary” or “Subsidiary Corporation” mean any corporation (other than
the Company) in an unbroken chain of corporations beginning with the Company,
in which each of the corporations other than the last corporation in the
unbroken chain owns stock possessing fifty percent or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain as determined at the point in time when reference is made to such
“Subsidiary” or “Subsidiary Corporation” in this Plan.

 

ARTICLE III

GRANTING OF AWARDS TO PARTICIPANTS

 

3.1           ELIGIBLE
PARTICIPANTS.  Awards may be granted by
the Plan Committee to any employee of the Company or a Subsidiary Corporation,
including any employee who is also a director of the Company or a Subsidiary
Corporation.  Awards other than grants of
Incentive Stock Options may also be granted to (a) a director of the
Company who is not an employee of the Company or a Subsidiary Corporation and (b) any
individual or entity, other than an employee, who provides services to the
Company or a Subsidiary Corporation in the capacity of an advisor or
consultant. References in this Plan to “employment” and similar terms (except “employee”)
shall include the providing of services in the capacity of a director, advisor
or consultant, and references to termination of employment shall mean
termination of the relationship (employee, director, advisor or consultant)
under which the Award was granted, even if the person 

 

5

 

continues in another relationship. A person
who has been engaged by the Company for employment shall be eligible for Awards
other than Incentive Stock Options, provided such person actually reports for
and commences such employment within 90 days after the Date of Grant.  Incentive Stock Options may be granted only
to individuals who are employees on the Date of Grant.

 

3.2           DESIGNATION OF
PARTICIPANTS.  At any time and from time
to time during the Plan Year, the Plan Committee may designate the employees of
the Company and its Subsidiaries and other Participants eligible for Awards.

 

3.3           ALLOCATION OF AWARDS.  Contemporaneously with the designation of a
Participant pursuant to Section 3.2 hereof, the Plan Committee shall
determine the size, type and Date of Grant for each Award, taking into
consideration such factors as it deems relevant, which may include the
following:

 

(a)           the total number of shares
of Common Stock available for Awards under the Plan;

 

(b)           the work assignment or the
position of the Participant and its sensitivity and/or impact in relationship
to the profitability and growth of the Company and its Subsidiaries; and

 

(c)           the Participant’s
performance in reference to such factors.

 

The Plan Committee may grant
a Participant only one type of Award or it may grant any combination of Awards
in whatever relationship one to the other, if any, as the Plan Committee in its
discretion so determines.

 

3.4           NOTIFICATION TO PARTICIPANTS
AND DELIVERY OF DOCUMENTS.  As soon as
practicable after such determinations have been made, each Participant shall be
notified of (a) his/her designation as a Participant, (b) the Date of
Grant, (c) the number and type of Awards granted to the Participant, (d) in
the case of Performance Awards, the Performance Period and Performance Goals,
and (e) in the case of Restricted Stock or Restricted Stock Units, the
Restriction Period. The Participant shall thereafter be supplied with written
evidence of any such Awards.

 

ARTICLE IV

PERFORMANCE AWARDS

 

4.1           ESTABLISHMENT OF PERFORMANCE
GOALS.  Performance Goals applicable to a
Performance Award shall be established by the Plan Committee in its absolute
discretion on or before the Date of Grant and not more than a reasonable period
of time after the beginning of the relevant Performance Period.  Such Performance Goals may include or be
based upon any one or more of the following criteria:  net sales; comparable store sales; total
revenue; gross margin rate; selling, general and administrative expense rate;
earnings before interest, taxes, depreciation and 

 

6

 

amortization; earnings before interest and taxes; earnings before
taxes; net earnings; earnings per share; Target Corporation share price; total
shareholder return; return on equity; return on sales; return on assets; return
on invested capital; cash flow return on investment; economic value added;
credit card segment profitability; credit card segment pre-tax return on
invested capital; credit card spread to LIBOR; operating cash flow; free cash
flow; working capital; interest coverage; net debt to earnings before interest,
taxes, depreciation, amortization and rent expense ratio; debt leverage; and
total net debt.  Performance Goals may be
absolute in their terms or be measured against or in relationship to the
performance of other companies or indices, whether comparably, similarly or
otherwise situated to the Company. 
Performance Goals may be based on the Company’s consolidated results or
the results of any segment or other subset of the Company’s business, and may
be calculated in accordance with generally accepted accounting principles or
any other management accounting principle. 
At any time prior to distribution of a Performance Award, the Plan
Committee may, in its sole discretion, modify the Performance Goals applicable
to such Performance Award if it determines that unforeseen events have occurred
which have had a substantial effect on the Performance Goals and such
unforeseen events would otherwise make application of the original Performance
Goals unfair; provided, however, that no such change or modification may be
made to the extent it increases the amount of compensation payable to any
Participant who is a “covered employee” within the meaning of Code Section 162(m).

 

4.2           LEVELS OF PERFORMANCE
REQUIRED TO EARN PERFORMANCE AWARDS.   At or about the same time that Performance
Goals are established for a specific period, the Plan Committee shall in its
absolute discretion establish the percentage of the Performance Awards granted
for such Performance Period which shall be earned by the Participant for
various levels of performance measured in relation to achievement of
Performance Goals for such Performance Period.

 

4.3           OTHER RESTRICTIONS.  The Plan Committee shall determine the terms
and conditions applicable to any Performance Award, which may include
restrictions on the delivery of Common Stock payable in connection with the
Performance Award and restrictions that could result in the future forfeiture
of all or part of any Common Stock earned. The Plan Committee may provide that
shares of Common Stock issued in connection with a Performance Award be held in
escrow and/or legended.

 

4.4           NOTIFICATION TO
PARTICIPANTS.  Promptly after the Plan
Committee has established or modified the Performance Goals with respect to a
Performance Award, the Participant shall be provided with written notice of the
Performance Goals so established or modified.

 

4.5           MEASUREMENT OF PERFORMANCE
AGAINST PERFORMANCE GOALS.  The Plan
Committee shall, as soon as practicable after the close of a Performance
Period, determine:

 

7

 

(a)           the extent to which the
Performance Goals for such Performance Period have been achieved; and

 

(b)           the percentage of the
Performance Awards earned as a result.

 

Notwithstanding
the foregoing, if and to the extent the applicable Performance Award agreement
permits, the Plan Committee may, in its sole discretion, reduce the percentage
of any Performance Award otherwise determined for a Performance Period, and
such reduced percentage shall be the amount earned by the Participant. All
determinations of the Plan Committee shall be absolute and final as to the
facts and conclusions therein made and be binding on all parties. Promptly
after the Plan Committee has made the foregoing determination, each Participant
who has earned Performance Awards shall be notified, in writing thereof. For
all purposes of this Plan, notice shall be deemed to have been given the date
action is taken by the Plan Committee making the determination.  Participants may not sell, transfer, pledge,
exchange, hypothecate or otherwise dispose of all or any portion of their
Performance Awards during the Performance Period, except that Performance
Awards may be transferable by assignment by a Participant to the extent
provided in the applicable Performance Award agreement.

 

4.6           TREATMENT OF PERFORMANCE
AWARDS EARNED.  Upon the Plan Committee’s
determination that a percentage of any Performance Awards have been earned for
a Performance Period, Participants to whom such earned Performance Awards have
been granted and who have been (or were) in the employ of the Company or a
Subsidiary thereof continuously from the Date of Grant, subject to the
exceptions set forth at Section 4.9 and Section 4.10 hereof, shall be
entitled, subject to the other conditions of this Plan, to payment in
accordance with the terms and conditions of their Performance Awards.  Such terms and conditions may permit or
require that any applicable tax withholding be deducted from the amount
payable.  Performance Awards shall under
no circumstances become earned or have any value whatsoever for any Participant
who is not in the employ of the Company or its Subsidiaries continuously during
the entire Performance Period for which such Performance Award was granted,
except as provided at Section 4.9 or Section 4.10 hereof.

 

4.7           DISTRIBUTION.  Distributions payable pursuant to Section 4.6
above shall be made as soon as practicable after the Plan Committee determines
the Performance Awards have been earned unless the provisions of Section 4.8
hereof are applicable to a Participant.

 

4.8           DEFERRAL OF RECEIPT OF
PERFORMANCE AWARD DISTRIBUTIONS.  With
the consent of the Plan Committee, a Participant who has been granted a
Performance Award may by compliance with the then applicable procedures under
the Plan irrevocably elect in writing to defer receipt of all or any part of
any distribution associated with that Performance Award.  The terms and conditions of any such
deferral, including but not limited to, the period of time for, and form of,
election; the manner and method of payout; the plan and form in which the
deferred amount shall be held; the interest equivalent or other payment that
shall accrue pending its payout; and 

 

8

 

the use and form of Dividend Equivalents in respect of stock-based
units resulting from such deferral, shall be as determined by the Plan
Committee.  The Plan Committee may, at
any time and from time to time, but prospectively only, amend, modify, change,
suspend or cancel any and all of the rights, procedures, mechanics and timing
parameters relating to such deferrals. An election made prior to December 31,
2008 to defer receipt of any distribution associated with a Performance Award
relating to Performance Periods ending after December 31, 2004 is subject
to the provisions of Appendix A.

 

4.9           NON-DISQUALIFYING
TERMINATION OF EMPLOYMENT.  Except for Section 4.10
hereof, the only exceptions to the requirement of continuous employment during
a Performance Period for Performance Award distribution are termination of a
Participant’s employment by reason of death (in which event the Performance
Award may be transferable by will or the laws of descent and distribution only
to such Participant’s beneficiary designated to receive the Performance Award
or to the Participant’s applicable legal representatives, heirs or legatees),
total and permanent disability, with the consent of the Plan Committee, normal
or late retirement or early retirement, with the consent of the Plan Committee,
or transfer of an executive in a spin-off, with the consent of the Plan
Committee, occurring during the Performance Period applicable to the subject
Performance Award. In such instance a distribution of the Performance Award
shall be made at the end of the Performance Period, and the percentage of the
total Performance Award that would have been earned during the Performance
Period shall be earned and paid out; provided, however, in a spin-off situation
the Plan Committee may set additional conditions, such as, without limiting the
generality of the foregoing, continuous employment with the spin-off entity. If
a Participant’s termination of employment does not meet the criteria set forth
above, but the Participant had at least 15 years of employment with the Company
or a Subsidiary or any combination thereof, the Plan Committee may allow
distribution of the percentage (or a portion thereof) of the total Performance
Award that is earned for the Performance Period, subject to any conditions that
the Plan Committee shall determine.

 

4.10         CHANGE IN CONTROL.  In the event of a Change in Control, the
Performance Period shall be deemed to have ended and a pro rata portion of all
outstanding Performance Awards under the Plan shall be deemed to have been
earned. Specifically, the pro rata amount earned shall be determined by
multiplying 100% of each Performance Award by a fraction, the numerator of which
shall be the number of months that have elapsed in the applicable Performance
Period prior to the Change in Control and the denominator of which shall be the
total number of months in the Performance Period. Distribution of the amount
deemed earned shall be made within ten days after the Change in Control or
later if so provided in the applicable Award agreement, a related deferral
election or, if applicable, Appendix A.

 

9

 

ARTICLE V

STOCK OPTIONS AND

STOCK APPRECIATION RIGHTS

 

5.1           NON-QUALIFIED
OPTION.  Non-Qualified Options granted
under the Plan are Stock Options that are not intended to be Incentive Stock
Options under the provisions of Section 422 of the Code. Non-Qualified
Options shall be evidenced by written agreements in such form and not
inconsistent with the Plan as the Plan Committee shall in its sole discretion
approve from time to time, which agreements shall specify the number of shares
to which they pertain and the purchase price of such shares.

 

5.2           INCENTIVE STOCK OPTION.  Incentive Stock Options granted under the
Plan are Stock Options that are intended to be “incentive stock options” under Section 422
of the Code, and the Plan shall be administered, except with respect to the
right to exercise options after termination of employment, to qualify Incentive
Stock Options issued hereunder as incentive stock options under Section 422
of the Code. An Incentive Stock Option shall not be granted to an employee who
owns, or is deemed under Section 424(d) of the Code to own, stock of
the Company (or of any parent or Subsidiary of the Company) possessing more
than 10% of the total combined voting power of all classes of stock therein.
The aggregate Fair Market Value (determined as of the time the option is
granted) of the stock with respect to which Incentive Stock Options are
exercisable for the first time by any Participant during any calendar year
(under all incentive stock option plans of the Company or any parent or
Subsidiary of the Company) shall not exceed $100,000. Incentive Stock Options
shall be evidenced by written agreements in such form and not inconsistent with
the Plan as the Plan Committee shall in its sole discretion approve from time
to time, which agreements shall specify the number of shares to which they
pertain and the purchase price of such shares.

 

5.3          OPTION TERMS. 
Stock Options granted under this Plan shall be subject to the following
terms and conditions:

 

(a)           Option Period.  Each Stock Option shall expire and all rights
to purchase shares thereunder shall cease not more than ten years after its
Date of Grant or on such date prior thereto as may be fixed by the Plan
Committee, or on such other date as is provided by this Plan in the event of
termination of employment, death or reorganization.  No Stock Option shall permit the purchase of
any shares thereunder during the first year after its Date of Grant, except as
provided in Section 5.5 hereof or as otherwise determined by the Plan
Committee.

 

(b)           Exercise Price.  The purchase price per share payable upon
exercise of a Stock Option shall not be less than the Fair Market Value of a
share of Common Stock on the Date of Grant of the Stock Option.

 

(c)           Transferability
and Termination of Options.  During the lifetime of an individual to whom
a Stock Option is granted, the Stock Option may be exercised only by such
individual and only while such individual is an employee of the Company or a
Subsidiary and only if the Participant has been continuously so employed by any
one or combination thereof since the Date of Grant of the Stock Option,
provided, however, that if the

 

10

 

employment of such Participant by the Company
or a Subsidiary Corporation terminates, the Stock Option may additionally be
exercised as follows, or in any other manner provided by the Plan Committee,
but in no event later than ten years after the Date of Grant of the Stock
Option, except as set forth in (ii) and (v) below:

 

(i)            If a
Participant’s termination of employment occurs by reason of normal or late
retirement under any retirement plan of the Company or its Subsidiaries, such
Participant’s Stock Options may be exercised within five years after the date
of such termination of employment.  If a
Participant’s termination of employment occurs by reason of early retirement
under any retirement plan of the Company or its Subsidiaries, or by reason of
the transfer of a Participant in a spin-off, or by reason of total and
permanent disability, as determined by the Plan Committee, without retirement,
then such Participant’s Stock Options shall be exercisable for a period of up
to five years after the date of such termination of employment if the Plan
Committee consents to such an extension. 
During the extension period, the right to exercise Stock Options, if
any, accruing in installments, shall continue unless the Plan Committee
provides otherwise; provided, however, that if the Stock Options are Incentive
Stock Options all installments shall be immediately exercisable; and provided
further, that the Plan Committee may set additional conditions, such as,
without limiting the generality of the foregoing, an agreement to not provide
services to a competitor of the Company and its Subsidiaries and/or continuous
employment with a spin-off entity.

 

(ii)           If a Participant’s
termination of employment occurs by reason of death, then such Participant’s
outstanding Stock Options shall all become immediately exercisable and may be
exercised within five years after the date of death or the life of the option,
whichever is less, but in the case of Non-Qualified Options in no event less
than one year after the date of death, unless the Plan Committee provides
otherwise.

 

(iii)          If a Participant’s
termination of employment occurs for any reason other than as specified in Section 5.3(c)(i) or
(ii) hereof, the Participant has been employed by the Company or a
Subsidiary or any combination for more than 15 years, and if the Plan Committee
so approves, then such Participant’s Stock Options may be exercised within a
period of up to five years after the date of termination of employment.  During the extension period, the right to
exercise options, if any, accruing in installments shall continue 

 

11

 

unless the Plan Committee provides otherwise;
provided, however, the Plan Committee may set additional conditions.

 

(iv)          If a Participant’s
termination of employment occurs for any reason other than as specified in Section 5.3(c)(i) or
(ii) hereof and the Plan Committee has not approved an extension, then,
except as provided below and only with respect to installments that have as of
the date of termination already accrued, such Participant’s Stock Options may
be exercised within ninety days after the date of such termination of
employment except in the case of Participants who would at the time be subject
to the provisions of Section 16(b) of the Exchange Act, in which
instance the period of exercise shall be two hundred ten days after
termination.  Notwithstanding the
foregoing, those Participants whose employment is terminated because of
deliberate and serious disloyal or dishonest conduct in the course of
employment that justifies and results in prompt discharge for specific cause
under the established policies and practices of the Company as interpreted by
the Plan Committee shall have no additional period after termination of
employment in which to exercise their options. Examples of such deliberate and
serious disloyal or dishonest conduct would include material unlawful conduct,
material and conscious falsification or unauthorized disclosure of important
records, embezzlement or unauthorized conversion of property, serious violation
of conflict of interest or vendor relations policies, and misuse or disclosure
of significant trade secrets or other information likely to be of use to the
detriment of the Company or its interests.

 

(v)           Rights accruing to a
Participant under Sections 5.3(c)(i), 5.3(c)(iii) and 5.3(c)(iv) may,
upon the death of a Participant subsequent to his/her termination of
employment, be exercised by his/her duly designated beneficiary or otherwise by
his/her applicable legal representatives, heirs or legatees to the extent
vested in and unexercised or perfected by the Participant at the date of
his/her death.  In the case of
Non-Qualified Options, the period for such exercise shall not expire less than
one year after the date of the Participant’s death, unless the Plan Committee
provides otherwise.

 

(vi)          Absence on a leave of
absence approved by the Plan Committee shall not be deemed a termination or
interruption of continuous employment for the purposes of the Plan.

 

No Stock Option shall be assignable or transferable
by the individual to whom it is granted, except that it may be transferable (X) by
assignment by the Participant to the extent provided in the applicable option
agreement (or as subsequently allowed by the Plan Committee), or (Y) by 

 

12

 

will or the laws of descent and distribution in
accordance with the provisions of this Plan. 
Upon the death of the Participant an option may only be exercised by
such individual’s beneficiary designated to exercise the option or otherwise by
his/her applicable legal representatives, heirs or legatees, and only within
the specific time period set forth above and only to the extent vested in and
unexercised by the Participant at the date of his/her death, except as provided
in Section 5.3(c)(ii).

 

In no event, whether by the Participant directly or
by his/her proper assignee or beneficiary or other representative, shall any
option be exercisable at any time after its expiration date as stated in the
option agreement, except as provided in Section 5.3(c)(ii) and
(v).  When an option is no longer
exercisable it shall be deemed for all purposes and without further act to have
lapsed and terminated.  The Plan
Committee may, in its sole discretion, determine solely for the purposes of the
Plan that a Participant is permanently and totally disabled, and the acts and
decisions of the Plan Committee made in good faith in relation to any such
determination shall be conclusive upon all persons and interests affected
thereby.

 

(d)           Exercise of
Options.  An individual entitled to
exercise Stock Options may, subject to their terms and conditions and the terms
and conditions of the Plan, exercise them in whole or in part by delivery of
written notice of exercise to the Company at its principal office or such other
manner as the Company may direct, specifying the number of whole shares of
Common Stock with respect to which the Stock Options are being exercised.  Before shares may be issued, payment must be
made in full, in legal United States tender, in the amount of the purchase
price of the shares to be purchased at the time and any amounts for withholding
as provided in Section 10.8 hereof; provided, however, in lieu of paying
for the exercise price in cash as described above, the individual may pay
(subject to such conditions and procedures as the Plan Committee may establish)
all or part of such exercise price by tendering (either actually or by
attestation) owned and unencumbered shares of Common Stock acceptable to the
Plan Committee and having a Fair Market Value on the date of exercise of the
Stock Options equal to or less than the exercise price of the Stock Options
exercised, with cash, as set forth above, for the remainder, if any, of the purchase
price; provided, further, that the Plan Committee may permit a Participant to
elect to pay the exercise price by authorizing a third party to sell shares of
Common Stock (or a sufficient portion of the shares) acquired upon exercise of
the Stock Options and remit to the Company a sufficient portion of the sale
proceeds to pay the entire exercise price and any tax withholding resulting
from such exercise.  Subject to rules established
by the Plan Committee, the withholdings required by Section 10.8 hereof
may be satisfied by the Company withholding shares of Common Stock issued on
exercise that have a Fair Market Value on the 

 

13

 

date of exercise of the Stock Options equal
to or less than the withholding required by Section 10.8 hereof.

 

(e)           Repricing Prohibited.  Subject to Sections 5.5, 7.3 and 10.7,
outstanding Stock Options granted under this Plan shall not be repriced.

 

5.4           STOCK APPRECIATION
RIGHTS.  Stock Appreciation Rights may be
granted to Participants either alone (“freestanding”) or in tandem with other
Awards, including Performance Awards, Stock Options and Restricted Stock.  Stock Appreciation Rights granted in tandem
with Incentive Stock Options must be granted at the same time as the Incentive
Stock Options are granted.  Stock
Appreciation Rights granted in tandem with any other Award may be granted at
any time prior to the earlier of the exercise or expiration of such Award.  Stock Appreciation Rights granted in tandem
with Stock Options shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Options.  The Plan Committee shall establish the terms
and conditions applicable to any Stock Appreciation Rights, which terms and
conditions need not be uniform but may not be inconsistent with the terms of
the Plan.  Freestanding Stock
Appreciation Rights shall generally be subject to terms and conditions
substantially similar to those described in Section 5.3 for Stock Options,
including the requirements of 5.3(a), (b) and (e) regarding the
maximum period, minimum price and prohibition on repricing.

 

5.5           CHANGE IN CONTROL.  In the event of a Change in Control:

 

(a)           If the Company is the
surviving entity and any adjustments necessary to preserve the value of the Participant’s
outstanding Stock Options and Stock Appreciation Rights have been made, or the
Company’s successor at the time of the Change in Control irrevocably assumes
the Company’s obligations under this Plan or replaces the Participant’s
outstanding Stock Options and Stock Appreciation Rights with stock options and
stock appreciation rights having substantially the same value and having terms
and conditions no less favorable to the Participant than those applicable to
the Participant’s Stock Options and Stock Appreciation Rights immediately prior
to the Change in Control (collectively, an “Equitable Assumption or Replacement”),
then such Awards or their replacement awards shall become immediately
exercisable in full only if within two years after the Change in Control the
Participant’s employment:

 

(i)            is terminated without “Cause”, which for purposes of
this Section 5.5 shall mean (x) willful and continued failure to
substantially perform the Participant’s duties (other than failure resulting
from incapacity due to physical or mental illness) after receipt of a written
demand for such performance specifically identifying such failure, or (y) the
willful engaging by the Participant in illegal conduct or gross misconduct that
is materially and demonstrably injurious to the Company or its successor;

 

(ii)           terminates with “Good Reason”, which for purposes of
this Section 5.5 shall mean any material diminution of the Participant’s
position, 

 

14

 

authority, duties or responsibilities
(including the assignment of duties materially inconsistent with the
Participant’s position or a material increase in the time Participant is
required by the Company or its successor to travel), any reduction in salary or
in the Participant’s aggregate bonus and incentive opportunities, any material
reduction in the aggregate value of the Participant’s employee benefits
(including retirement, welfare and fringe benefits), or relocation to a
principal work site that is more than 40 miles from the Participant’s principal
work site immediately prior to the Change in Control; or

 

(iii)          terminates under circumstances that entitle the
Participant to accelerated exercisability under any individual employment
agreement between the Participant and the Company, a Subsidiary, or any
successor thereof.

 

(b)           If there is no Equitable
Assumption or Replacement, then without any action by the Plan Committee or the
Board, each outstanding Stock Option and Stock Appreciation Right granted under
the Plan that has not been previously exercised or otherwise lapsed and
terminated shall become immediately exercisable in full; provided, however,
that the Plan Committee, in its sole discretion, and without the consent of any
Participant affected thereby, may determine that a cash payment shall be made
promptly following the Change in Control in lieu of all or any portion of the
outstanding Stock Options and Stock Appreciation Rights granted under this
Plan.  The amount payable with respect to
each share of Common Stock subject to an affected Stock Option and each
affected Stock Appreciation Right shall equal the excess of the Fair Market
Value of a share of Common Stock immediately prior to such Change in Control
over the exercise price of such Stock Option or Stock Appreciation Right.  After such a determination by the Plan
Committee, each Stock Option and Stock Appreciation Right, with respect to
which a cash payment is to be made shall terminate, and the Participant shall
have no further rights thereunder except the right to receive such cash
payment.

 

ARTICLE VI

RESTRICTED STOCK AND RESTRICTED STOCK UNITS

 

6.1           RESTRICTION PERIOD.  At the time an Award of Restricted Stock or
Restricted Stock Units is made, the Plan Committee shall establish the terms
and conditions applicable to such Award, including the period of time (the “Restriction
Period”) during which certain restrictions established by the Plan Committee
shall apply to the Award.  The
Restriction Period shall not be less than three years, provided, however, that
for Awards to non-employee directors of the Company, the terms of the Award may
allow for the ratable release of the restrictions over a minimum period of one
year. Each such Award, and designated portions of the same Award, may have a
different Restriction Period, at the discretion of the Plan Committee. Except
as permitted or 

 

15

 

pursuant to Sections 6.4, 6.5 or 10.7 hereof, the Restriction Period
applicable to a particular Award shall not be changed.

 

6.2           RESTRICTED STOCK TERMS AND
CONDITIONS.  Restricted Stock shall be
represented by a stock certificate registered in the name of the Participant
granted such Restricted Stock.  Such
Participant shall have the right to enjoy all shareholder rights during the
Restriction Period except that:

 

(a)           The Participant shall not be
entitled to delivery of the stock certificate until the Restriction Period
shall have expired.

 

(b)           The Company may
either issue shares subject to such restrictive legends and/or stop-transfer
instructions as it deems appropriate or provide for retention of custody of the
Common Stock during the Restriction Period.

 

(c)           The Participant may not
sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the
Common Stock during the Restriction Period, except that it may be transferable
by assignment by the Participant to the extent provided in the applicable
Restricted Stock Award agreement.

 

(d)           A breach of the terms and
conditions established by the Plan Committee with respect to the Restricted
Stock shall cause a forfeiture of the Restricted Stock, and any dividends
withheld thereon.

 

(e)           Dividends payable in cash or
in shares of stock or otherwise may be either currently paid or withheld by the
Company for the Participant’s account. 
At the discretion of the Plan Committee, interest may be paid on the
amount of cash dividends withheld, including cash dividends on stock dividends,
at a rate and subject to such terms as determined by the Plan Committee.

 

Provided,
however, and the provisions of Section 6.4 to the contrary
notwithstanding, in lieu of the foregoing, the Plan Committee may provide that
no shares of Common Stock be issued until the Restriction Period is over and
further provide that the shares of Common Stock issued after the Restriction
Period has been completed, be issued in escrow and/or be legended and that the
Common Stock be subject to restrictions including the forfeiture of all or a
part of the shares.

 

6.3           PAYMENT FOR RESTRICTED
STOCK.  A Participant shall not be
required to make any payment for Restricted Stock unless the Plan Committee so
requires.

 

16

 

6.4           FORFEITURE PROVISIONS.  Subject to Section 6.5, in the event a
Participant terminates employment during a Restriction Period for the
Participant’s Restricted Stock or Restricted Stock Units, such Awards will be
forfeited; provided, however, that the Plan Committee may provide for proration
or full payout in the event of (a) a termination of employment because of
normal or late retirement, (b) with the consent of the Plan Committee,
early retirement or spin-off, (c) death, (d) total and permanent
disability, as determined by the Plan Committee, (e) with the consent of
the Plan Committee, termination of employment after 15 years of employment with
the Company or a Subsidiary or any combination thereof, or (f) in the case
of a non-employee director, a departure from the Board following the completion
of the director’s term of office, all subject to any other conditions the Plan
Committee may determine. Any Restricted Stock Unit that is not, in all cases,
due and payable not later than the 15th day of the
third month following the calendar year, or if later, the Company’s fiscal
year, in which the Restricted Stock Unit ceases to be subject to a “substantial
risk of forfeiture” within the meaning Section 409A of the Code, will be
subject to the provisions of Appendix A.

 

6.5           CHANGE IN
CONTROL.  In the event of a Change in
Control, restrictions on a fraction of each Participant’s outstanding
Restricted Stock and Restricted Stock Units granted under the Plan will
lapse.  The numerator of such fraction
with respect to an Award shall be the number of months that have elapsed in the
applicable Restriction Period prior to the Change in Control and the
denominator shall be the number of months in such Restriction Period.
Distribution of any shares not previously distributed shall be made within ten
days after the Change in Control or later if so provided in the applicable Award
agreement, a related deferral election or if applicable, Appendix A.

 

6.6           DEFERRAL OF
RECEIPT OF RESTRICTED STOCK UNITS.  With
the consent of the Plan Committee, a Participant who has been granted a
Restricted Stock Unit may by compliance with the then applicable procedures
under the Plan irrevocably elect in writing to defer receipt of all or any part
of any distribution associated with that Award. 
The terms and conditions of any such deferral, including but not limited
to, the period of time for, and form of, election; the manner and method of
payout; the plan and form in which the deferred amount shall be held; the
interest equivalent or other payment that shall accrue pending its payout; and
the use and form of Dividend Equivalents in respect of stock-based units
resulting from such deferral, shall be as determined by the Plan
Committee.  The Plan Committee may, at
any time and from time to time, but prospectively only, amend, modify, change,
suspend or cancel any and all of the rights, procedures, mechanics and timing
parameters relating to such deferrals. An election made prior to December 31,
2008 to defer receipt of any distribution associated with a Restricted Stock
Unit relating to a Restriction Period ending after December 31, 2004 is
subject to the provisions of Appendix A.

 

17

 

ARTICLE VII

SHARES OF STOCK SUBJECT TO THE PLAN; MAXIMUM AWARDS

 

7.1           SHARES AVAILABLE.  Subject to the other provisions of this Article VII,
the total number of shares available for grant as Awards pursuant to the Plan
shall not exceed in the aggregate 81,000,000 shares of Common Stock.  (This limit includes the 44,000,000 shares
that were originally made available under this Plan.)  Solely for the purpose of applying the limitation
in the preceding sentence and subject to the replenishment and adjustment
provisions of Sections 7.2 and 7.3 below:

 

(a)           each Award granted under
this Plan prior to May 19, 2004 (the date the Plan was last approved by
shareholders) shall reduce the number of shares available for grant by one
share for every one share granted;

 

(b)           each Stock Option or Stock
Appreciation Right granted under this Plan on or after May 19, 2004 shall
reduce the number of shares available for grant by one share for every one
share granted;

 

(c)           each Award
granted under this Plan on or after May 19, 2004 that may result in the
issuance of Common Stock, other than a Stock Option, Stock Appreciation Right,
or Dividend Equivalent, shall reduce the number of shares available for grant
by two shares for every one share granted;

 

(d)           each Dividend
Equivalent that the Corporation has determined may result in the issuance of
Common Stock shall reduce the number of shares available for grant by two
shares for every share that would be issuable if the accumulated value of the
Dividend Equivalent were converted into Common Stock at Fair Market Value, but
such reduction shall only occur if the corresponding dividends payable to
shareholders were paid in cash; and

 

(e)           if Awards are
granted in tandem, so that only one of the Awards may actually be exercised,
only the Award that results in the greater reduction in the number of shares
available for grant shall result in a reduction of the shares so available, and
the other Award shall be disregarded.

 

Shares available for grant under the Plan may
be authorized and unissued shares, treasury shares held by the Company or
shares purchased or held by the Company or a Subsidiary for purposes of the
Plan, or any combination thereof.  Shares
issued upon assumption or conversion of outstanding stock-based awards granted
by an acquired company shall be disregarded in applying the limitation set
forth in this Section 7.1.

 

7.2           SHARES AGAIN AVAILABLE.  In the event all or any portion of an Award
is forfeited or cancelled, expires, is settled for cash, or otherwise does not
result in the issuance of all or a portion of the shares subject to the Award
in connection with the exercise or settlement of such Award, the number of
shares not issued that were deducted for such Award pursuant to Section 7.1
above shall be restored and may again be used for Awards under the Plan. If a
Participant uses shares of Common Stock to pay a purchase or exercise price or
tax withholding, either by having the Company withhold shares or tendering
shares (either actually or by attestation), an equal number of such shares
shall 

 

18

 

be restored and may again be used for Awards under the Plan.  In addition, shares may be reacquired on the
open market by the Company using the Cash Proceeds received by the Company from
the exercise on or after May 19, 2004 of Stock Options granted under the
Plan to restore an equal number of shares that may again be used for Awards
under the Plan; provided, however, that the number of shares so restored does
not exceed the number that could be purchased at Fair Market Value with the
Cash Proceeds on the date of exercise of the Stock Option giving rise to such
Cash Proceeds.

 

If one of the events described
in the first sentence of the preceding paragraph occurs with respect to an
award that was granted under a Prior Plan (as defined in Section 10.11)
but was outstanding on May 19, 2004, the total number of shares available
for grant under this Plan shall be increased by one share for each share
subject to that award that is not issued.

 

Notwithstanding anything in
this Section 7.2 to the contrary and solely for purposes of determining
whether shares are available for the issuance of Incentive Stock Options, the
maximum aggregate number of shares that may be granted under this Plan shall be
determined without regard to any shares restored pursuant to this Section 7.2
that, if taken into account, would cause the Plan to fail the requirement under
Code Section 422 that the Plan designate the maximum aggregate number of
shares that may be issued.

 

7.3           RELEVANT CHANGE ADJUSTMENTS.   In
the event of any equity restructuring (within the meaning of Financial
Accounting Standards No. 123 (revised 2004)) other than: (1) any
distribution of securities or other property by the Company to shareholders in
a spin-off or split-up that does not qualify as a tax-free spin-off or split-up
under Section 355 of the Code (or any successor provision of the Code); or
(2) any cash dividend (including extraordinary cash dividends),
appropriate adjustments in the number of shares available for grant and in any
outstanding Awards, including adjustments in the size of the Award and in the
exercise price per share of Stock Options and Stock Appreciation Rights, shall
be made by the Plan Committee to give effect to such equity restructuring to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan. No such adjustment shall be required to
reflect the events described in clauses (1) and (2) above, or any
other change in capitalization that does not constitute an equity
restructuring, however such adjustment may be made: (x) if necessary to
comply with Section 409A of the Code, the adjustment qualifies as a
substitution or assumption under Treasury Regulation Section 1.424-1; and (y) the
Plan Committee affirmatively determines, in its discretion, that such an
adjustment is appropriate.

 

7.4           MAXIMUM PER PARTICIPANT
AWARD.  During any consecutive thirty-six
month period, no Participant may receive Awards that, in the aggregate, could
result in that Participant receiving, earning or acquiring, subject to the
adjustments described in Section 7.3:

 

19

 

(a)           Stock Options and Stock
Appreciation Rights for, in the aggregate, more than 4,000,000 shares of Common
Stock;

(b)           Performance Shares,
Restricted Stock and Restricted Stock Units for, in the aggregate, more than
700,000 shares of Common Stock;

(c)           A number of Dividend
Equivalents greater than the number of shares of Common Stock the Participant
could receive, earn or acquire in connection with the related stock-based
Awards granted to the Participant; and

(d)           Performance Units with a
value exceeding $15,000,000.

 

In
addition, during any consecutive thirty-six month period, no Participant who is
a non-employee director may receive Awards that, in the aggregate, could result
in that Participant receiving, earning or acquiring, subject to the adjustments
described in Section 7.3, more than 75,000 shares of Common Stock.  For purposes of applying the limits described
in this Section 7.4, if Awards subject to the same limit are granted in
tandem, so that only one of the Awards may actually be exercised, only one of
the Awards shall be counted.

 

ARTICLE VIII

ADMINISTRATION

 

8.1           PLAN
COMMITTEE.  The Plan will be administered
by a committee of two or more members of the Compensation Committee of the
Board who are appointed from time to time by the Board and who are outside,
independent Board members who, in the judgment of the Board, are qualified to
administer the Plan as contemplated by (a) Rule 16b-3 of the
Securities and Exchange Act of 1934 (or any successor rule), (b) Section 162(m) of
the Code, as amended, and the regulations thereunder (or any successor Section and
regulations), and (c) any rules and regulations of a stock exchange
on which Common Stock is traded.  Any
member of the committee administering the Plan who does not satisfy or ceases
to satisfy the qualifications set out in the preceding sentence may recuse
himself or herself from any vote or other action taken by such committee.  The Board may, at any time and in its
complete discretion, remove any member of such committee and may fill any vacancy
on such committee.

 

8.2           POWERS.  The Plan Committee shall have and exercise
all of the powers and responsibilities granted expressly or by implication to
it by the provisions of the Plan. 
Subject to and as limited by such provisions, the Plan Committee may
from time to time enact, amend and rescind such rules, regulations and
procedures with respect to the administration of the Plan as it deems
appropriate or convenient.

 

8.3           INTERPRETATION.  All questions arising under the Plan, any
Award agreement, or any rule, regulation or procedure adopted by the Plan
Committee shall be determined by the Plan Committee, and its determination
thereof shall be conclusive and binding upon all parties.

 

20

 

8.4           COMMITTEE PROCEDURE.  Any action required or permitted to be taken
by the Plan Committee under the Plan shall require the affirmative vote of a
majority of a quorum of the members of the Plan Committee.  A majority of all members of the Plan
Committee shall constitute a “quorum” for Plan Committee business. The Plan
Committee may act by written determination instead of by affirmative vote at a
meeting, provided that any written determination shall be signed by all members
of the Plan Committee, and any such written determination shall be as fully
effective as a majority vote of a quorum at a meeting.

 

8.5           DELEGATION.  The Plan Committee may delegate all or any
part of its authority under the Plan to a subcommittee of directors and/or
officers of the Company for purposes of determining and administering Awards
granted to persons who are not then subject to the reporting requirements of Section 16
of the Exchange Act.

 

ARTICLE IX

REDUCTION IN AWARDS

 

9.1           WHEN APPLICABLE.  Anything in this Plan to the contrary
notwithstanding, the provisions of this Article IX shall apply to a
Participant if an independent auditor selected by the Plan Committee (the “Auditor”)
determines that each of (a) and (b) below are applicable.

 

(a)           Payments or
distributions hereunder, determined without application of this Article IX,
either alone or together with other payments in the nature of compensation to
the Participant which are contingent on a change in the ownership or effective
control of the Company, or in the ownership of a substantial portion of the
assets of the Company, or otherwise (but after any elimination or reduction of
such payments under the terms of the Company’s Officer Income Continuance
Policy Statement, as amended), would result in any portion of the payments
hereunder being subject to an excise tax on excess parachute payments imposed
under Section 4999 of the Code.

 

(b)           The excise tax imposed on
the Participant under Section 4999 of the Code on excess parachute
payments, from whatever source, would result in a lesser net aggregate present
value of payments and distributions to the Participant (after subtraction of
the excise tax) than if payments and distributions to the Participant were
reduced to the maximum amount that could be made without incurring the excise
tax.

 

9.2           REDUCED
AMOUNT.  Under this Article IX the
payments and distributions under this Plan shall be reduced (but not below
zero) so that the present value of such payments and distributions shall equal
the Reduced Amount. The “Reduced Amount” (which may be zero) shall be an amount
expressed in present value which maximizes the aggregate present value of
payments and distributions under this Plan 

 

21

 

which can be made without causing any such payment
to be subject to the excise tax under Section 4999 of the Code. The
determinations and reductions under this Section 9.2 shall be made after
eliminations or reductions, if any, have been made under the Company’s Officer
Income Continuance Policy Statement, as amended.

 

9.3           PROCEDURE.  If the Auditor determines that this Article IX
is applicable to a Participant, it shall so advise the Plan Committee in
writing. The Plan Committee shall then promptly give the Participant notice to
that effect together with a copy of the detailed calculation supporting such
determination which shall include a statement of the Reduced Amount. Such
notice shall also include a description of which and how much of the Awards
shall be eliminated or reduced (as long as their aggregate present value equals
the Reduced Amount). For purposes of this Article IX, Awards shall be
reduced in the following order: (1) Stock Options with an exercise price
above the then Fair Market Value of a share of Common Stock that have a
positive value for purposes of Section 280G of the Code, as determined
under applicable IRS guidance; (2) pro rata among Awards that constitute
deferred compensation subject to Section 409A of the Code; and (3) if
a further reduction is necessary to reach the Reduced Amount, among the Awards
that are not subject to Section 409A of the Code. Present value shall be
determined in accordance with Section 280G of the Code. All the foregoing
determinations made by the Auditor under this Article IX shall be made as
promptly as practicable after it is determined that excess parachute payments
(as defined in Section 280G of the Code) will be made to the Participant
if an elimination or reduction is not made. As promptly as practicable, the
Company shall provide to or for the benefit of the Participant such amounts and
shares as are then due to the Participant under this Plan and shall promptly
provide to or for the benefit of the Participant in the future such amounts and
shares as become due to the Participant under this Plan.

 

9.4           CORRECTIONS.  As a result of the uncertainty in the
application of Section 280G of the Code at the time of the initial
determination by the Auditor hereunder, it is possible that payments or
distributions under this Plan will have been made which should not have been
made (“Overpayment”) or that additional payments or distributions which will
have not been made could have been made (“Underpayment”), in each case,
consistent with the calculation of the Reduced Amount hereunder. In the event
that the Auditor, based upon the assertion of a deficiency by the Internal
Revenue Service against the Company or the Participant which the Auditor
believes has a high probability of success, determines that an Overpayment has
been made, any such Overpayment shall be treated for all purposes as a loan to
the Participant which the Participant shall repay together with interest at the
applicable Federal rate provided for in Section 7872(f)(2) of the
Code; provided, however, that no amount shall be payable by the Participant if
and to the extent such payment would not reduce the amount which is subject to
the excise tax under Section 4999 of the Code. In the event that the
Auditor, based upon controlling precedent, determines that an Underpayment has
occurred, any such Underpayment shall be promptly paid to or for the benefit of
the Participant together with interest at the applicable Federal rate provided
for in Section 7872(f)(2)(A) of the Code.

 

22

 

9.5           NON-CASH BENEFITS.  In making its determination under this Article IX,
the value of any non-cash benefit shall be determined by the Auditor in
accordance with the principles of Section 280G(d)(3) of the Code.

 

9.6           DETERMINATIONS BINDING.  All determinations made by the Auditor under
this Article IX shall be binding upon the Company, the Plan Committee and
the Participant.

 

ARTICLE X

GENERAL PROVISIONS

 

10.1         AMENDMENT OR TERMINATION OF
PLAN.  The
Board may at any time amend, suspend, discontinue or terminate the Plan
(including the making of any necessary enabling, conforming and procedural
amendments to the Plan to authorize and implement the granting of Incentive
Stock Options or other income tax preferred stock options which may be
authorized by federal law subsequent to the effective date of this Plan);
provided, however, that no amendment by the Board shall, without further
approval of the shareholders of the Company, increase the total number of
shares of Common Stock which may be made subject to the Plan, except as provided
at Section 7.3 hereof, or make any other change for which shareholder
approval is required by law or under the applicable rules of the New York
Stock Exchange.  No action taken pursuant
to this Section 10.1 of the Plan shall, without the consent of the Participant,
adversely affect any Awards which have been previously granted to a Participant
except pursuant to Section 10.5 of the Plan.

 

10.2         NON-ALIENATION OF RIGHTS AND
BENEFITS.  Except as expressly provided
herein, no right or benefit under the Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance or charge and any attempt to
anticipate, alienate, sell, assign, pledge, encumber or charge the same shall
be void. No right or benefit hereunder shall in any manner be liable for or
subject to the debts, contracts, liabilities or torts of the person entitled to
such right or benefit. If any Participant or beneficiary hereunder should
become bankrupt or attempt to anticipate, alienate, sell, assign, pledge,
encumber or charge any right or benefit hereunder (other than as expressly
provided herein), then such right or benefit shall, in the sole discretion of
the Plan Committee, cease and in such event the Company may hold or apply the
same or any or no part thereof for the benefit of the Participant or
beneficiary, his/her spouse, children or other dependents or any of them in any
such manner and in such proportion as the Plan Committee in its sole discretion
may deem proper.

 

10.3         NO RIGHTS AS
SHAREHOLDER.  The granting of Awards
under the Plan shall not entitle a Participant or any other person succeeding
to his/her rights, to any dividend, voting or other right as a shareholder of
the Company unless and until the issuance of a stock certificate to the
Participant or such other person pursuant to the provisions of the Plan and
then only subsequent to the date of issuance thereof.

 

23

 

10.4         LIMITATION OF LIABILITY OR
OBLIGATION OF THE COMPANY.  As
illustrative only of the limitations of liability or obligation of the Company
and not intended to be exhaustive thereof, nothing in the Plan shall be
construed:

 

(a)           to give any
employee of the Company any right to be granted any Award other than at the
sole discretion of the Plan Committee;

 

(b)           to give any Participant any
rights whatsoever with respect to shares of Common Stock except as specifically
provided in the Plan;

 

(c)           to limit in any way the
right of the Company or any Subsidiary to terminate, change or modify, with or
without cause, the employment of any Participant at any time; or

 

(d)           to be evidence of any
agreement or understanding, express or implied, that the Company or any
Subsidiary will employ any Participant in any particular position at any
particular rate of compensation or for any particular period of time.

 

Payments
and other benefits received by a Participant under an Award shall not be deemed
part of a Participant’s regular, recurring compensation for purposes of any
termination, indemnity or severance pay laws and shall not be included in, nor
have any effect on, the determination of benefits under any other employee
benefit plan, contract or similar arrangement provided by the Company or any
Subsidiary, unless expressly so provided by such other plan, contract or arrangement
or the Plan Committee determines that an Award or portion of an Award should be
included to reflect competitive compensation practices or to recognize that an
Award has been made in lieu of a portion of competitive cash compensation.

 

10.5         GOVERNMENT REGULATIONS.  Notwithstanding any other provisions of the
Plan seemingly to the contrary, the obligation of the Company with respect to
Awards granted under the Plan shall at all times be subject to any and all
applicable laws, rules and regulations and such approvals by any
government agencies as may be required or deemed by the Board or Plan Committee
as reasonably necessary or appropriate for the protection of the Company.

 

In connection with any sale,
issuance or transfer hereunder, the Participant acquiring the shares shall, if
requested by the Company, give assurances satisfactory to counsel of the
Company that the shares are being acquired for investment and not with a view
to resale or distribution thereof and assurances in respect of such other
matters as the Company may deem desirable to assure compliance with all
applicable legal requirements.

 

10.6         NON-EXCLUSIVITY OF THE
PLAN.  Neither the adoption of the Plan
by the Board nor the submission of the Plan to shareholders of the Company for
approval shall be construed as creating any limitations on the power or
authority of the Board to 

 

24

 

adopt such other or additional incentive or other compensation
arrangements of whatever nature as the Board may deem necessary or desirable or
preclude or limit the continuation of any other plan, practice or arrangement
for the payment of compensation or fringe benefits to employees generally, or
to any class or group of employees, which the Company or any Subsidiary now has
lawfully put into effect, including, without limitation, any retirement,
pension, savings, profit sharing or stock purchase plan, insurance, death and
disability benefits, and executive short term incentive plans.

 

10.7         REORGANIZATION.  In case the Company is merged or consolidated
with another corporation, or in case the property or stock of the Company is
acquired by another corporation, or in case of a separation, reorganization or
liquidation of the Company (for purposes hereof any such occurrence being
referred to as an “Event”), the Plan Committee or a comparable committee of any
corporation assuming the obligations of the Company hereunder, shall either:

 

(a)           make appropriate provision for the protection of any
outstanding stock-based Awards granted thereunder by the substitution on an
equitable basis of appropriate stock, stock units, stock options or stock
appreciation rights of the Company, or of the merged, consolidated or otherwise
reorganized corporation which will be issuable in respect to the Awards.  Stock to be issued pursuant to such
substitute awards shall be limited so that the excess of the aggregate fair
market value of the shares subject to such substitute awards immediately after such
substitution over the purchase price thereof (if any) is not more than the
excess of the aggregate fair market value of the shares subject to such
substitute awards immediately before such substitution over the purchase price
thereof (if any); or

 

(b)           upon written notice to the
Participant, declare that all Performance Awards granted to the Participant are
deemed earned, that the Restriction Period of all Restricted Stock and
Restricted Stock Units has been eliminated and that all outstanding Stock
Options and Stock Appreciation Rights shall accelerate and become exercisable
in full but that all outstanding Stock Options and Stock Appreciation Rights,
whether or not exercisable prior to such acceleration, must be exercised within
the period of time set forth in such notice or they will terminate.  In connection with any declaration pursuant
to this Section 10.7(b), the Plan Committee may, but shall not be
obligated to, cause a cash payment to be made to each Participant who holds a
Stock Option or Stock Appreciation Right that is terminated in an amount equal
to the product obtained by multiplying (x) the amount (if any) by which
the Event Proceeds Per Share (as hereinafter defined) exceeds the exercise
price per share covered by such Stock Option times (y) the number of
shares of Common Stock covered by such Stock Option or Stock Appreciation
Right.  For purposes of this Section 10.7(b),
“Event Proceeds Per Share” shall mean the cash plus the fair market value, as
determined in good faith by the Plan Committee, of the non-cash 

 

25

 

consideration to be received per share by the
shareholders of the Company upon the occurrence of the Event.

 

10.8         WITHHOLDING
TAXES, ETC.   All distributions under the Plan shall be
subject to any required withholding taxes and other withholdings and, in case
of distributions in Common Stock, the Participant or other recipient may, as a
condition precedent to the delivery of Common Stock, be required to pay to
his/her participating employer the excess, if any, of the amount of required
withholding over the withholdings, if any, from any distributions in cash under
the Plan.  All or a portion of such
payment may, in the discretion of the Plan Committee and upon the election of
the Participant, be made (a) by withholding from shares that would
otherwise be delivered to the Participant a number of shares sufficient to
satisfy the remaining required tax withholding or (b) by tendering (either
actually or by attestation) owned and unencumbered shares of Common Stock
acceptable to the Plan Committee and having a Fair Market Value on the date of
tender equal to or less than the remaining required tax withholding.  No distribution under the Plan shall be made
in fractional shares of Common Stock, but the proportional market value thereof
shall be paid in cash.

 

10.9         GENERAL RESTRICTION.  Each Award shall be subject to the
requirement that, if at any time the Board shall determine, in its discretion,
that the listing, registration or qualification of the shares subject to such
option and/or right upon any securities exchange or under any state or federal
law, or the consent or approval of any government regulatory body, is necessary
or desirable as a condition of, or in connection with the granting of such
Award or the issue or purchase of shares respectively thereunder, such Award
may not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board.

 

10.10       USE OF PROCEEDS.  The proceeds derived by the Company from the
sale of the stock pursuant to Awards granted under the Plan shall constitute
general funds of the Company.

 

10.11       PRIOR PLANS.  Notwithstanding the adoption of this Plan by
the Board, the Company’s Executive Long Term Incentive Plan of 1981 and the
Director Stock Option Plan of 1995, as the same have been amended from time to
time (the “Prior Plans”), shall remain in effect, and all grants and awards
heretofore made under the Prior Plans shall be governed by the terms of the
Prior Plans. The Plan Committee shall not, however, make any additional grants
pursuant to the Prior Plans.

 

10.12       DURATION OF PLAN.  This Plan shall remain in effect until the
earliest of the following events occurs: (a) distribution of all shares of
Common Stock subject to the Plan, (b) termination of this Plan pursuant to
Section 10.1 hereof, or (c) May 19, 2014; provided, however,
that Awards made before the termination or expiration of this Plan may be
exercised, vested, settled or otherwise effectuated after such date in
accordance with the terms of such Awards.

 

26

 

10.13       SEVERABILITY.  In the event any provision of this Plan shall
be held to be illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of this Plan, and this Plan shall be
construed and enforced as if the illegal or invalid provision had not been
included.

 

10.14       GOVERNING LAW.  To the extent that federal laws do not otherwise
control, this Plan and all determinations made and actions taken pursuant to
this Plan shall be governed by the laws of Minnesota and construed accordingly.

 

10.15       HEADINGS.  The headings of the Articles and their
subparts in this Plan are for convenience of reading only and are not meant to
be of substantive significance and shall not add to or detract from the meaning
of such Article or subpart to which it refers.

 

10.16       STOCK CERTIFICATES.  Notwithstanding anything in the Plan to the
contrary, to the extent the Plan provides for the issuance of stock
certificates to reflect the issuance of shares of Common Stock or Restricted
Stock, the issuance may be effected on a non-certificated basis, to the extent
not prohibited by applicable law or the applicable rules of any stock
exchange on which the Common Stock is traded.

 

27

 

APPENDIX A

 

A-1         PURPOSE AND EFFECT. This Appendix A to the
Target Corporation Long-Term Incentive Plan modifies the terms of any deferred
Performance Award and any Restricted Stock Unit that is subject to Section 409A
of the Code that was awarded prior to December 31, 2008 and that is
paid or payable after December 31, 2008. The provisions of this
Appendix A will supersede any inconsistent terms of any award that is covered
by this Appendix A. Awards covered by this Appendix A (collectively referred to
herein as “Appendix A Awards”) include:

 

(a)   Any Performance Award
deferred prior to December 31, 2008 for a Performance Period ending
after December 31, 2004 (“Deferred Performance Share Unit”);

 

(b)   Any Restricted Stock Unit
(other than a Deferred Restricted Stock Unit defined below) for which
distribution is not, in all cases, due and payable not later than the 15th day of the third month following the calendar
year, or if later, the Company’s fiscal year, in which the Restricted Stock
Unit ceases to be subject to a “substantial risk of forfeiture” within the
meaning of Section 409A of the Code; and

 

(c)   Any Restricted Stock Unit
relating to a Restriction Period ending after December 31, 2004 for
which an election was made prior to December 31, 2008 to defer
receipt of any distribution associated with such Restricted Stock Unit (“Deferred
Restricted Stock Unit”).

 

A-2         DEFINITIONS. The capitalized terms in
this Addendum that are not defined below, shall have the same meaning as in the
Agreement, or, if not defined in the Agreement, as defined in the Plan.

 

(a)   Company. For purposes
of this Addendum, Company includes any person that would be treated as a single
employer with the Company under Section 414(b) or 414(c) of the
Code.

 

(b)   Disabled. An employee
Participant will be Disabled if, by reason of any medically-determinable
physical or mental impairment which can be expected to result in death or can
be expected to last for a continuous period of not less than twelve months,
Participant (i) is unable to engage in any substantial gainful activity or
(ii) is receiving income replacement benefits for a period of not less
than three months under an accident and health plan covering employees of the
Company. An employee Participant will be deemed to be Disabled if he or she is
determined to be totally disabled by the Social Security Administration.

 

(c)   Termination of Employment. For purposes
of determining an employee Participant’s entitlement to payment of an Appendix
A Award, “Termination 

 

28

 

of Employment” means a
severance of such Participant’s employment relationship with the Company, for
any reason. For purposes of determining when a distribution will be made under
Appendix A, a “Termination of Employment” will be deemed to occur if, based on
the relevant facts and circumstances to the Participant, the Company and
Participant reasonably anticipate that future services to be performed by the
Participant for the Company will permanently decrease to no more than 20% of
the average level of services performed over the immediately preceding 36-month
period. A bona fide leave of absence that is six months or less, or during
which an individual retains a reemployment right, will not cause a Termination
of Employment. In the case of a leave of absence without a right of
reemployment that exceeds the time periods described in this paragraph, a Termination
of Employment will be deemed to occur once the leave of absence exceeds six
months. Notwithstanding the foregoing, a Termination of Employment shall not
occur unless such termination also qualifies as a “separation from service,” as
defined under Section 409A of the Code and related guidance thereunder.

 

(d)   Trust. Trust means
the Target Corporation Deferred Compensation Trust, established by agreement
dated January 1, 2005, by and between the Company and State Street Bank
and Trust Company, as amended, or similar trust agreement.

 

A-3         PAYMENT OF EMPLOYEE PARTICIPANT’S RESTRICTED
STOCK UNITS. The
vested amount of an employee Participant’s Restricted Stock Units and Deferred
Restricted Stock Units shall convert to shares of Common Stock and shall be issued
to or on behalf of the Participant upon the earlier of the following:

 

(a)   the employee Participant’s
death;

 

(b)   the date the employee
Participant becomes Disabled;

 

(c)   for a Participant’s Deferred Restricted
Stock Units, the later of the Vesting Date or the first day of the month next
following the date that is six (6) months after the employee Participant’s
Termination of Employment; and for a Participant’s Restricted Stock Units that
are not Deferred Restricted Stock Units, the earlier of the Vesting Date or the
first day of the month next following the date that is six (6) months
after the employee Participant’s Termination of Employment; or

 

(d)   the termination and liquidation of
employee Participant’s Restricted Stock Units or Deferred Restricted Stock
Units under Section A-7 below.

 

Payments under Paragraphs (a), (b) and (c) will
be made within 90 days of such distribution event and payment on account of
Paragraph (d) will be made in accordance with Section A-7.

 

29

 

A-4         PAYMENT OF NON-EMPLOYEE DIRECTOR
PARTICIPANT’S RESTRICTED STOCK UNITS. The vested amount of a non-employee director
Participant’s Restricted Stock Units shall convert to shares of Common Stock
and shall be issued to or on behalf of the Participant upon the earlier of the
following:

 

(a) the date of the Participant’s death; or

 

(b) the date the non-employee director
Participant ceases to be a member of the Board of Directors of the Company,
provided the Participant has ceased all contractual relationships as an
independent contractor with the Company and has experienced a “separation from
service” under Section 409A of the Code, provided further, if the
Participant is a “specified employee,” as defined under Section 409A of
the Code, on the date of his or her separation from service, payment will be
suspended for six (6) months following the Participant’s separation from
service, or, if earlier, until the Participant’s death.

 

A-5         PAYMENT OF DEFERRED PERFORMANCE AWARD. 
The vested amount of the percentage of a Participant’s Deferred
Performance Share Units shall convert to shares of Common Stock and shall be
issued to or on behalf of a Participant as soon as practicable, but not more
than 90 days, after the later of the following:

 

(a) the end of the Performance Period; or

 

(b) the first of the following events to
occur:

 

(1)           the Participant’s death;

(2)           the date the Participant becomes
Disabled;

(3)           the first day of the month next following
the date that is six (6) months after the Participant’s Termination of
Employment;

(4)           the fixed distribution date, if any,
designated by the Participant pursuant to a written distribution election made
in accordance with Plan procedures; or

(5)           the termination and liquidation of the
Participant’s Deferred Performance Share units under Section A-7 below.

 

A-6         FUNDING UPON A CHANGE IN CONTROL. In the event a Change in Control causes the
Trust to be funded, the Company shall:

 

(a)           determine the amount of the Company’s
obligation to Participants who are entitled to a distribution of Appendix A
Awards, by multiplying the number of Units earned as of the Change in Control
by the Fair Market Value of one share of Common Stock on the date of the Change
in Control;

 

(b)           credit the amounts determined in
paragraph (a) to a bookkeeping account in the name of each applicable
Participant;

 

30

 

(c)           on and after the date of the Change in
Control, credit to such bookkeeping accounts investment earnings at an annual
rate equal to the sum of the 10-Year United States Treasury Note rate plus
2%.  The 10-Year United States Treasury
Note rate will be determined on the date of the Change in Control, or if no
such rate is available on that date, the immediately preceding date such rate
is available, and such rate will be reset each calendar quarter as necessary;
and

 

(d)           transfer cash or other property to the
Trust as provided under the Trust.  Such
transfer shall be made to the extent permitted by, subject to, and in
accordance with, the terms of the Trust.

 

A-7         AWARD TERMINATION AND LIQUIDATION ON ACCOUNT
OF A CHANGE IN CONTROL.  Upon a Change in Control the Appendix A
Awards will terminate and payment of all amounts under such Awards will be
accelerated if and to the extent provided in this Section A-7.

 

(a)   The Appendix A Awards will
be terminated effective as of the first date on which there has occurred both (i) a
Change in Control under Section 2.4(a) and (ii) a funding of the
Trust on account of such Change in Control (referred to herein as the “Appendix
A termination effective date”) unless, prior to such Appendix A termination
effective date the Board affirmatively determines that the Appendix A Awards
will not be terminated as of such effective date. The Board will be deemed to
have taken action to irrevocably terminate the Appendix A Awards as of the
Appendix A termination effective date by its failure to affirmatively determine
that the Appendix A Awards will not terminate as of such date.

 

(b)   The determination by the
Board under paragraph (a) constitutes a determination that such
termination will satisfy the requirements of Section 409A of the Code,
including an agreement by the Company that it will take such additional action
or refrain from taking such action as may be necessary to satisfy the
requirements necessary to terminate and liquidate the Appendix A Awards under
paragraph (c) below.

 

(c)   In the event the Board does
not affirmatively determine not to terminate the Appendix A Awards as provided
in paragraph (a), such termination shall be subject to either (1) or (2) as
follows:

 

1.     If the Change in Control
qualifies as a “change in control event” under Section 409A of the Code,
payment of all Appendix A Awards will be accelerated and made in a lump sum as
soon as administratively practicable but not more than 90 days following the
Appendix A termination effective date, provided the requirements of Treasury
Regulation Section 1.409A-3(j)(4)(ix)(B) have been satisfied.

 

31

 

2.     If the Change in Control
does not qualify as a “change in control event” for purposes of Section 409A
of the Code, payment of all Appendix A Awards will be accelerated and made in a
lump sum as soon as administratively practicable but not more than 60 days
following the 12 month anniversary of the Appendix A termination effective
date, provided, the requirements of Treasury Regulation Section 1.409A-3(j)(4)(ix)(C) have
been satisfied.

 

A-8         LIMITATIONS ON TRANSFER. Awards
subject to this Appendix A may not be assigned or transferred by a Participant
during their lifetime, other than to a former spouse incident to divorce if and
to the extent required by a qualified domestic relations order and permitted
under the terms of the applicable Award agreement, and the Awards shall not be
subject to anticipation, alienation, sale, assignment, pledge, encumbrance or
hypothecation, execution, attachment or similar process. Any attempt to
anticipate, alienate, sell, assign, transfer, pledge, encumber, hypothecate, charge
or otherwise dispose of an Award in a manner contrary to the provisions hereof,
and the levy of any attachment or similar process upon the awards, shall be
null and void.

 

32

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