Document:

technest_8k-ex1001.htm

    Exhibit 10.1

    

 

    SECURITIES
PURCHASE AGREEMENT

     

     

    THIS
SECURITIES PURCHASE AGREEMENT is made as of the 20th day of May, 2009, by and
between Technest Holdings, Inc. (the “Company”), a Nevada
corporation, and each of the persons whose names are set forth on the Schedule
of Purchasers attached hereto as Exhibit A (the “Purchasers” and each
individually as a “Purchaser”).

     

    WHEREAS, each Purchaser wishes to
purchase from the Company, and the Company wishes to sell to each Purchaser,
certain shares (the “Shares”) of the
Company’s Series D 5% Convertible Preferred Stock, par value $0.0001 per share
(“Series D
Preferred”) a copy of whose certificate of designation is set forth below
in Exhibit B;

     

    NOW,
THEREFORE, in consideration of the mutual covenants contained in this Agreement,
the parties agree as follows:

     

    SECTION
1  Sale of
Securities.

     

    1.1  Authorization of Sale of the
Securities.  Subject to the terms and conditions of this
Agreement, the Company has authorized the sale and issuance to the Purchasers of
the number of Shares set forth next to each Purchaser’s name on Exhibit A
hereof.

     

    1.2  Agreement to Sell and
Purchase the Shares.  At the Closing (as defined below), the
Company will issue and sell the Shares to each Purchaser, severally and not
jointly, and each Purchaser will buy the Shares from the Company set forth
opposite such Purchaser’s name on Exhibit A, upon the
terms and conditions hereinafter set forth, at the purchase price set forth on
Exhibit
A.

     

    1.3  Several and not Joint
Obligations.  The representations, warranties, covenants,
agreements and obligations of the Purchasers under this Agreement are several
and not joint.

    

    1.4  Time of the
Essence.  Time is of the essence in this
Agreement.  If no Closing (as hereinafter defined) has take place by
May 20, 2009, the Company may unilaterally and in its sole discretion terminate
this Agreement as to any or all Purchasers, in which case no terminated party
shall have any liability to or claim against the Company under or in connection
with this Agreement or the transactions contemplated by this
Agreement.

    

    1.5  Closing.  Subject
to and in reliance upon all of the representations, warranties, covenants, terms
and conditions of this Agreement, the closing shall take place at the offices of
the Company located in Bethesda, Maryland at 10:00 a.m., local time, on May 20,
2009, or at such other location, date and time as many be agreed upon between
the applicable Purchasers and Company (such closing being called the “Closing”).

    

    SECTION
2  Representations, Warranties
and Covenants of the Company.

     

    The Company hereby represents and
warrants to, and covenants with, the Purchasers as follows:

     

    3.1  Organization and
Qualification.  The Company is a corporation, validly existing
and in good standing under the laws of the State of Nevada; and the Company is
duly qualified to do business as a foreign corporation and is in good standing
in each other jurisdiction in which qualification is required, except where the
failure to be so qualified will not have a material adverse effect.

     

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    3.2  Issuance, Sale and Delivery
of the Shares.  Both the Shares being purchased hereunder, and
the underlying shares of the Company’s common stock into which the Shares may
convert are duly authorized and, when issued, delivered and paid for in the
manner set forth in this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances
other than liens or encumbrances created or imposed upon the
Purchasers.

     

    3.3  Due Execution, Delivery and
Performance of the Agreements.  The Company has full corporate
power and authority to enter into this Agreement, to issue and sell the Shares,
and perform the transactions contemplated by this Agreement.  The
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions therein contemplated will not
violate any provision of the Restated Articles of Incorporation or by-laws of
the Company.

     

    3.4  SEC
Filings.  Each report, schedule, registration statement and
definitive proxy statement filed by the Company with the Securities and Exchange
Commission (the “Commission”) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), since
December 31, 2007 is available on EDGAR (as such documents have since the time
of their filing been amended, the “Information
Documents”), which are all the documents (other than preliminary
material) that the Company was required to file with the Commission since such
date.  Except as disclosed to the Purchasers, as of their respective
dates, the Information Documents complied in all material respects
with  the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder applicable to the Information
Documents, and none of the Information Documents contained at the time they were
filed, any untrue statement of a material fact or omitted to state a 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.

     

    3.5 Authorized
Shares.  The authorized
capital stock of the Company consists of (i) 495,000,000 shares of Common Stock,
$.001 par value per share, of which  20,676,739 shares have been
issued and are outstanding as of the date hereof and (ii) 5,000,000 of Preferred
Stock, of which 150 shares have been designated as Series A Preferred Stock,
64.631  shares of which have been issued and are
outstanding;  1,149,425 shares have been designated as Series B
Preferred Stock, none of which are outstanding;  1,149,425 shares have
been designated as Series C Preferred Stock,  402,294 shares of which
have been issued and are outstanding; 3,000 shares have been designated as
Series D Preferred Stock, 1,300 shares of which have been issued and are
outstanding as of the date hereof.  All issued and outstanding shares
of Common Stock and Preferred Stock have been duly authorized and validly issued
and are fully paid and nonassessable.

     

    3.6 Brokers, Finders.  The Company has
taken no action which would give rise to any claim by any person for brokerage
commission, finder's fees or similar payments by Investor relating to this
Agreement or the transactions contemplated hereby.  Investor shall
have no obligation with respect to such fees or with respect to any claims made
by or on behalf of other persons for fees of a type contemplated in this Section
that may be due in connection with the transactions contemplated
hereby.  The Company shall indemnify and hold harmless each of
Investor, its employees, officers, directors, agents, and partners, and their
respective affiliates, from and against all claims, losses, damages, costs
(including the costs of preparation and attorney's fees) and expenses suffered
in respect of any such claimed or existing fees, as and when
incurred.

    
      
         

      

      
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    3.7 Amendments, Modification or
Waivers.  The Company shall pay all reasonable fees and
expenses incurred by the Investor in connection with any amendments,
modifications or waivers of this Agreement incurred in connection with the
enforcement of this Agreement, including, without limitation, all reasonable
attorneys’ fees and expenses. The Company shall pay all stamp or other similar
taxes and duties levied in connection with issuance of the Shares pursuant
hereto.

     

    SECTION 4  Representations, Warranties
and Covenants of the Purchasers

     

    4.1  Experience; Accredited
Investor Status.  Each Purchaser, individually and not jointly,
represents and warrants to, and covenants with, the Company that: (i) he is an
“accredited investor” within the meaning of Rule 501 of Regulation D promulgated
under the Securities Act, (ii) he is knowledgeable, sophisticated and
experienced in making, and is qualified to make, decisions with respect to
investments in securities representing an investment decision like that involved
in the purchase of the Shares, including investments in securities issued by the
Company, and has requested, received, reviewed and understood all information he
deems relevant in making an informed decision to purchase the Shares; (iii) he
acknowledges that the offering of the Shares pursuant to this Agreement has not
been reviewed by the Securities and Exchange Commission or any state regulatory
authority; (iv) it is acquiring the Shares set forth next to his name on Exhibit A hereto, for
his own account for investment only and with no intention of effecting a
distribution any of such Shares or any arrangement or understanding with any
other persons regarding the distribution of such Shares; (v) he will not,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any of the Shares except in compliance with the Securities Act of 1933, as
amended (the “Securities Act”),
rules and regulations promulgated under the Securities Act and any applicable
state securities or blue sky laws; (vi) he understands that the securities are
“restricted securities” as such term is defined in Rule 144(a)(3) promulgated
under the Securities Act, and that the Shares are illiquid in that they may not
readily be resold and that the Company has no obligation or plan to register the
resale of the Shares by the Purchaser under the Securities Act; (vii) he has, in
connection with his decision to purchase Shares, not relied upon any
representations or other information (whether oral or written) other than as set
forth in the representations and warranties of the Company contained herein;
(viii) he has had an opportunity to discuss this investment with representatives
of the Company and ask questions of them and such questions have been answered
to his full satisfaction.

     

    4.2  Acknowledgement of
Risk.  Each Purchaser, individually and not jointly, recognizes
that an investment in the Shares is speculative and involves a high degree of
risk, including a risk of total loss of the Purchaser’s
investment.  Each Purchaser, individually and not jointly,
acknowledges that they have been afforded an opportunity to ask questions and to
review any documents that might be necessary to evaluate the degree of risk
involved in the transactions contemplated by this Agreement.

     

    
      
         

      

      
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    4.3  Acknowledgement of Company’s
Reliance.  Each Purchaser, individually and not jointly,
represents and warrants that all of the information provided to the Company or
its agents or representatives concerning such Purchaser’s suitability to invest
in the Company and the representations and warranties contained herein, are
complete, true, and correct as of the date hereof, and understands that the
Company is relying on the statements contained herein to establish an exemption
from registration under U.S. federal and state securities laws.  Each
Purchaser, individually and not jointly, represents and warrants that the
address set forth in the signature page hereto is such Purchaser’s true and
correct domicile.

     

    4.4  Restrictions on
Transfer.  Each Purchaser agrees to not, without the prior
written consent of the Company, directly or indirectly, make any offer, sale,
assignment, transfer, encumbrance, contract to sell, grant of an option to
purchase or other disposition of any Shares beneficially owned (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by
the Purchaser on the date hereof or hereafter acquired for a period of six
months subsequent to the date hereof.  Each Purchaser agrees and
consents to the entry of stop transfer instructions with the Company’s transfer
agent against the transfer of Shares except in compliance with this
agreement.

    

    SECTION 5.  Certain Covenants of the
Company

    

    5.1 Filings.  (i)  The
Company undertakes and agrees to promptly and timely make all necessary filings
and other applications in connection with the sale of the Shares to the
Purchaser under any United States laws and regulations applicable to the
Company, or by any domestic securities exchange or trading market, and to
provide a copy thereof to the Investor promptly after such filing.

    

    5.2 Reporting
Status.  So long as the Purchaser beneficially owns any of the
Shares, the Company shall file all reports required to be filed with the SEC
pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall not
terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would permit such
termination.  The Company will take all reasonable action under its
control to obtain and to continue the listing and trading of its Common Stock
(including, without limitation, all Converted Shares) on the principal exchange
where its common stock is traded.

    

    5.3 Available
Shares.  The Company shall have at all times hereafter
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to issue one hundred percent (100%) of the number of
shares of Common Stock as may be required to satisfy the conversion rights of
the Purchaser pursuant to the terms and conditions of the Certificate of
Designation.

    

    5.4 Negative
Covenants.  So long as any of
the Shares are outstanding, the Company shall not and shall not cause its
subsidiaries to, without the affirmative vote of seventy five percent (75%) of
the holders of the Shares then outstanding, (a) alter or adversely change the
powers, preferences or rights given to the Shares, (b) alter or amend the
Certificate of Designation associated with the Shares, (c) authorize or create
any class of stock ranking as to dividends or distribution of assets upon a
liquidation or otherwise senior to or pari passu with the Shares, (d) amend its
certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of any holders of the Shares, (e) increase the
authorized or designated number of the Shares, (f) allow for the creation of a
corporate obligation other than in the ordinary course of business, (g) allow
the creation of any lien on any of its assets or the assets of any subsidiary,
(h) issue any additional Shares (including the reissuance of any Shares
previously converted into common stock) or (i) enter into any agreement with
respect to the foregoing.

    

    
      
         

      

      
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    SECTION 6  Expenses.  Each
party hereto will pay its own expenses in connection with the transactions
contemplated hereby, whether or not such transactions shall be
consummated.

     

    SECTION 7  Notices.  All
notices, requests, consents, and other communications under this Agreement shall
be in writing and shall be delivered by hand, sent via overnight courier, sent
by facsimile, or mailed by first class certified or registered mail, return
receipt requested, postage prepaid:

     

    if to the
Company, to:

     

    Technest
Holdings, Inc.

    10411
Motor City Drive, Suite 650

    Bethesda,
MD 20817

    

    or to
such other person at such other place as the Company shall designate to the
Purchasers in writing; and if to the Purchasers, at the address as set forth on
Exhibit A, or
at such other address or addresses as may have been furnished to the Company in
writing pursuant to this Section
7.

     

    SECTION 8  Severability.  In
case any provision contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.

     

    SECTION 9  Governing
Law.  This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York for contracts to be wholly
performed in such state and without giving effect to the principles thereof
regarding the conflict of laws. Each of the parties consents to the exclusive
jurisdiction of the federal courts whose districts encompass any part of the
County of New York or the state courts of the State of New York sitting in the
County of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions.  Each party
hereto agrees to waive its right to a trial by jury in any proceeding in
connection with any dispute associated with this Agreement.

    

    SECTION 10  Entire
Agreement.  This Agreement contains the entire agreement of the
parties with respect to the subject matter hereof and supersedes and is in full
substitution for any and all prior oral or written agreements and understandings
between them related to such subject matter, and neither party hereto shall be
liable or bound to the other party hereto in any manner with respect to such
subject matter by any representations, indemnities, covenants or agreements
except as specifically set forth herein.

     

    
      
         

      

      
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    IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be executed as of the date first above written by their duly
authorized representatives shown below:

    
 

     

    
      	 	      
              TECHNEST
      HOLDINGS, INC.

               

              By: /s/ Gino M.
      Pereira                                           

               

              Name:     
      Gino M. Pereira

               

              Title:       
      Chief Executive Officer

               

              

               

              SOUTHRIDGE
      PARTNERS LP

               

              By: /s/ Stephen
      Hicks                                            
      

               

              Name:     
      Stephen Hicks

               

              Title:       
      President of General Partner

            

    

     

     

    

    

    

     

    
      
         

      

      
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     Exhibit
A

     

    Schedule
of Purchasers

     

     

    
      
        
          
            
              	
                      Name and Address:

                    	
                      Shares:

                    	
                      Purchase Price:

                    
	 	 	 
	
                      Southridge
      Partners LP

                      90
      Grove Street,

                      Ridgefield
      CT

                    	
                      140

                    	
                      $70,000

                    
	 
      	 
      	 
      

            

          

        

      

    

    

     

    

     

    

     

     

     

     

     

     

     

     

     

     

    
      
         

      

      
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    Exhibit
B

     

    

     

    Certificate
of Designation

     

     

     

     

     

     

     

     

     

     

     

    
 

    
      
         

      

      
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    CERTIFICATE
OF DESIGNATION OF RIGHTS AND PREFERENCES

    FOR
SERIES D 5% CONVERTIBLE PREFERRED STOCK

    OF

    TECHNEST
HOLDINGS, INC.

    

    Pursuant
to Section 78.1955 of the Nevada Revised Statutes, Technest Holdings, Inc., a
Nevada corporation (the "Company"), does hereby certify:

    

    FIRST:
That pursuant to authority expressly vested in it by the Restated Articles of
Incorporation, as amended, of the Company, the Board of Directors of the Company
has adopted the following resolution establishing a new series of Preferred
Stock of the Company, consisting of Three Thousand (3,000) shares designated
"Series D 5% Convertible Preferred Stock," with such powers, designations,
preferences, and relative participating, optional, or other rights, if any, and
the qualifications, limitations, or restrictions thereof, as are set forth in
the resolutions:

    

    RESOLVED,
that the Company's Board of Directors hereby approves the designation and
issuance of the Series D 5% Convertible Preferred Stock according to the terms
and conditions as set forth in Exhibit A and authorizes and instructs the
Company's Executive Officers to proceed in filing the Certificate of Designation
with the State of Nevada and to take such other action as shall be appropriate
in connection with the issuance of the Series D 5% Convertible Preferred
Stock.

    

    SECOND:
That said resolutions of the directors of the Company were duly adopted in
accordance with the provisions of Sections 78.315 and 78.1955 of the Nevada
Revised Statutes.

    

    IN
WITNESS WHEREOF, the undersigned hereby affirms, under penalties of perjury,
that the foregoing instrument is the act and deed of the Company and that the
facts stated therein are true.  Dated as of the 1st day of October,
2008.

     

    
    

     

    
      	 	      
              TECHNEST
      HOLDINGS, INC.,

              a
      Nevada corporation,

              

              By:/s/ Gino
      Pereira                                
      

              Name:  Gino
      Pereira

              Title:    President

            

    

     

     

     

     

     

    

    
      
        
           

        

        
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    EXHIBIT

     

     

    SECTION
1.                                SERIES
D 5% CONVERTIBLE PREFERRED STOCK TERMS

     

    Section
1.                      Designation, Amount and Par
Value.  The series of preferred stock shall be designated as
the Series D 5% Convertible Preferred Stock (the "Preferred Stock"),
and the number of shares so designated and authorized shall be Three Thousand
(3,000).  Each share of Preferred Stock shall have a par value of
$0.0001 per share and a stated value of $1,000 per share (the "Stated
Value").

    

    Section
2.                      Dividends.

    

    (a)           Holders
of Preferred Stock shall be entitled to receive, when and as declared by the
Board of Directors either out of funds legally available therefor or through the
issuance of shares of the Company’s
common stock, and the Company shall accrue, quarterly in arrears on March 31,
June 30, September 30, and December 31 of each year, commencing on the earlier
of December 31, 2008, or any Conversion Date (as defined below), cumulative
dividends on the Preferred Stock at the rate per share (as a percentage of the
Stated Value per share) equal to five percent (5%) per annum, payable in cash or
shares of Common Stock (as defined in Section 7) at the option of the
Holders.  The Company may pay, at its option, accrued dividends at any
time while the Preferred Stock remains outstanding.  The Company shall
pay all accrued and unpaid dividends within five (5) days following either (a)
the conversion of any or all of the Preferred Stock or (b) the redemption by the
Company of any or all of the remaining outstanding shares of Preferred
Stock.  The number of shares of Common Stock issuable as payment of
dividends hereunder shall equal the aggregate dollar amount of dividends then
being paid, divided by the Conversion Price (as defined in Section 5(c)) then in
effect.  Dividends on the Preferred Stock shall be calculated on the
basis of a 360-day year, shall accrue daily commencing the Issuance Date (as
defined in Section 7), and shall be deemed to accrue on such date whether or not
earned or declared and whether or not there are profits, surplus or other funds
of the Company legally available for the payment of dividends.  The
party that holds the Preferred Stock on an applicable record date for any
dividend payment will be entitled to receive such dividend payment and any other
accrued and unpaid dividends which accrued prior to such dividend payment date,
without regard to any sale or disposition of such Preferred Stock subsequent to
the applicable record date but prior to the applicable dividend payment
date.  Except as otherwise provided herein, if at any time the Company
pays less than the total amount of dividends then accrued on account of the
Preferred Stock, such payment shall be distributed ratably among the Holders of
the Preferred Stock based upon the number of shares then held by each Holder in
proportion to the total number of shares of Preferred Stock then
outstanding.  In order for the Holders to exercise the right to have
dividends paid in cash on any Conversion Date, the Holders must indicate such
intention in the Conversion Notice, which notice will remain in effect for
subsequent Conversion Notices until rescinded by the Holder in a written notice
to such effect that is addressed to the Company.

    
      
         

      

      
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    (b)  Notwithstanding
anything to the contrary contained herein, the Company may not issue shares of
Common Stock in payment of dividends on the Preferred Stock (and must deliver
cash in respect thereof) if:  (i)  the number of shares of
Common Stock at the time authorized, unissued and unreserved for all purposes,
or held as treasury stock, is either insufficient to issue such dividends in
shares of Common Stock or the Company has not duly reserved for issuance in
respect of such dividends a sufficient number of shares of Common Stock, (ii)
such shares are not listed for trading on the Nasdaq SmallCap Market or the OTC
Bulletin Board ("OTC BB")(and any other exchange, market or trading facility in
which the Common Stock is then listed for trading). Payment of dividends in
shares of Common Stock is further subject to the provisions of Section
5.

    

    (c)  So
long as any shares of Preferred Stock remain outstanding, neither the Company
nor any subsidiary thereof shall, without the consent of the Holders of seventy
five percent (75%) of the shares of Preferred Stock then outstanding, redeem,
repurchase or otherwise acquire directly or indirectly any Junior Securities (as
defined in Section 7), nor shall the Company directly or indirectly pay or
declare any dividend or make any distribution upon, nor shall any distribution
be made in respect of, any Junior Securities, nor shall any monies be set aside
for or applied to the purchase or redemption (through a sinking fund or
otherwise) of any Junior Securities.

    

    Section
3.                      Voting Rights; Negative
Covenants.  The Preferred Stock shall have the right to vote on
an as converted basis on any matter that may from time to time be submitted to
the Company’s shareholders for a vote, either by written consent or by
proxy.  So long as any shares of Preferred Stock are outstanding, the
Company shall not and shall cause its subsidiaries not to, without the
affirmative vote of seventy five percent (75%) of the holders of the Preferred
Stock then outstanding, (a) alter or change adversely the powers, preferences or
rights given to the Preferred Stock, (b) alter or amend this Certificate of
Designation, (c) authorize or create any class of stock ranking as to dividends
or distribution of assets upon a Liquidation (as defined in Section 4) or
otherwise senior to or pari passu with the Preferred Stock, (d) amend its
certificate of incorporation, bylaws or other charter documents so as to affect
adversely any rights of any holders of the Preferred Stock, (e) increase the
authorized or designated number of shares of Preferred Stock, (f) allow for the
creation of a corporate obligation other than in the ordinary course of
business, (g) allow the creation of any lien on any of its assets or the assets
of any subsidiary, (h) issue any additional shares of Preferred Stock (including
the reissuance of any shares of Preferred Stock converted for Common Stock) or
(i) enter into any agreement with respect to the foregoing.

    

    Section
4.                      Liquidation.  Upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary (a "Liquidation"), and
subject to the rights of the holders of the Company’s Series A Convertible
Preferred Stock and Series C Convertible Preferred Stock then outstanding, the
holders of the Preferred Stock shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid
dividends per share, whether declared or not, and all other amounts in respect
thereof (including liquidated damages, if any) then due and payable prior to any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the holders of Preferred
Stock shall be distributed among the holders of Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full.  The Company shall mail
written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record holder of Preferred
Stock.

    

    
      
         

      

      
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    Section
5.                      Conversion.

    

    (a)  Conversions at Option of
Holder.  Each share of Preferred Stock shall be convertible
into shares of Common Stock at the Conversion Ratio (as defined in Section 7) at
the option of a Holder, at any time and from time to time, from and after the
issuance of the Preferred Stock.  A Holder shall effect conversions by
surrendering to the Company the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with a
completed form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice").  Each Conversion Notice shall specify the number of
shares of Preferred Stock to be converted, the date on which such conversion is
to be effected, which date may not be prior to the date the holder delivers such
Conversion Notice by facsimile (the "Conversion Date") and
the Conversion Price determined as specified in Section 5(c)
hereof.  If no Conversion Date is specified in a Conversion Notice,
the Conversion Date shall be the date that the Conversion Notice is deemed
delivered pursuant to this Section 5(a).  Subject to Section 5(b)
hereof, each Conversion Notice, once given, shall be irrevocable.

    

    (b)   Not
later than five (5) Trading Days after a Conversion Date, the Company will
deliver to the holder (i) a certificate or certificates representing the number
of shares of Common Stock being issued upon the conversion of shares of
Preferred Stock, (ii) one or more certificates representing the number of shares
of Preferred Stock not converted, (iii) a bank check in the amount of accrued
and unpaid dividends (if the Holder has elected to pay accrued and unpaid
dividends in cash) and (iv) if the Holder has elected and is permitted hereunder
to pay accrued dividends in shares of Common Stock, certificates representing
such number of shares of Common Stock as are issuable on account of accrued
dividends in such number as determined in accordance with Section
2(a).  The Company shall, upon request of the Holder, use reasonable
efforts to deliver any certificate or certificates required to be delivered by
the Company under this Section electronically through the Depository Trust
Company or another established clearing corporation performing similar
functions.  If in the case of any Conversion Notice such certificate
or certificates, including for purposes hereof, any shares of Common Stock to be
issued on the Conversion Date on account of accrued but unpaid dividends
hereunder as specifically determined by the Company, are not delivered to or as
directed by the applicable holder by the third Trading Day after the Conversion
Date, the holder shall be entitled by written notice to the Company at any time
on or before its receipt of such certificate or certificates, to rescind such
conversion, in which event the Company shall immediately return the certificates
representing the shares of Preferred Stock tendered for conversion.

    

    
      
         

      

      
        - 12
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    (c) The
conversion price for each share of Preferred Stock (the “Conversion Price”) on
any Conversion Date shall be twenty cents ($0.20), subject to Section 5(d) and
Section 6 below.  All calculations under this Section 5 shall be made
to the nearest whole share of common stock.

    

    (d)  If
at any time conditions shall arise by reason of action taken by the Company
which in the opinion of the Board of Directors are not adequately covered by the
other provisions hereof and which might materially and adversely affect the
rights of the holders of Preferred Stock (different than or distinguished from
the effect generally on rights of holders of any class of the Company's capital
stock) or if at any time any such conditions are expected to arise by reason of
any action contemplated by the Company, the Company shall mail a written notice
briefly describing the action contemplated and the material adverse effects of
such action on the rights of the holders of Preferred Stock at least 30 calendar
days prior to the effective date of such action, and an Appraiser selected by
the holders of majority in interest of the Preferred Stock shall give its
opinion as to the adjustment, if any (not inconsistent with the standards
established in this Section 5), of the Conversion Price (including, if
necessary, any adjustment as to the securities into which shares of Preferred
Stock may thereafter be convertible) and any distribution which is or would be
required to preserve without diluting the rights of the holders of shares of
Preferred Stock; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in good faith, in which case the
adjustment shall be equal to the average of the adjustments recommended by each
such Appraiser.  The Board of Directors shall make the adjustment
recommended forthwith upon the receipt of such opinion or opinions or the taking
of any such action contemplated, as the case may be; provided, however, that no such
adjustment of the Conversion Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.

    

    (e)  The
Company covenants that it will at all times reserve and keep available out of
its authorized and unissued Common Stock solely for the purpose of issuance upon
conversion of Preferred Stock and payment of dividends on Preferred Stock, each
as herein provided, free from preemptive rights or any other actual or
contingent purchase rights of persons other than the holders of Preferred Stock,
not less than 150% of such number of shares of Common Stock as shall be issuable
(taking into account the adjustments and restrictions of Section 5(d)) upon the
conversion of all outstanding shares of Preferred Stock and payment of dividends
hereunder.  The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly and validly authorized, issued
and fully paid and nonassessable.

    

    (f)  Upon
a conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of Common Stock, but may if
otherwise permitted and unless waived by the holder of the Preferred Stock, make
a cash payment in respect of any final fraction of a share based on the Per
Share Market Value at such time.  If the Company elects not, or is
unable, to make such a cash payment, the holder of a share of Preferred Stock
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.

    

    
      
         

      

      
        - 13
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    (g)  The
issuance of certificates for shares of Common Stock on conversion of Preferred
Stock shall be made without charge to the Holders thereof for any documentary
stamp or similar taxes that may be payable in respect of the issue or delivery
of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.

    

    (h)  Shares
of Preferred Stock converted into Common Stock shall be canceled and shall have
the status of authorized but unissued shares of undesignated preferred
stock.

    

    (i)  Any
and all notices or other communications or deliveries to be provided by the
Holders of the Preferred Stock hereunder, including, without limitation, any
Conversion Notice, shall be in writing and delivered by facsimile, sent by a
nationally recognized overnight courier service, or sent by certified or
registered mail, postage prepaid, addressed to the attention of the President of
the Company at the facsimile telephone number or address of the principal place
of business of the Company.  Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered by facsimile, sent by a nationally recognized overnight
courier service or sent by certified or registered mail, postage prepaid,
addressed to each holder of Preferred Stock at the facsimile telephone number or
address of such holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the Holder.  Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
5:00 p.m. (New York time), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified in this Section later than 5:00 p.m. (New York time) on any
date and earlier than 11:59 p.m. (New York time) on such date, (iii) four days
after deposit in the United States mails, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.

    

    Section
6.  Redemption; Adjustments to
Conversion Price.

    

    (a)           Redemption.

    

    
      	
               
      

            	
              (i)

            	
              The
      Company shall have the obligation, subject to the Holder’s right of
      conversion under Section 5, to redeem from funds legally available
      therefor all or any portion of the then-outstanding and unconverted shares
      of the Preferred Stock at a price equal to the Redemption Price (defined
      below), at such time as the Company has received proceeds from the sale of
      EOIR, or if no such proceeds become available, as such time as the Company
      has funds legally available for redemption.  Any redemption
      pursuant to this Section 6(a)(i) shall be effected by the delivery of a
      notice to each holder of Preferred Stock to be redeemed, which notice
      shall indicate the number of shares of Preferred Stock of each holder to
      be redeemed and the date that such redemption is to be effected, which
      shall be the tenth (10th)
      day after the date such notice is deemed delivered (the "Redemption
      Date").  All redeemed shares of Preferred Stock shall
      cease to be outstanding and shall have the status of authorized but
      unissued preferred stock.

            

    

    

    

    
      
         

      

      
        - 14
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    (b)  The Conversion Price
shall be subject to adjustment from time to time as follows:

    

    (i).           Sale.   If,
for as long as any shares of Preferred Stock remain outstanding, the Company
enters into a merger (other than where the Company is the surviving entity) or
consolidation with another corporation or other entity (collectively, a “Sale”),
the Company will require, in the agreements reflecting such transaction, that
the surviving entity and, if an entity different from the successor or surviving
entity, the entity whose capital stock or assets the holders of Common Stock of
the Company are entitled to receive as a result of such
transaction,  expressly assume the obligations of the Company
hereunder.  Notwithstanding the foregoing, if the Company enters into
a Sale and the holders of the Common Stock are entitled to receive stock,
securities or property in respect of or in exchange for Common Stock, then as a
condition of such Sale, the Company and any such successor, purchaser or
transferee will agree that the  Preferred Stock may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation or transfer by a Holder of the number of shares of Common Stock
into which then outstanding shares of Preferred Stock might have been converted
immediately before such merger, consolidation or transfer, subject to
adjustments which shall be as nearly equivalent as may be
practicable.  In the event of any such proposed Sale, the Holder
hereof shall have the right to either (i) convert all of any of the outstanding
Preferred Stock by delivering a Notice of Conversion to the Company within 10
days of receipt of notice of such Sale from the Company or (ii) if the surviving
entity in the transaction is not a publicly traded entity listed on a Principal
Trading Market, demand a redemption of all or any of the
outstanding  Preferred Stock at the  Redemption Price by
delivering a notice to such effect  to the Company within ten (10)
days of receipt of notice of such Sale from the Company.

    

    (ii).           Spin
Off.  If, for as long as any shares of Preferred Stock remain
outstanding  the Company consummates a  spin off or
otherwise divests itself of a part of its business or operations or disposes of
all or of a part of its assets in a transaction (the “Spin Off”) in which the
Company, in addition to or in lieu of any other compensation received by the
Company  for such business, operations or assets, causes securities of
another entity (the “Spin Off Securities”) to be issued to security holders of
the Company, then the Company shall cause (i) to be reserved Spin Off Securities
equal to the number thereof which would have been issued to the Holder had all
of the Holder’s shares of Preferred Stock outstanding on the record date (the
“Record Date”) for determining the amount and number of Spin Off Securities to
be issued to security holders of the Company (the “Outstanding Preferred Stock”)
been converted as of the close of business on the Trading Day immediately before
the Record Date (the “Reserved Spin Off Securities”), and (ii) to be issued to
the Holder upon the conversion of all or any of the Outstanding Preferred Stock,
such amount of the Reserved Spin Off Securities equal to (x) the Reserved Spin
Off Securities multiplied by (y) a fraction, of which (a) the numerator is the
principal amount of the Outstanding Preferred Stock  then being
converted, and (b) the denominator is the principal amount of the Outstanding
Preferred Stock.

    
      
         

      

      
        - 15
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    (iii).           Stock
Splits, etc.  If, at any time while any shares of Preferred Stock
remain outstanding, the Company effectuates a stock split or reverse stock split
of its Common Stock or issues a dividend on its Common Stock consisting of
shares of Common Stock, the Conversion Price and any other amounts calculated as
contemplated by this Certificate of Designations shall be equitably adjusted to
reflect such action.  By way of illustration, and not in limitation,
of the foregoing (i) if the Company effectuates a 2:1 split of its Common Stock,
thereafter, with respect to any conversion for which the Company issues shares
after the record date of such split, the Conversion Price shall be deemed to be
one-half of what it had been calculated to be immediately prior to such split;
(ii) if the Company effectuates a 1:10 reverse split of its Common Stock,
thereafter, with respect to any conversion for which the Company issues shares
after the record date of such reverse split, the Conversion Price shall be
deemed to be ten times what it had been calculated to be immediately prior to
such split; and (iii) if the Company declares a stock dividend of one share of
Common Stock for every 10 shares outstanding, thereafter, with respect to any
conversion for which the Company issues shares after the record date of such
dividend, the Conversion Price shall be deemed to be such amount multiplied by a
fraction, of which the numerator is the number of shares (10 in the example) for
which a dividend share will be issued and the denominator is such number of
shares plus the dividend share(s) issuable or issued thereon (11 in the
example).

    

    (iv).           Notice
of Adjustments.  Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article 6, the Company, at
its expense, shall promptly compute such adjustment or readjustment and prepare
and furnish to each Holder of Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based.  The Company shall, upon the
written request at any time of any Holder of Preferred Stock, furnish to such
Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price in effect at the time and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of a share of Designated Preferred
Stock.

    

    Section
7.  Definitions.  For
the purposes hereof, the following terms shall have the following
meanings:

    

    "Business Day" means
any day except Saturday, Sunday and any day which shall be a legal holiday or a
day on which banking institutions in the State of Delaware are authorized or
required by law or other government action to close.

    
      
         

      

      
        - 16
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    "Closing Bid Price"
shall mean the closing bid price (as reported by Bloomberg L.P.) of the Common
Stock on the OTC Bulletin Board or such other exchange or trading facility on
which the common stock is traded.

    

    "Common Stock" means
the common stock, $.001 par value per share, of the Company, and stock of any
other class into which such shares may hereafter have been reclassified or
changed.

    

    "Conversion Ratio"
means, at any time, a fraction, the numerator of which is Stated Value plus
accrued but unpaid dividends to the extent to be paid in shares of Common Stock
and the denominator of which is the Conversion Price at such time.

    

    “Issuance Date" means
the earliest date on which a Holder receives shares of the Preferred Stock,
regardless of the number of certificates which may be issued to evidence such
Preferred Stock.

    

    "Junior Securities"
means the Common Stock and all other equity securities of the Company except for
the Company’s
Series A Convertible Preferred Stock and Series C Convertible Preferred
Stock.

    

    "Per Share Market
Value" means on any particular date (a) the closing bid price per share
of the Common Stock on such date on the OTC BB or other principal stock exchange
or quotation system on which the Common Stock is then listed or quoted or if
there is no such price on such date, then the closing bid price on such exchange
or quotation system on the date nearest preceding such date, or (b) if the
Common Stock is not listed then on the OTC BB or any stock exchange or quotation
system, the closing bid price for a share of Common Stock in such other
over-the-counter market, as reported by the Nasdaq Stock Market or in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices at the close of business on such
date, or (c) if the Common Stock is not then reported by the National Quotation
Bureau Incorporated or similar organization or agency succeeding to its
functions of reporting prices, then the average of the "Pink Sheet" quotes for
the relevant conversion period, as determined in good faith by the holder, or
(d) if the Common Stock is not then publicly traded the fair market value of a
share of Common Stock as determined by an Appraiser selected in good faith by
the holders of a majority in interest of the shares of the Preferred Stock;
provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such
Appraiser.

    

    "Person" means an
individual or a corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or political subdivision thereof) or other entity of
any kind.

    
      
         

      

      
        - 17
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    "Redemption Price"
shall be equal to the Stated Value of such shares of Preferred Stock plus all
accrued dividends thereon.

    

    "Trading Day" means
(a) a day on which the Common Stock is traded on the OTC BB or other stock
exchange or market on which the Common Stock has been listed, or (b) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices).

    

    

    
      
         

      

      
        - 18
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    EXHIBIT
B

    

    NOTICE
OF CONVERSION

    

    (To be
executed by the registered holder

    to
convert shares of Preferred Stock)

    

    The
undersigned hereby elects to convert the number of shares of Series D 5%
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.001 per share (the "Common Stock"), of Technest Holdings, Inc. (the
"Company") according to the conditions hereof, as of the date written
below.  If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith.  No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.

    

    Conversion
calculations:

    ______________________________________________________

    Date to
effect conversion

    

    ______________________________________________________

    Number of
shares of Preferred Stock to be converted

    

    ______________________________________________________

    Number of
shares of Common Stock to be issued

    

    ______________________________________________________

    Applicable
conversion price

    

    ______________________________________________________

    Name of
Holder

    ______________________________________________________

    

    ______________________________________________________

    Address
of Holder

    

    __________________________________

    Authorized
Signature

    

    

    - 19 -Exhibit 10.1

 

SECOND AMENDED AND RESTATED

 

EMPLOYMENT AGREEMENT 

dated as of December 31, 2008 (“this Agreement”) by and between THQ,

a Delaware corporation (the “Company”), 

and BRIAN J. FARRELL (the “Executive”)

 

RECITALS

 

WHEREAS, the Company and the Executive are parties to
an Amended and Restated Employment Agreement dated as of July 20, 2006,
under which the term of Executive’s “Employment Period” thereunder will expire March 31,
2010; and

 

WHEREAS the Board of Directors of the Company (the “Board”)
deems it to be in the best interests of the Company and its shareholders to
assure the continued employment of Executive, and Executive desires to continue
such employment, under the terms of this Agreement;

 

NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants contained therein, the parties agree as follows:

 

1.             EMPLOYMENT; TERM.

 

The Company will continue to employ Executive and
Executive will continue to be employed by the Company as the Company’s
President and Chief Executive Officer (“CEO”) during the original and any
extended term of this Agreement (“the Employment Term”) which commences on July 20,
2006 and which shall, unless sooner terminated by the Company or Executive
pursuant to Section 7, continue through March 31, 2010; provided,
however, that, commencing on March 31, 2008 and thereafter, this Agreement
shall be automatically extended each year on March 31 by a period of one (1) additional
year if the Company has not given written notice to Executive, at least ninety
(90) calendar days prior to the relevant March 31, that it has elected not
to extend this Agreement.

 

In the event the Company elects not to extend this
Agreement by providing written notice of such election at least ninety (90)
calendar days prior to a given March 31, Executive may resign for “Good
Reason” pursuant to Section 7.4(a) hereof and shall thereupon be
entitled to the benefits specified in Section 7.5 hereof.  Notwithstanding the foregoing, this Agreement
shall automatically terminate on March 31 of the calendar year in which
Executive turns sixty-five (65) years of age.

 

2.             DUTIES, RESPONSIBILITIES.

 

(a)           During the Employment Term, Executive
agrees to devote his entire business time, attention and energies to the
business of the Company and its subsidiaries; provided however that Executive
may engage in other activities that do not conflict with or interfere with the
performance of his duties and responsibilities hereunder including without
limitation (i) investing his assets or funds, so long as the business of
any such entity in which he

 

 

1

 

shall make his
investments shall not be in direct competition with that of the Company, except
that Executive may invest in an entity in competition with the Company if its
stock is listed for trading on a national stock exchange or traded in the
over-the-counter market and Executive’s holdings represent less than 5% of its
outstanding stock; or (ii) acting as a director, trustee, officer or upon
a committee of any other firm, trust or corporation if such positions do not
unreasonably interfere with the services to be rendered by Executive hereunder
and, as to future outside Board memberships, the Executive obtains the consent
of the Company’s Board of Directors or the Company’s Nominating/Corporate
Governance Committee; or (iii) being involved in educational, civic or
charitable activities which do not unreasonably interfere with the services to
be rendered by Executive hereunder. 
During the Employment Term, the Executive shall, if elected or
appointed, serve as a director of the Company.

 

(b)           As CEO, Executive shall report solely
and directly to the Board.  The Executive
shall at all times be the most senior executive of the Company.  He shall have such senior executive powers,
duties, authorities and responsibilities as are consistent with Executive’s
position and title and as have been historically performed by Executive,
including acting as chairman of any meeting of the Board (unless an independent
Chairman of the Board is elected and except for meetings of the Board’s
independent Directors), supervising financing, acquisitions and similar
transactions and strategic planning for the Company consistent with his title
and position, supervising the chief operating officer of the Company and
directly or indirectly all other employees of the Company, and managing all
activities of the Company, including without limitation, organizational
structure and non-officer compensation. 
Without limitation on the foregoing, Executive shall have (i) complete
senior management authority and responsibility with respect to the management
and operations of the Company and its business, including implementation of the
business strategy of the Company consistent with long-term strategy and
policies approved by the Board, (ii) authority on behalf of the Company to
employ and terminate employment of all Company personnel (other than the
authority to terminate the employment of the CFO or General Counsel or any
Internal Auditor without Board or relevant Committee approval), and (iii) authority
to execute contracts on behalf of the Company in the discharge of his duties
and responsibilities.

 

3.             COMPENSATION.

 

As compensation for Executive’s services to be
rendered hereunder during the Employment Term, the Company will pay to
Executive the following:

 

3.1           Base Salary.  An annual base salary (“Base Salary”)
(payable in substantially equal installments at the Company’s normal pay
periods) during the Employment Term of $626,045, which Base Salary was
established effective as of April 1, 2006. 
The Base Salary shall be subject to annual review commencing at the end
of the first fiscal year of the Company ending during the Employment Term and
at the end of each fiscal year thereafter, and may be increased (but not
decreased) for subsequent fiscal years.

 

 

2

 

3.2           Bonus.

 

(a)           In addition to the Base Salary, the
Executive is also entitled to a bonus (the “Bonus”) for each fiscal year of the
Company commencing during the Employment Term, in accordance with the Company’s
recently adopted Pay-for-Performance Annual Incentive Plan and its successors
for all future years.

 

(b)           The Board in its sole discretion may
also award to Executive a performance bonus at any time in such amount and in
such form as the Board may determine (the “Performance Bonus”) after taking
into consideration other compensation paid or payable to Executive under this
Agreement, as well as the financial and non-financial progress of the business
of the Company and the contributions of the Executive toward that progress.

 

(c)           Any Bonus and Performance Bonus shall
be payable as soon as practicable after the end of the fiscal year for which it
is payable but in all events shall be made within two and one-half months (21⁄2
months) after the later of the end of the calendar year or the Company’s fiscal
year in which Executive’s right to such payment vests as provided in Section 8.

 

(d)           The Executive shall also be eligible
for awards of stock options and any other stock or equity based awards that may
be available to executives of the Company.

 

4.             LOCATION; EXPENSES; ADDITIONAL BENEFITS;
INDEMNIFICATION.

 

4.1           Location.  Executive’s principal place of business shall
be at the Company’s headquarters in the Los Angeles Metropolitan area, and
Executive shall not be required to relocate outside of the Los Angeles
Metropolitan area.

 

4.2           Expenses.  The Company shall pay directly, or reimburse
the Executive for, all reasonable and necessary expenses and disbursements
incurred by him for and on behalf of the Company in the performance of his
duties under this Agreement.  For such
purpose, the Executive shall submit to the Company itemized reports of such
expenses in accordance with the Company’s policies.

 

4.3           Vacation.  The Executive shall be entitled to paid
vacations during the Employment Term in accordance with the Company’s then
prevalent practices for senior executive employees; provided, however, that
Executive shall be entitled to such paid vacations for not less than four (4) weeks
per annum.

 

4.4           Employee Benefit Plans.  The Executive shall be entitled to
participate in, and to receive benefits under, any employee benefit plans of
the Company (including, without limitation, pension, profit sharing, group life
insurance and group medical insurance plans) as may exist from time to time for
its executive employees.  Subject to the
limitation contained in Section 4.7 below, the Company shall make the
maximum pension and profit sharing contribution for the Executive legally
permitted to be made by an employer and shall permit the Executive to
contribute the maximum pension and profit sharing contribution legally
permitted to be made by an employee each year during the Employment Period.

 

 

3

 

4.5           Life and Disability Insurance.  The Company shall provide to Executive, and
pay the premiums on, insurance on Executive’s life in the amount of $3 million
as well as, on an after-tax basis, long-term disability insurance for the
Executive covering at least 80% of his Base Salary during the Employment Term
and for a period of twenty-four (24) months thereafter, each of which shall
have the coverage reasonably requested by Executive; provided, however, that
the foregoing coverage shall be subject to any insurance examinations of
Executive required by the insurer. 
Executive shall designate the beneficiaries under the disability and
life insurance policies.

 

4.6           Perquisites.  Executive shall be entitled to receive all
perquisites made available by the Company (and approved by the Company’s Board
or Compensation Committee) from time to time during the Employment Term to
other senior executives of the Company in the United States.  Without limiting the generality of the
foregoing, Executive shall be entitled to a secretary, a car allowance and
insurance in accordance with the Company’s policy, or, if more beneficial to
Executive, as provided by the Company to any of its senior executives.  Payment of such perquisites shall comply with
Section 8 hereof.

 

4.7           Indemnification.  As a director and officer of the Company, the
Executive shall be entitled to the benefits of all provisions of the
Certificate of Incorporation of the Company, as amended, and the Bylaws of the
Company, as amended, that provide for indemnification of officers and directors
of the Company as well as any Indemnification Agreement that the Company and
Executive have entered or may enter into. 
No such provisions shall be amended in any way to limit or reduce the
extent of the indemnification available to Executive as an officer or director
of the Company, except if and then to the extent required to comply with
applicable laws or regulations.

 

In addition, and without
limitation on the foregoing:

 

(a)           to the fullest extent permitted by
law, the Company shall indemnify and save and hold harmless the Executive from
and against any and all claims, demands, liabilities, costs and expenses,
including judgments, fines or amounts paid on account thereof (whether in
settlement or otherwise), and reasonable expenses, including attorneys’ fees
actually and reasonably incurred (except only if and to the extent that such
amounts shall be finally adjudged to have been caused by Executive’s willful
breach of the express provisions of this Agreement) to the extent that the
Executive is made a party to or witness in any action, suit or proceeding, or
if a claim or liability is asserted against Executive (whether or not in the
right of the Company), by reason of the fact that he was or is a director or
officer, or acted in such capacity on behalf of the Company, or by reason of or
arising out of or resulting from entering into this Agreement or the rendering
of services by the Executive pursuant to this Agreement, whether or not the
same shall proceed to judgment or be settled or otherwise brought to a
conclusion.  The Company shall advance to
Executive on demand all reasonable expenses incurred by Executive in connection
with the defense or settlement of any such claim, action, suit or proceeding,
and Executive hereby undertakes to repay such amounts if and to the extent that
it shall be finally adjudged that the Executive is not entitled to be
indemnified by the Company under this Agreement or under the provisions of the
Certificate of Incorporation or Bylaws of the Company as of the date hereof
that govern indemnification of officers or directors of the Company (but giving
effect to future amendments that broaden or expand any such

 

 

4

 

indemnification and
obligations or right more favorably to Executive).  Executive shall also be entitled to recover
any costs of enforcing his rights under this Section (including, without
limitation, reasonable attorneys’ fees and disbursements) in the event any
amount payable hereunder is not paid within thirty (30) days of written request
therefore by Executive.  The rights of
Executive under this Section shall survive the termination of this
Agreement and shall be applicable for so long as Executive may be subject to
any claim, demand, liability, cost or expense against which this paragraph 4.7
is intended to protect and indemnify him; and

 

(b)           the Company shall, at no cost to the
Executive, use its best efforts to at all times include the Executive during
the Employment Term and for a period of not less than seven (7) years
thereafter, as an insured under any directors and officers liability insurance
policy maintained by the Company, which policy shall provide such coverage in
such amounts as the Board of Directors shall deem appropriate for coverage of
all directors and officers of the Company.

 

4.8           Company’s share of the pension and
profit sharing contribution referenced in Section 4.4 and insurance
premiums referenced in Section 4.5 shall not exceed in any calendar year
an aggregate of $50,000.

 

5.             CERTAIN ADDITIONAL PAYMENTS

 

(a)           Anything in this Agreement to the
contrary notwithstanding, in the event it shall be determined that any payment,
benefit or distribution made or provided by the Company or its affiliated
companies to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 5) (a “Payment”) would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the “Code”), or any interest or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the “Excise Tax”),
then the Executive shall be entitled to receive an additional payment (a “Gross-Up
Payment”) in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.

 

(b)           Subject to the provisions of
paragraph 5(c), all determinations required to be made under this paragraph
5(b), including whether and when a Gross-Up Payment is required and the amount
of such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the Company’s public accounting firm (the “Accounting
Firm”) which shall provide detailed supporting calculations both to the Company
and the Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested
by the Company.  In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting any Change in Control which may give rise to the Excise Tax,
the Executive shall appoint another nationally recognized public accounting
firm to make the determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm hereunder).  All fees and

 

 

5

 

expenses of the
Accounting Firm shall be borne solely by the Company.  Any Gross-Up Payment, as determined pursuant
to this paragraph 5(b), shall be paid by the Company to the Executive within
five days of the receipt of the Accounting Firm’s determination.  If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with a
written opinion that failure to report the Excise Tax on the Executive’s
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty.  Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive.  As a result of the
uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made (“Underpayment”), consistent with the calculations required to be made
hereunder.  In the event that the Company
exhausts its remedies pursuant to paragraph 5(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.

 

(c)           The Executive shall as soon as
practicable notify the Company in writing of any claim by the Internal Revenue
Service that, if successful, would require the payment by the Company of the
Gross-Up Payment.  Such notification
shall apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid.  The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which the Executive gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect
to such claim is due).  If the Company
notifies the Executive in writing prior to the expiration of such period that
it desires to contest such claim, the Executive shall:

 

(1)           give the Company any information
reasonably requested by the Company relating to such claim,

 

(2)           take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the Company,

 

(3)           cooperate with the Company in good
faith in order effectively to contest such claim, and

 

(4)           permit the Company to participate in
any proceedings relating to such claim; provided, however, that the Company
shall bear and pay directly all costs and expenses (including additional
interest and penalties) incurred in connection with such contest and shall
indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or income tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of costs and
expenses.  Without limitation on the
foregoing provisions of this paragraph 5(c) the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or

 

 

6

 

contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided further, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect thereto) imposed with respect
to such advance or with respect to any imputed income with respect to such
advance; and provided further, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount.  Furthermore, the
Company’s control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by
the Internal Revenue Service or any other taxing authority.

 

(d)           If, after the receipt by the
Executive of an amount advanced by the Company pursuant to paragraph 5(c), the
Executive becomes entitled to receive, and receives, any refund with respect to
such claim, the Executive shall (subject to the Company’s complying with the
requirements of paragraph 5(c)) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after taxes
applicable thereto).  If, after the
receipt by the Executive of an amount advanced by the Company pursuant to
paragraph 5(c), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of 30 days after such determination, then such advance
shall be deemed paid to Executive and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.

 

(e)           Notwithstanding the foregoing, all
Gross-Up Payments and adjustments shall be paid no later than the end of the
calendar year following the year in which the Executive remits the related
taxes as necessary to comply with Code Section 409A.

 

6.             EXCLUSIVE EMPLOYMENT, CONFIDENTIAL INFORMATION, ETC.

 

6.1           Non-Solicitation.  Executive’s employment hereunder is on an
exclusive basis, and during the period of Executive’s employment hereunder and
thereafter, in the event of Executive’s voluntary resignation without “Good
Reason,” for a period of 12 months following the date of such resignation (the “Non-Solicitation
Period”), Executive will not (x) directly or indirectly, engage, employ or
solicit the employment of any person who is then or has been within six (6) months
prior thereto, an employee of the Company or any of the Company’s affiliates or
predecessors, or (y) request, advise or suggest to any customer or
supplier to the Company that such person curtail, cancel or withdraw its
business from the Company.

 

6.2           Confidential Information.  Executive shall not during the Employment
Term or at any time thereafter use for Executive’s own purposes, or disclose to
or for the benefit of any third party, any trade secret or other confidential
information of the Company or any of its affiliates or predecessors (except as
may be required by law or in the performance of Executive’s duties hereunder),
and Executive will comply with any confidentiality obligations of the

 

 

7

 

Company to third
parties.  Notwithstanding the foregoing,
confidential information shall be deemed not to include information which (i) is
or becomes generally available to the public other than as a result of a
disclosure by Executive or any other person who directly or indirectly receives
such information from Executive or at Executive’s direction or (ii) is or
becomes available to Executive on a non-confidential basis from a source which
is entitled to disclose it to Executive.

 

6.3           Company Ownership.  The results and proceeds of Executive’s
services hereunder, including, without limitation, any works of authorship
resulting from Executive’s services during Executive’s employment with the
Company or any of its affiliates or predecessors and any works in progress,
shall be works-made-for-hire and the Company shall be deemed the sole owner
throughout the universe of any and all rights of whatsoever nature therein,
whether or not now or hereafter known, existing, contemplated, recognized or
developed, with the right to use the same in perpetuity in any manner the
Company determines in its sole discretion without any further payment to
Executive whatsoever.  If for any reason
any of such results and proceeds shall not legally be a work-for-hire or there
are any rights which do not accrue to the Company under the preceding sentence,
then Executive hereby irrevocably assigns and agrees to assigns any and all of
Executive’s right, title and interest thereto, including, without limitation,
any and all copyrights, patents, trade secrets, trademarks and/or other rights
of whatsoever nature therein, whether or not now or hereafter known, existing,
contemplated, recognized or developed to the Company, and the Company shall
have the right to use the same in perpetuity throughout the universe in any
manner the Company determines without any further payment to Executive
whatsoever.  Executive shall, from time
to time as may be requested by the Company, do any and all things which the
Company may deem useful or desirable to establish or document the Company’s
exclusive ownership of any and all rights in any such results and proceeds,
including, without limitation, the execution of appropriate copyright and/or
patent applications or assignments.  To
the extent Executive has any rights in the results and proceeds of Executive’s
services that cannot be assigned in the manner described above, Executive
unconditionally and irrevocably waive the enforcement of such rights.  This paragraph 6.3 is subject to, and shall
not be deemed to limit, restrict, or constitute any waiver by the Company of
any rights of ownership to which the Company may be entitled by operation of
law by virtue of the Company or any of its affiliates or predecessors being
Executive’s employer.

 

6.4           Return of Property.  All documents, data, recordings, or other
property, whether tangible or intangible, including all information stored in
electronic form, obtained or prepared by or for Executive and utilized by
Executive in the course of Executive’s employment with the Company or any of
its affiliates or predecessors shall remain the exclusive property of the
Company; provided however that Executive may remove all such property which was
prepared by or for Executive’s personal use.

 

6.5           Injunctive Relief.  The Company has entered into this Agreement
in order to obtain the benefit of Executive’s unique skills, talent, and
experience.  Executive acknowledges and
agrees that any violation of paragraphs 6.1 through 6.4 hereof will result in
irreparable damage to the Company, and accordingly, the Company may obtain
injunctive and other equitable relief for any breach or threatened breach of
such paragraphs, in addition to any other remedies available to the Company.

 

 

8

 

6.6           Survival; Modification of Terms.  Executive’s obligations under paragraphs 6.1
through 6.4 hereof shall remain in full force and effect for the entire period
provided therein notwithstanding the termination of the Employment Term
pursuant to Section 7 hereof or otherwise. 
Executive and the Company agree that the restrictions and remedies
contained in paragraphs 6.1 through 6.4 are reasonable and that it is Executive’s
intention and the intention of the Company that such restrictions and remedies
shall be enforceable to the fullest extent permissible by law.  If it shall be found by a court of competent
jurisdiction that any such restriction or remedy is unenforceable but would be
enforceable if some part thereof were deleted or the period or area of
application reduced, then such restriction or remedy shall apply with such
modification as shall be necessary to make it enforceable.

 

7.             TERMINATION

 

7.1           Disability or Death.  In the event Executive, as a result of his
medical condition, is not expected to be substantially able to perform
Executive’s duties for a six (6) consecutive month period, the Board at
any time after such disability has in fact continued for 60 consecutive days,
may determine (“the Disability Determination”) that the Company requires such
duties and responsibilities be performed by another executive.  The Executive’s employment hereunder shall
automatically terminate upon his death.

 

7.2           Voluntary Resignation.  The Executive’s employment hereunder shall
automatically be terminated upon the Executive’s voluntary resignation from the
Company.  Executive’s resignation shall
be in writing and specify an effective date no less than thirty (30) days after
the date of notice.

 

7.3           Termination for Cause.  The Company may, at its option, terminate
Executive’s employment under this Agreement for “Cause” in the manner herein
set forth, and the Company shall thereafter have no further obligations under
this Agreement, including, without limitation, any obligation to pay Salary or
Bonus or provide benefits under this Agreement for any period subsequent to
termination.  For purposes of this
Agreement, “Cause” shall mean embezzlement, fraud or other conduct related to
the Company which would constitute a felony, conviction of a felony, or if
Executive materially breaches this Agreement (including, without limitation,
Executive’s continued failure (to the extent which would constitute “gross
negligence”) or refusal substantially to perform Executive’s lawful obligations
under Sections 2 or 6 hereof, except in the event of Executive’s disability as
set forth in paragraph 7.1).

 

Notwithstanding the foregoing, termination by the
Company for Cause shall not be effective until and unless (i) in the event
of any act or circumstance alleged to be a basis for termination for “Cause”,
the Executive is given written notice by the Board of such alleged act or
circumstance, and such alleged act or circumstance shall not have been cured by
the Executive within 20 days of receipt of such notice, to the satisfaction of
the Board in the exercise of its reasonable judgment (or, if within such 20-day
period the Executive commences and proceeds to take all reasonable actions to
effect such cure, within such reasonable additional time period (no longer than
60 days) as may be necessary), and (ii) notice of intention to terminate
for Cause has been given by the Company within sixty (60) days after the Board
learns of the act, failure or event constituting “Cause,” and (iii) the
Board has voted (at an in-person meeting of the Board duly called and held as
to which termination of Executive is an agenda item) by a vote of at least

 

 

9

 

80% of the members of the
Board to terminate Executive for Cause after Executive has been given notice of
the particular acts or circumstances which are the basis for the alleged
termination for Cause and has been afforded at least 20 days notice of the
meeting and an opportunity to present his position in writing and to be present
with his counsel at such meeting and to present his case thereat, and (iv) the
Board has given notice of termination to Executive within three days after such
meeting, and (v) if Executive has commenced an expedited arbitration in
the manner prescribed below within 15 days after such notice of termination,
disputing the Company’s right under this Agreement to terminate for Cause, the
Arbitrator shall have determined that the Executive is terminable for
Cause.  Upon the giving of such notice of
termination, (x) Executive shall be deemed suspended with pay until he
shall be deemed to have been terminated for Cause hereunder or until the
Arbitrator shall have determined that Executive is not terminable for Cause and
(y) while suspended, Executive shall cease to act as an executive of the
Company and shall depart the premises of the Company.  If Executive or his representative fails to
file a demand for arbitration with the American Arbitration Association (“AAA”)
and pay the requisite fees pursuant to the national Rules of the AAA
within 15 days of receipt of notice of termination from the Board, and
diligently pursue such proceeding in accordance with the procedures set forth
in Section 14 hereof; such termination shall be conclusively presumed to
have been for Cause.

 

7.4           “Good Reason” Termination.

 

(a)           Executive may resign and terminate
Executive’s employment hereunder for “Good Reason” at any time during the
Employment Term by written notice to the Company not more than sixty (60) days
after the occurrence of the event constituting “Good Reason”.  Such notice shall state an effective date no
earlier than 30 days after the date it is given and no later than twelve (12)
months after the occurrence of the event constituting Good Reason.  The Company shall have 30 days from the
giving of such notice within which to cure. 
Good Reason shall mean any of the following, without Executive’s prior
written consent (other than in connection with the termination of Executive’s
employment for “Cause” (as defined above) or in connection with Executive’s
Disability):

 

(1)           the assignment to Executive by the
Company of duties inconsistent with Executive’s positions, duties,
responsibilities, titles or offices, or the withdrawal of a material part of
Executive’s responsibilities or a change in Executive’s reporting relationship,
as set forth in Section 2;

 

(2)           a reduction by the Company in
Executive’s Base Salary or Bonus set forth in Section 3 hereof (or other
benefits set forth in Section 4 hereof) as in effect at the date hereof as
the same may be increased from time to time during the Employment Term;

 

(3)           the Company’s requiring Executive to
be based anywhere other than the Los Angeles metropolitan area, except for
required travel on the Company’s business to an extent substantially consistent
with business travel obligations of other senior executives of the Company;

 

 

10

 

(4)           the failure or delay of the Company
to provide to the Executive any of the payments or benefits contemplated in
Sections 3 and 4 hereof or any other material breach by the Company of its
obligations hereunder;

 

(5)           as provided in Section 1 hereof;
or

 

(6)           the failure of the Board or its
nominating committee at any time to nominate Executive for election or
re-election by the shareholders of the Company to the Company’s Board.

 

(b)           Termination Without Cause.  The Company may terminate Executive’s employment
under this Agreement without “Cause” (as defined above in paragraph 7.3) at any
time during the Employment Term by written notice to Executive; provided,
however, that the Company may terminate Executive’s employment pursuant to this
paragraph only with the affirmative vote of eighty percent of the members of
the Board.

 

7.5           Termination Payments, Etc.

 

(a)           In the event that Executive’s
employment terminates pursuant to paragraph 7.4(a) or 7.4(b) hereof,
Executive shall be entitled to receive from the Company (at the Company’s
expense), subject to applicable withholding taxes and subject to paragraph 8
hereof:

 

(1)           a lump sum payment, payable within 30
days of termination, equal to three (3) times the sum of (x) Executive’s
annual Base Salary as provided in paragraph 3.1 on the date of termination plus  (y) bonus
compensation at the annual rate of the highest Bonus and Performance Bonus
amounts received by Executive during any prior fiscal year (but no less than
$460,000);

 

(2)           continuation of medical and dental
insurance coverage for Executive and his family for the greater of three years
or the balance of the Employment Term or, if earlier, the date on which
Executive becomes eligible for substantially equivalent medical and dental
coverage from a third party employer provided without cost to Executive;

 

(3)           continuation of life and disability
insurance coverage as set forth in paragraph 4.5 until the end of the later of (x) three
years after the date of Executive’s employment termination, or (y) the end
of the Employment Term (the amount of such insurance to be reduced by the
amount of any insurance provided by a new employer without cost to Executive);

 

(4)           continuation of Executive’s
perquisites as provided in paragraph 4.6 until the end of the later of (x) three
years after the date of Executive’s employment termination, or (y) the end
of the Employment Term, payable in accordance with the Company’s then effective
payroll practices;

 

(5)           all stock options, stock appreciation
rights and restricted stock to the extent not yet fully vested or having all
restrictions lapse shall become fully vested and non-restricted on the date of
termination of Executive’s employment; and all such stock options and 

 

 

11

 

stock appreciation rights
shall be exercisable for their full stated term as specified at the time of
grant and without further extension thereof;

 

(6)           immediate vesting of Executive’s
rights in all other employee benefit and compensation plans;

 

(7)           fees and disbursements of Executive’s
counsel incurred as a result of the termination of Executive’s employment
during the one-year period following such termination; and

 

(8)           provision of an appropriate office
and secretarial assistance for at least six (6) months after the
termination of Executive’s employment.

 

(b)           The Executive shall be under no
obligation to mitigate the amount of any payment or benefit provided for above
under paragraph 7.5(a) by seeking other employment or otherwise, nor shall
such payments be offset or reduced by any compensation which the Executive may
receive from future employment or otherwise.

 

(c)           The payments and benefits provided
for above in paragraph 7.5(a) are in lieu of, and Executive shall not be a
participant in, any severance or income continuation or income protection under
any Company plan that may now or hereafter exist and shall be deemed to satisfy
and be in full and final settlement of all obligations of the Company for
severance or income continuation or income protection to Executive under this
Agreement.

 

(d)           Except as otherwise provided in
paragraph 7.5(a) (2) through 7.5(a) (6) coverage under all
the Company benefit plans and programs will terminate upon the termination of
Executive’s employment except to the extent otherwise expressly provided in
such plans or programs.

 

7.6           Death or Disability.  If Executive dies prior to the end of the
Employment Term or if the Board makes a Disability Determination, Executive or
his beneficiary or estate shall be entitled to receive (in addition to amounts
and benefits under any life insurance policy or disability program or policy)
Executive’s Salary up to the date on which the death or Disability
Determination occurs and a pro-rated Bonus for the fiscal year in which the
death or Disability Determination occurs payable at the same time such salary
or Bonus would otherwise have been paid had the Executive continued
employment.  In addition, the vesting or
lapsing of restrictions of all stock options, stock appreciation rights and restricted
stock granted to Executive that are not exercisable or remain restricted as of
the date on which the death or Disability Determination occurs shall be
accelerated, and Executive or his beneficiary or estate shall be entitled to
exercise such stock options and stock appreciation rights, together with all
stock options and stock appreciation rights that are exercisable as of the date
of death or Disability Determination, through the stated expiration date of
such stock options and stock appreciation rights.

 

In addition, in the event of such a termination the
Company shall within 20 days of such termination pay to the Executive or his
personal representative, as the case may be, severance pay in a lump sum equal
to his then annual Base Salary for one year as set forth in paragraph 3.1
hereof, subject to compliance with Section 8.

 

 

12

 

7.7           Change of Control.  Notwithstanding any other provision herein,
in order to protect the Executive against the possible consequences and
uncertainties of a Change of Control (as hereinafter defined) of the Company
and thereby induce the Executive to remain in the employ of the Company, the
Company agrees that in the event of a Change of Control this Agreement shall continue
to be operative according to its terms except that:

 

(a)           If the Executive’s employment is
terminated by the Company other than for “Cause” (as defined in paragraph 7.3
hereof) within one year subsequent to a Change of Control or if the Executive
voluntarily terminates such employment within one year subsequent to a Change
of Control for any reason (whether or not Good Reason) (the “Evaluation Period”),
then in either such event, the Executive shall be entitled to the payments and
benefits of paragraph 7.5 as if the termination had occurred under paragraphs
7.4(a) or 7.4(b).

 

(b)           [Intentionally omitted.]

 

(c)           The Company shall pay or reimburse
the Executive for all fees and disbursements of counsel, if any, incurred by
the Executive as a result of the termination of his employment by the Company
or his voluntary termination of such employment during the Evaluation Period
following a Change of Control (including, without limitation, those which may
be incurred by the Executive in seeking to obtain or enforce any right or
benefit provided by this Agreement), subject to compliance with paragraph 8
hereof.

 

(d)           The Executive shall be under no
obligation to mitigate the amount of any payment provided for under this
paragraph 7.7 by seeking other employment or otherwise nor shall such amount be
offset by any compensation which the Executive may receive from future
employment or otherwise.

 

(e)           For purposes of this Agreement, a “Change
in Control” with respect to the Company shall be deemed to have taken place if,
at any time during the Employment Term, any of the following events occur:

 

(1)           Any person, entity or group, as those
terms are used in Section 13(d) and Section 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act’), becomes, is
discovered to be, or files a report on Schedule 13D or 14D-1 (or any successor
schedule, form or report) disclosing that such person, entity or group is, a
beneficial owner (as defined in Rule 13d 1 under the Exchange Act or any
successor rule or regulation), directly or indirectly, of securities of
the Company representing 25% or more of the combined voting power of the
Company’s then outstanding securities entitled to vote generally in the
election of directors;

 

(2)           Individuals who, as of April 1,
2006, constitute the Board of Directors of the Company cease for any reason to
constitute at least a majority of the Board of Directors of the Company, unless
any such change is approved by a vote of at least 80% of the members of the
Board of Directors of the Company (including Executive) in office immediately
prior to such cessation;

 

(3)           The Company is merged, consolidated
or reorganized into or with another corporation or other legal person, or
securities of the Company are exchanged for 

 

 

13

 

securities of another
corporation or other legal person, and immediately after such merger,
consolidation, reorganization or exchange less than a majority of the combined
voting power of the then outstanding securities of such corporation or person
immediately after such transaction are held, directly or indirectly, in the
aggregate by the holders of securities entitled to vote generally in the
election of directors of the Company immediately prior to such transaction;

 

(4)           The Company in any transaction or
series of related transactions, sells all or substantially all of its assets to
any other corporation or other legal person and less than a majority of the
combined voting power of the then-outstanding securities of such corporation or
person immediately after such sale or sales are held, directly or indirectly,
in the aggregate by the holders of securities entitled to vote generally in the
election of directors of the Company immediately prior to such sale;

 

(5)           The Company and its affiliates shall
sell or dispose of (in a single transaction or series of related transactions)
business operations that generated two-thirds of the consolidated revenues
(determined on the basis of the Company’s four most recently completed fiscal
quarters for which reports have been filed under the Exchange Act) of the
Company and its subsidiaries immediately prior thereto;

 

(6)           The Company files a report or proxy
statement with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 disclosing in response to Form 8-K or
Schedule 14A (or any successor schedule, fowl or report or item therein) that a
change in control of the Company has or may have occurred or will or may occur
in the future pursuant to any then existing contract or transaction;

 

(7)           Any Person or Group acquires (or has
acquired during the 12-month period ending on the date of the most recent
acquisition by such Person or Group) assets from the Company that have a total
gross fair market value equal to or more than 40% of the total gross fair
market value of all of the assets of the Company immediately prior to such
acquisition or acquisitions. For this purpose, gross fair market value means
the value of the assets of the Company, or the value of the assets being
disposed of, determined without regard to any liabilities associated with such
assets. However, no Change in Control shall be deemed to occur under this Section 7.7(e) (7) as
a result of a transfer to:

 

(A)          A shareholder of the Company (immediately
before the asset transfer) in exchange for or with respect to its stock;

 

(B)           An entity, 50% or more of the total
value or voting power of which is owned, directly or indirectly, by the
Company;

 

(C)           A Person or Group that owns, directly
or indirectly, 50% or more of the total value or voting power of all the
outstanding stock of the Company; or

 

(D)          An entity, at least 50% of the total
value or voting power of which is owned, directly or indirectly, by a person
described in clause (C) above.

 

For these purposes, the
term “Person” shall mean an individual, Company, association, joint stock
company, business trust or other similar organization, partnership, limited
liability 

 

 

14

 

company, joint venture,
trust, unincorporated organization or government or agency, instrumentality or
political subdivision thereof. The term “Group” shall have the meaning set
forth in Rule 13d-5 of the Securities Exchange Commission, modified to the
extent necessary to comply with Proposed Treasury Regulation Section 1.409A-3(g)(5)(v)(B),
or any successor thereto in effect at the time a determination of whether a
Change of Control has occurred is being made.

 

(8)           Any other transaction or series of
related transactions occur that have substantially the effect of the
transaction specified in any of the preceding clauses in this paragraph 7.7(e).

 

(f)            Notwithstanding the provisions of Section 7.7(e)(1) through
7.7(e)(8) hereof, unless otherwise determined in a specific case by majority
vote of the Board of Directors of the Company, a Change in Control shall not be
deemed to have occurred for purposes of this Agreement solely because (i) the
Company, (ii) an entity in which the Company directly or indirectly
beneficially owns 50% or more of the voting securities or (iii) any
Company- sponsored employee stock ownership plan, or any other employee benefit
plan of the Company, either files or becomes obligated to file a report or a
proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K
or Schedule 14A (or any successor schedule, form or report or item thereon)
under the Exchange Act, disclosing beneficial ownership by it of shares of
stock of the Company, or because of the Company reports that a Change in
Control of the Company has or may have occurred or will or may occur in the
future by reason of such beneficial ownership.

 

8.             IRC 409A AND RABBI TRUST.

 

(a)           All payments of “nonqualified
deferred compensation” (within the meaning of Code Section 409A) are
intended to comply with the requirements of Code Section 409A, and shall
be interpreted in accordance therewith. 
Neither party individually or in combination may accelerate any such
deferred payment, except in compliance with Code Section 409A, and no
amount shall be paid prior to the earliest date on which it is permitted to be
paid under Code Section 409A.  In
the event that the Executive is determined to be a “specified employee” (as
defined and determined under Code Section 409A) of Company at a time when
its stock is deemed to be publicly traded on an established securities market,
payments determined to be “nonqualified deferred compensation” payable
following termination of employment shall be paid only after the earlier of (i) the
last day of the sixth (6th) complete calendar month following such termination
of employment, or (ii) the Executive’s death, consistent with the
provisions of Code Section 409A. 
Any payment delayed by reason of the prior sentence shall be paid out in
a single lump sum on the earliest date permitted under Code Section 409A
in order to catch up to the original payment schedule.  Notwithstanding anything herein to the
contrary, no amendment may be made to this Agreement if it would cause the
Agreement or any payment hereunder not to be in compliance with Code Section 409A.

 

(b)           Unless otherwise expressly provided,
any payment of compensation by Company to the Executive, whether pursuant to
this Agreement or otherwise, shall be made within two and one-half months (21⁄2
months) after the end of the later of the calendar year or the Company’s fiscal
year in which the Executive’s right to such payment vests (i.e., is not subject
to 

 

 

15

 

a substantial risk of
forfeiture for purposes of Code Section 409A).  Such amounts shall not be subject to the
requirements of paragraph 8(a) above applicable to “nonqualified deferred
compensation.”

 

(c)           Paragraph 8(a) above shall not
apply to that portion of any amounts payable solely upon an “involuntary separation
from service” (as defined under Section 409A) to the extent that such
amount does not exceed the lesser of (1) two hundred percent (200%) of the
Executive’s annualized compensation from the Company for the calendar year
immediately preceding the calendar year during which the date of termination
occurs, or (2) two hundred percent (200%) of the annual limitation amount
under Section 401(a)(17) of the Code (the maximum amount of compensation
that may be taken into account for purposes of a tax-qualified retirement plan)
for the calendar year during which the date of termination occurs.

 

(d)           All benefit plans, programs and
policies sponsored by the Company are intended to comply with all requirements
of Code Section 409A or to be structured so as to be exempt from the
application of Code Section 409A. 
All expense reimbursement or in-kind benefits provided under this
Agreement or, unless otherwise specified, under any Company program or policy
shall be subject to the following rules: (i) the amount of expenses
eligible for reimbursement or in-kind benefits provided during one calendar
year may not affect the benefits provided during any other year; (ii) reimbursements
shall be paid no later than the end of the calendar year following the year in
which the Executive incurs such expenses, and the Executive shall take all
actions necessary to claim all such reimbursements on a timely basis to permit
the Company to make all such reimbursement payments prior to the end of said
period, and (iii) the right to reimbursement or in-kind benefits shall not
be subject to liquidation or exchange for another benefit..

 

(e)           Immediately prior to a Change in
Control, involuntary termination without Cause, or voluntary termination for
Good Reason, the Company shall establish a “grantor trust” within the meaning
of sections 671, et.  seq. of the Code
with terms reasonably acceptable to the Executive, for the purpose of
protecting the payment, in the event of a Change in Control of the Company,
involuntary termination without Cause, or voluntary termination for Good
Reason, of any unfunded obligations of the Company to the Executive.  The grantor trust shall be funded only to the
extent consistent with Section 409A(b)(2) of the Code.

 

(f)            A termination of employment shall
not be deemed to have occurred for purposes of any provision of this Agreement
providing for the payment of any amounts or benefits upon or following a
termination of employment unless such termination is also a “separation of
service” within the meaning of Section 409A and, for purposes of any such
provision of this Agreement, references to a “termination,” “termination of
employment” or like terms shall mean “separation from service.”  In addition, for purposes of Section 409A,
each payment that the Executive may be eligible to receive under this Agreement
shall be treated as a separate and distinct payment and shall not collectively
be treated as a single payment.

 

16

 

9.             SUCCESSORS; BINDING AGREEMENT.

 

Neither of the parties hereto shall have the right to
assign this agreement or any rights or obligations hereunder without the prior
written consent of the other party. 
Subject to the foregoing, this Agreement shall inure to the benefit of
and be binding upon the parties and their successors and assigns.

 

10.           COUNTERPARTS.

 

This Agreement may be executed in several
counterparts, each of which shall be an original but together shall constitute
one in the same instrument.

 

11.           NOTICES.

 

Any notice required or permitted to be given under
this Agreement shall be in writing and shall be deemed to have been duly given
when (i) delivered personally; (ii) sent by facsimile or other
similar electronic device and confirm; (iii) delivered by courier or
overnight express; or (iv) three business days after being sent by
registered or certified mail, postage prepaid, addressed as follows:

 

	
  If
  to the Company:

  	
  THQ Inc.

  
	
   

  	
  29903 Agoura Road

  
	
   

  	
  Agoura Hills, California 91301

  
	
   

  	
  Attention: Secretary

  
	
   

  	
   

  
	
  If
  to Executive:

  	
  Brian J. Farrell

  
	
   

  	
  [latest address on file with the Company]

  

 

or to such other address
as a party may furnish to the other party in writing in accordance herewith,
except that notices of change of address shall be effective only upon receipt.

 

12.           GOVERNING LAW.

 

This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of California without reference
to conflicts of laws, principles or rules.

 

13.           WAIVER.

 

No waiver by either party hereto of any provision of
this Agreement shall be deemed a waiver of any preceding or succeeding breach
of such provision or as a waiver of any other provision hereof.

 

 

17

 

14.           ARBITRATION.

 

In the event of any controversy, dispute or claim
arising out of or related to this Agreement or the Executive’s employment by
the Company, the parties shall negotiate in good faith in an attempt to reach a
mutually acceptable settlement of such dispute. 
If negotiations in good faith do not result in a settlement of any such
controversy, dispute or claim, it shall be finally settled by expedited
arbitration in accordance with the National Rules of the American
Arbitration Association governing employment disputes, subject to the
following:

 

(a)           The Arbitrator shall be determined
from a list of names of five impartial arbitrators each of whom shall be an
attorney experienced in arbitration matters concerning executive employment
disputes, supplied by the American Arbitration Association (the “Association”)
and chosen by Executive and the Company each in turn striking a name from the
list until one name remains.

 

(b)           The Arbitrator shall determine
whether and to what extent any party shall be entitled to damages under this
Agreement.

 

(c)           The Arbitrator shall not have the power
to add to nor modify any of the terms or conditions of this Agreement.  The Arbitrator’s decision shall not go beyond
what is necessary for the interpretation and application of the provision of
this Agreement in respect of the issue before the Arbitrator.  The Arbitrator shall not substitute his or
her judgment for that of the parties in the exercise of rights granted or
retained by this Agreement.  The
Arbitrator’s award or other permitted remedy, if any, and the decision shall be
based upon the issue as drafted and submitted by the respective parties and the
relevant and competent evidence adduced at the hearing.

 

(d)           The Arbitrator shall have the
authority to award any remedy or relief provided for in this Agreement, in
addition to any other remedy or relief (including provisional remedies and
relief) that a court of competent jurisdiction could order or grant.  In addition, the Arbitrator shall have the
authority to decide issues relating to the interpretation, meaning or
performance of this Agreement even if such decision would constitute an
advisory opinion in a court proceeding or if the issues would otherwise not be
ripe for resolution in a court proceeding, and any such decision shall bind the
parties in their continuing performance of this Agreement.  The Arbitrator’s written decision shall be
rendered within sixty days of the hearing. 
The decision reached by the Arbitrator shall be final and binding upon
the parties as to the matter in dispute. 
To the extent that the relief or remedy granted by the Arbitrator is
relief or remedy on which a court could enter judgment, a judgment upon the
award rendered by the Arbitrator shall be entered in any court having
jurisdiction thereof (unless in the case of an award of damages, the full
amount of the award is paid within 10 days of its determination by the
Arbitrator).  Otherwise, the award shall
be binding on the parties in connection with their continuing performance of
this Agreement and in any subsequent arbitral or judicial proceedings between
the parties.

 

 

18

 

(e)           The arbitration shall take place in
Los Angeles, California.

 

(f)            The arbitration proceeding and all
filing, testimony, documents and information relating to or presented during
the arbitration proceeding shall be disclosed exclusively for the purpose of
facilitating the arbitration process and for no other purpose and shall be
deemed to be information subject to the confidentiality provisions of this
Agreement.

 

(g)           The parties shall continue performing
their respective obligations under this Agreement notwithstanding the existence
of a dispute while the dispute is being resolved unless and until such
obligations are terminated or expire in accordance with the provisions hereof.

 

(h)           The Arbitrator may order a
pre-hearing exchange of information including depositions, interrogatories,
production of documents, exchange of summaries of testimony or exchange of
statements of position, and the Arbitrator shall limit such disclosure to avoid
unnecessary burden to the parties and shall schedule promptly all discovery and
other procedural steps and otherwise assume case management initiative and
control to effect an efficient and expeditious resolution of the dispute.  At any oral hearing of evidence in connection
with an arbitration proceeding, each party and its counsel shall have the right
to examine its witness and to cross-examine the witnesses of the other
party.  No testimony of any witness shall
be presented in written form unless the opposing party or parties shall have
the opportunity to cross- examine such witness, except as the parties otherwise
agree in writing.

 

(i)            Notwithstanding the dispute
resolution procedures contained in this Section 14, either party may apply
to any court having jurisdiction (i) to enforce this Agreement to
arbitrate, (ii) to seek provisional injunctive relief so as to maintain
the status quo until the arbitration award is rendered or the Dispute is
otherwise resolved, or (iii) to challenge or vacate any final judgment,
award or decision of the Arbitrator that does not comport with the express
provisions of this Section 14.

 

15.           ATTORNEYS’ FEES

 

The Company shall pay or reimburse the Executive for
all reasonable fees and disbursements of the Executive’s counsel in connection
with the negotiation and execution of this Agreement.  In addition, in the event of any arbitration
or judicial proceeding hereunder, the prevailing party shall be entitled to
recover his or its reasonable attorneys fees and costs.

 

16.           HEADINGS.

 

The Article, Section, paragraph and subparagraph
headings are for convenience of reference only and shall not define or limit
the provisions hereof.

 

17.           ENTIRE AGREEMENT.

 

This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and there are no
representations, warranties or commitments except as set forth herein.  This Agreement supersedes any other prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether written or oral, of the parties hereto 

 

 

19

 

relating to the subject
matter of this Agreement.  This Agreement
shall be deemed part of any Award Agreement pursuant to which Executive
receives any equity-based award.  This
Agreement may be amended only in a writing executed by the parties hereto.

 

18.           SEVERABILITY.

 

If any provision of this Agreement, as applied to
either party or to any circumstances, shall be adjudged by a court to be void
or unenforceable, the same shall be deemed stricken from this Agreement and
shall in no way affect any other provision of this Agreement or the validity or
enforceability of this Agreement.

 

19.           SUPERSEDES PREVIOUS AGREEMENT.

 

Effective as of the date of this Agreement, this
Agreement shall supersede and cancel all prior agreements relating to Executive’s
employment by the Company or any of its affiliates and predecessors, including,
without limitation, the employment agreement between Executive and THQ Inc.
dated as of January 1, 2001, and any amendments thereto, and the Amended
and Restated Employment Agreement between such parties dated as of July 20,
2006, and any amendments thereto. 
Notwithstanding the preceding sentence, this Agreement is not intended,
and shall not be construed, to affect Executive’ s rights in any compensation
or benefits that have been granted or accrued prior to the effective date or
rights contained in any Indemnification Agreement entered into prior to the
effective date.

 

IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date and year first above written.

 

	
   

  	
  Company:

  
	
   

  	
   

  
	
   

  	
  THQ
  Inc., a Delaware Corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  	 

	
   

  	
  Its:

  	
   

  	
   

  	 

						

 

	
   

  	
   

  	
   

  
	
   

  	
  Brian
  J. Farrell

  	
   

  

 

 

20

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