Document:

Exhibit 10.1

 

FIRST LOAN MODIFICATION AGREEMENT

 

This First Loan
Modification Agreement (this “Loan Modification Agreement”) is entered into as
of August 5, 2008, by and among (a) SILICON
VALLEY BANK, a California corporation, with its principal place of business
at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan
production office located at One Newton Executive Park, Suite 200, 2221
Washington Street, Newton, Massachusetts 02462 (“Bank”) and (b) NETWORK ENGINES, INC., a Delaware
corporation, with offices at 25 Dan Road, Canton, Massachusetts 02021 (“Network”),
and ALLIANCE SYSTEMS, INC., a Texas
corporation with offices at 3501 East Plano Parkway, Suite 100, Plano,
Texas 75074 (“Alliance”) (Network and Alliance are individually and collectively,
jointly and severally, “Borrower”).

 

1.             DESCRIPTION OF
EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and
obligations which may be owing by Borrower to Bank, Borrower is indebted to
Bank pursuant to a loan arrangement dated as of October 11, 2007,
evidenced by, among other documents, a certain Loan and Security Agreement
dated as of October 11, 2007, between Borrower and Bank (as amended, the “Loan
Agreement”).  Capitalized terms used but
not otherwise defined herein shall have the same meaning as in the Loan
Agreement.

 

2.             DESCRIPTION OF
COLLATERAL.  Repayment of the
Obligations is secured by the Collateral as described in the Loan Agreement
(together with any other collateral security granted to Bank, the “Security
Documents”).

 

Hereinafter, the Security
Documents, together with all other documents evidencing or securing the
Obligations shall be referred to as the “Existing Loan Documents”.

 

3.             DESCRIPTION OF
CHANGE IN TERMS.

 

A.                                   Modifications
to Loan Agreement.

 

1                                          The
Loan Agreement shall be amended by deleting the following text appearing in Section 2.1.2(a) thereof:

 

“The face amount of
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit and any Letter of Credit Reserve) may not exceed Fifteen Million Dollars
($15,000,000.00), inclusive of Credit Extensions relating to Sections 2.1.3 and
2.1.4.”

 

and inserting in lieu
thereof the following:

 

“The face amount of
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit and any Letter of Credit Reserve) may not exceed Ten Million Dollars
($10,000,000.00), inclusive of Credit Extensions relating to Sections 2.1.3 and
2.1.4.”

 

2                                          The
Loan Agreement shall be amended by deleting the following text appearing in Section 2.1.3
thereof:

 

“FX Forward Contracts
shall have a Settlement Date of at least one (1) FX Business Day after the
contract date and shall be subject to a reserve of ten percent (10%) of each
outstanding FX Forward Contract in a maximum aggregate amount equal to One
Million Five Hundred Thousand Dollars ($1,500,000.00) (the “FX Reserve”), inclusive of Credit Extension
relating to Sections 2.1.1, 2.1.2 and 2.1.4. 
The aggregate amount of FX Forward Contracts at any one time may not
exceed ten (10) times the amount of the FX Reserve and the aggregate
amount of FX Forward Contracts may not exceed Fifteen 

 

 

Million Dollars
($15,000,000.00), inclusive of Credit Extensions relating to Sections 2.1.1,
2.1.2 and 2.1.4.”

 

and inserting in lieu
thereof the following:

 

“FX Forward Contracts
shall have a Settlement Date of at least one (1) FX Business Day after the
contract date and shall be subject to a reserve of ten percent (10%) of each
outstanding FX Forward Contract in a maximum aggregate amount equal to One
Million Dollars ($1,000,000.00) (the “FX
Reserve”), inclusive of Credit Extension relating to Sections 2.1.1,
2.1.2 and 2.1.4.  The aggregate amount of
FX Forward Contracts at any one time may not exceed ten (10) times the
amount of the FX Reserve and the aggregate amount of FX Forward Contracts may
not exceed Ten Million Dollars ($10,000,000.00), inclusive of Credit Extensions
relating to Sections 2.1.1, 2.1.2 and 2.1.4.”

 

3                                          The
Loan Agreement shall be amended by deleting the following appearing as Section 2.2
thereof in its entirety:

 

“              2.2          Overadvances.  If, at any time, the Credit Extensions under
Sections 2.1.1, 2.1.2, 2.1.3 and 2.1.4 exceed the lesser of either (a) the
Revolving Line or (b) the Borrowing Base, Borrower shall immediately pay
to Bank in cash such excess.”

 

and inserting in lieu
thereof the following:

 

“              2.2          Overadvances.  If, at any time, the Credit Extensions under
Sections 2.1.1, 2.1.2, 2.1.3 and 2.1.4 exceed the Revolving Line, Borrower
shall immediately pay to Bank in cash such excess.”

 

4                                          The
Loan Agreement shall be amended by deleting the following text appearing in Section 2.4
thereof:

 

“If this Agreement is terminated on or prior to the date that is one (1) year
from the Effective Date (A) by Bank in accordance with clause (ii) in
the foregoing sentence, or (B) by Borrower for any reason, Borrower shall
pay to Bank a termination fee in an amount equal to Seventy-Five Thousand
Dollars ($75,000.00) (the “Early Termination Fee”).”

 

and inserting in lieu
thereof the following:

 

“If this Agreement is terminated on or prior to the date that is one (1) year
from the Effective Date (A) by Bank in accordance with clause (ii) in
the foregoing sentence, or (B) by Borrower for any reason, Borrower shall
pay to Bank a termination fee in an amount equal to Fifty Thousand Dollars
($50,000.00) (the “Early Termination Fee”).”

 

5                                          The
Loan Agreement shall be amended by deleting the following appearing as Section 5.3
thereof in its entirety:

 

“              5.3          Accounts
Receivable.  For any Eligible
Account in any Borrowing Base Certificate, all statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
such Eligible Accounts are and shall be true and correct and all such invoices,
instruments and other documents, and all of Borrower’s Books are genuine and in
all material respects what they purport to be. 
All sales and other transactions 

 

 

underlying or giving rise
to each Eligible Account shall comply in all material respects with all
applicable laws and governmental rules and regulations.  Borrower has no knowledge of any actual
Insolvency Proceeding of any Account Debtor whose accounts are an Eligible
Account in any Borrowing Base Certificate. 
To the best of Borrower’s knowledge, all signatures and endorsements on
all documents, instruments, and agreements relating to all Eligible Accounts
are genuine, and all such documents, instruments and agreements are legally
enforceable in accordance with their terms.”

 

and inserting in lieu
thereof the following:

 

“              5.3          Intentionally
Deleted.”

 

6                                          The
Loan Agreement shall be amended by deleting the following text appearing as Section 6.2(b) thereof
in its entirety:

 

“              (b)           Within twenty (30) days after the last day
of each month, if an Advance is outstanding as of the last day of such month,
deliver to Bank a duly completed Borrowing Base Certificate signed by a
Responsible Officer, with aged listings of accounts receivable (by invoice
date).”

 

and inserting in lieu
thereof the following:

 

“              (b)           Within thirty (30) days after the last day
of each month, if an Advance is outstanding as of the last day of such month,
deliver to Bank aged listings of accounts receivable (by invoice date).”

 

7                                          The
Loan Agreement shall be amended by deleting the following text appearing as Section 6.7(b) thereof
in its entirety:

 

“              (b)           Operating Cash Flow.  Operating Cash Flow of at least (i) One
Million Five Hundred Thousand Dollars ($1,500,000.00) for the quarter ending December 31,
2007, (ii) Five Hundred Thousand Dollars ($500,000.00) for the quarter
ending March 31, 2008, (iii) One Million Five Hundred Thousand
Dollars ($1,500,000.00) for the quarter ending June 30, 2008, and (iv) Two
Million Dollars ($2,000,000.00) for the quarter ending September 30, 2008
and as of the last day of each quarter thereafter.”

 

and inserting in lieu
thereof the following:

 

“              (b)           Operating Cash Flow.  Operating Cash Flow of at least (i) $1,500,000.00
for the quarter ended December 31, 2007, (ii) $500,000.00 for the
quarter ended March 31, 2008, (iii) $3,000,000.00 for the twelve (12)
month period ending September 30, 2008, (iv) $1,000,000.00 for the twelve
(12) month period ending December 31, 2008, (v) ($600,000.00) for the
twelve (12) month periods ending March 31, 2009 and June 30, 2009, (vi) $1.00
for the twelve (12) month period ending September 30, 2009, (vii) $1,000,000.00
for the twelve (12) month period ending December 31, 2009, and (viii) $2,000,000.00
for the twelve (12) month period ending March 31, 2010 and for the twelve
(12) month period ending on the last day of each quarter thereafter.”

 

8              The
Loan Agreement shall be amended by deleting the following definitions,
appearing in Section 13.1 thereof:

 

 

“              “Availability Amount” is (a) the lesser of (i) the
Revolving Line or (ii) the Borrowing Base minus (b) the amount of all
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) plus an amount equal to the Letter of Credit Reserves, minus (c) the
FX Reserve, and minus (d) the outstanding principal balance of any
Advances (including any amounts used for Cash Management Services).”

 

“              “Current Liabilities” are all obligations
and liabilities of Borrower to Bank, plus, without duplication, the aggregate
amount of Borrower’s Total Liabilities that mature within one (1) year.”

 

“              “Operating Cash Flow” is, for each quarter, (a) Borrower’s
consolidated EBITDA, minus (b) Borrower’s consolidated capital
expenditures.”

 

“              “Revolving Line” is an Advance or Advances in an aggregate
amount of up to Fifteen Million Dollars ($15,000,000.00) outstanding at any
time.”

 

“              “Revolving Line Maturity Date”  is
October 9, 2008.”

 

and inserting in lieu
thereof the following:

 

“              “Availability Amount” is (a) the Revolving Line, minus (b) the
amount of all outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit) plus an amount equal to the Letter of Credit Reserves, minus
(c) the FX Reserve, and minus (d) the outstanding principal balance
of any Advances (including any amounts used for Cash Management Services).”

 

“              “Current Liabilities” are all obligations and
liabilities of Borrower to Bank and all of Borrower’s Included Indebtedness,
plus, without duplication, the aggregate amount of Borrower’s Total Liabilities
that mature within one (1) year.”

 

“              “Operating Cash Flow” is, for each quarter, (a) Borrower’s
consolidated EBITDA, minus (b) Borrower’s consolidated capital
expenditures, minus (c) Borrower’s cash taxes.”

 

“              “Revolving Line” is an Advance or Advances in an aggregate
amount of up to Ten Million Dollars ($10,000,000.00) outstanding at any time.”

 

“              “Revolving Line Maturity Date”  is
                        ,
2010 [DATE THAT IS 24 MONTHS AFTER THE DATE OF THE LOAN MODIFICATION
AGREEMENT].”

 

9                                          The
Loan Agreement shall be amended by inserting the following new definition,
appearing alphabetically in Section 13.1 thereof:

 

“              “Included  Indebtedness”
is (a) indebtedness for borrowed money, (b) obligations evidenced by
notes, bonds, debentures or similar instruments, and (c) capital lease
obligations.”

 

10                                    The
Loan Agreement shall be amended by deleting the following definitions,
appearing in Section 13.1 thereof:

 

 

“              “Borrowing Base” is (a) Five Million Dollars, plus (b) eighty
percent (80.0%) of Eligible Accounts, as determined by Bank from Borrower’s
most recent Borrowing Base Certificate; provided, however, that Bank may
decrease the foregoing percentages in its good faith business judgment based on
events, conditions, contingencies, or risks which, as determined by Bank may
adversely affect Collateral.”

 

“              “Borrowing Base Certificate” is that certain certificate in
the form attached hereto as Exhibit C.”

 

“              “Eligible Accounts” are Accounts which arise in the ordinary
course of Borrower’s business that meet all Borrower’s representations and
warranties in Section 5.3.  Bank
reserves the right, at any time and from time to time after the Effective Date,
to adjust any of the criteria set forth below and to establish new criteria in
its good faith business judgment.  Unless
Bank agrees otherwise in writing, Eligible Accounts shall not include:

 

(a)           Accounts for which the
Account Debtor has not been invoiced;

 

(b)           Accounts that the
Account Debtor has not paid within ninety (90) days of invoice date;

 

(c)           Accounts owing from an
Account Debtor, fifty percent (50%) or more of whose Accounts have not been
paid within ninety (90) days of invoice date;

 

(d)           Credit balances over
ninety (90) days from invoice date;

 

(e)           Accounts owing from an
Account Debtor, including Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts (provided that such percentage
shall be fifty percent (50.0%) for
Accounts for which the Account Debtor is EMC) for the amounts that
exceed that percentage, unless Bank approves in writing;

 

(f)            Accounts owing from an
Account Debtor which does not have its principal place of business in the
United States;

 

(g)           Accounts owing from an
Account Debtor which is a federal, state or local government entity or any
department, agency, or instrumentality thereof;

 

(h)           Accounts owing from an
Account Debtor to the extent that Borrower is indebted or obligated in any
manner to the Account Debtor (as creditor, lessor, supplier or otherwise -
sometimes called “contra” accounts, accounts payable, customer deposits or
credit accounts), with the exception of customary credits, adjustments and/or
discounts given to an Account Debtor by Borrower in the ordinary course of its
business;

 

(i)            Accounts for
demonstration or promotional equipment, or in which goods are consigned, or
sold on a “sale guaranteed”, “sale or return”, “sale on approval”, “bill and
hold”, or other terms if Account Debtor’s payment may be conditional;

 

(j)            Accounts for which the
Account Debtor is Borrower’s Affiliate, officer, employee, or agent;

 

 

(k)           Accounts in which the
Account Debtor disputes liability or makes any claim (but only up to the
disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business;

 

(l)            Accounts owing from an
Account Debtor with respect to which Borrower has received deferred revenue
(but only to the extent of such deferred revenue);

 

(m)          Accounts owing from an
Account Debtor with respect to which Borrower maintains a reserve in connection
with Borrower’s provision of a right of return to the Account Debtor (but only
to the extent of such reserve);

 

(n)           Accounts for which Bank
in its good faith business judgment determines collection to be doubtful; and

 

(0)           other Accounts Bank
deems ineligible in the exercise of its good faith business judgment.”

 

11                                    The
Loan Agreement shall be amended by deleting Exhibit C thereof and
inserting in lieu thereof Schedule 1 hereto.

 

12                                    The
Loan Agreement shall be amended by deleting Exhibit D thereof and
inserting in lieu thereof Schedule 2 hereto.

 

4.             FEES.  Borrower shall pay to Bank a modification fee
equal to Fifteen Thousand Dollars ($15,000.00), which fee shall be due on the
date hereof and shall be deemed fully earned as of the date hereof.  In addition, Borrower shall pay to Bank an
anniversary fee equal to Fifteen Thousand Dollars ($15,000.00) (the “Anniversary
Fee”), which Anniversary Fee shall be earned as of the date hereof, and shall
be payable on the earliest to occur of: (i) August 5, 2009 [DATE THAT
IS 12 MONTHS AFTER THE DATE OF THE LOAN MODIFICATION AGREEMENT]; (ii) the occurrence
of an Event of Default; or (iii) the early termination of the Loan
Agreement.  Borrower shall also reimburse
Bank for all legal fees and expenses incurred in connection with this amendment
to the Existing Loan Documents.

 

5.             PERFECTION
CERTIFICATES.

 

(a)           In  connection with this Loan Modification
Agreement, Network delivered to Bank a perfection certificate signed by Network
(the “Perfection Certificate”).  Network
represents and warrants to Bank that: (i) Network’s exact legal name is
that indicated on the Perfection Certificate and on the signature page hereof;
and (ii) Network is an organization of the type, and is organized in the
jurisdiction, set forth in the Perfection Certificate; and (iii) the
Perfection Certificate accurately sets forth Network’s organizational
identification number or accurately states that Network has none; and (iv) the
Perfection Certificate accurately sets forth Network’s place of business, or,
if more than one, its chief executive office as well as Network’s mailing address
if different, and (v) all other information set forth on the Perfection
Certificate pertaining to Network is accurate and complete.

 

(b)           Alliance hereby
ratifies, confirms and reaffirms, all and singular, the terms and disclosures
contained in a certain Perfection Certificate dated as of October 11,
2007, between Alliance and Bank, and acknowledges, confirms and agrees the
disclosures and information Alliance provided to Bank in the Perfection
Certificate have not changed, as of the date hereof.

 

6.             CONSISTENT
CHANGES.  The Existing Loan Documents
are hereby amended wherever necessary to reflect the changes described above.

 

 

7.             RATIFICATION OF
LOAN DOCUMENTS.  Borrower hereby
ratifies, confirms, and reaffirms all terms and conditions of all security or
other collateral granted to the Bank, and confirms that the indebtedness
secured thereby includes, without limitation, the Obligations.

 

8.             NO DEFENSES OF
BORROWER.  Borrower hereby
acknowledges and agrees that, as of the date of this Loan Modification
Agreement, Borrower has no offsets, defenses, claims, or counterclaims against
Bank with respect to the Obligations, or otherwise, and that if Borrower now
has, or ever did have, any offsets, defenses, claims, or counterclaims against
Bank, whether known or unknown, at law or in equity, all of them are hereby
expressly WAIVED and Borrower hereby RELEASES Bank from any liability
thereunder.

 

9.             CONTINUING
VALIDITY.  Borrower understands and
agrees that in modifying the existing Obligations, Bank is relying upon
Borrower’s representations, warranties, and agreements, as set forth in the
Existing Loan Documents.  Except as
expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.  Bank’s agreement to modifications to the
existing Obligations pursuant to this Loan Modification Agreement in no way
shall obligate Bank to make any future modifications to the Obligations.  Nothing in this Loan Modification Agreement
shall constitute a satisfaction of the Obligations.  It is the intention of Bank and Borrower to
retain as liable parties all makers of Existing Loan Documents, unless the
party is expressly released by Bank in writing. 
No maker will be released by virtue of this Loan Modification Agreement.

 

10.           COUNTERSIGNATURE.  This Loan Modification Agreement shall become
effective only when it shall have been executed by Borrower and Bank.

 

[The remainder of this page is
intentionally left blank]

 

 

This Loan Modification
Agreement is executed as a sealed instrument under the laws of the Commonwealth
of Massachusetts as of the date first written above.

 

 

	
  BORROWER:

  	
   

  	
  BANK:

  
	
   

  	
   

  	
   

  
	
  NETWORK
  ENGINES, INC.

  	
   

  	
  SILICON
  VALLEY BANK

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ALLIANCE
  SYSTEMS, INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  	
   

  
									

 

 

Schedule 1

 

EXHIBIT C

 

Intentionally Deleted.

 

 

Schedule 2

 

EXHIBIT D

 

COMPLIANCE CERTIFICATE

 

	
  TO:

  	
  SILICON VALLEY BANK

  	
  Date:

  	
   

  
	
  FROM:

  	
  NETWORK ENGINES, INC. and ALLIANCE SYSTEMS,
  INC.

  	
   

  	
   

  

 

The undersigned
authorized officer of Network Engines, Inc. and Alliance Systems, Inc.
(individually and collectively, jointly and severally, “Borrower”) certifies
that under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the “Agreement”), (1) Borrower is in complete
compliance for the period ending
                              
with all required covenants except as noted below, (2) there are no Events
of Default, (3) all representations and warranties in the Agreement are
true and correct in all material respects on this date except as noted below;
provided, however, that such materiality qualifier shall not be applicable to
any representations and warranties that already are qualified or modified by
materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, (4) Borrower,
and each of its Subsidiaries, has timely filed all required tax returns and
reports, and Borrower has timely paid all foreign, federal, state and local
taxes, assessments, deposits and contributions owed by Borrower except as
otherwise permitted pursuant to the terms of Section 5.9 of the Agreement,
and (5) no Liens have been levied or claims made against Borrower or any
of its Subsidiaries relating to unpaid employee payroll or benefits of which
Borrower has not previously provided written notification to Bank.  Attached are the required documents
supporting the certification.  The
undersigned certifies that these are prepared in accordance with GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.  The
undersigned acknowledges that no borrowings may be requested at any time or
date of determination that Borrower is not in compliance with any of the terms
of the Agreement, and that compliance is determined not just at the date this
certificate is delivered.  Capitalized
terms used but not otherwise defined herein shall have the meanings given them
in the Agreement.

 

Please
indicate compliance status by circling Yes/No under “Complies” column.

 

	
  Reporting Covenant

  	
   

  	
  Required

  	
   

  	
  Complies

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Monthly financial statements with Compliance Certificate

  	
   

  	
  Monthly within 30 days*

  	
   

  	
  Yes No

  	
   

  
	
  10-Q, 10-K and 8-K

  	
   

  	
  Within 5 days after filing with SEC

  	
   

  	
  Yes No

  	
   

  
	
  A/R Agings

  	
   

  	
  Monthly within 30 days (if Obligations are outstanding on last day of
  such month)*

  	
   

  	
  Yes No

  	
   

  
	
  Board Projections

  	
   

  	
  Annually 45 days after FYE

  	
   

  	
  Yes No

  	
   

  

 

*See Section 6.2 of the Loan and
Security Agreement

 

	
  Financial Covenant

  	
   

  	
  Required

  	
   

  	
  Actual

  	
   

  	
  Complies

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maintain on a Quarterly  Basis:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Adjusted Quick Ratio

  	
   

  	
  1.25:1.0

  	
   

  	
  :1.0

  	
   

  	
  Yes No

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating Cash Flow

  	
   

  	
  $

  	
  **

  	
  $

  	
   

  	
  Yes No

  	
   

  

 

**As
set forth in Section 6.7(b) of the Loan and Security Agreement

 

 

The following financial
covenant analyses and information set forth in Schedule 1 attached hereto are
true and accurate as of the date of this Certificate.

 

The following are the
exceptions with respect to the certification above:  (If no exceptions exist, state “No exceptions
to note.”)

 

 

	
  Network Engines, Inc.

  	
  BANK USE
  ONLY

  
	
  Alliance
  Systems, Inc.

  	
   

  
	
   

  	
  Received by:

  	
   

  
	
   

  	
   

  	
  AUTHORIZED SIGNER

  
	
  By:

  	
   

  	
   

  	
  Date:

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Verified:

  	
   

  
	
   

  	
   

  	
  AUTHORIZED SIGNER

  
	
   

  	
  Date:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Compliance Status:         Yes   No

  
											

 

 

Schedule 1 to Compliance Certificate

 

Financial Covenants of Borrower

 

Dated:

 

In the event of a conflict
between this Schedule and the Loan Agreement, the terms of the Loan Agreement
shall control.

 

	
  I.

  	
   

  	
  Adjusted  Quick Ratio
  (Section 6.7(a))

  	
   

  	
   

  

 

	
  Required:

  	
   

  	
  1.25:1.00

  
	
  Actual:

  	
   

  	
         :1.00

  

 

	
  A.

  	
   

  	
  Aggregate
  value of the unrestricted cash of Borrower

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B.

  	
   

  	
  Aggregate value of the
  net billed accounts receivable of Borrower

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C.

  	
   

  	
  Quick Assets (the sum
  of lines A through B)

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  D.

  	
   

  	
  Aggregate value of
  Obligations to Bank

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  E.

  	
   

  	
  Aggregate
  value of liabilities of Borrower (including all Indebtedness) that matures
  within one (1) year and current portion of Subordinated Debt permitted
  by Bank to be paid by Borrower

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  F.

  	
   

  	
  Current
  Liabilities (the sum of lines D and E)

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  G

  	
   

  	
  Deferred Revenue

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  H

  	
   

  	
  Line F minus line G

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  I.

  	
   

  	
  Adjusted Quick Ratio
  (line C divided by line H)

  	
   

  	
   

  

 

Is
line I equal to or greater than 1.25:1:00?

 

	
   

  	
  o 

  	
   No, not in compliance

  	
  o  Yes, in compliance

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  II.

  	
   

  	
  Operating Cash Flow (Section 6.7(b))

  	
   

  	
   

  
									

 

	
  Required:

  	
   

  	
  $              (as
  set forth in Section 6.7(b))

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Actual:

  	
   

  	
  $

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  o 

  	
   No, not in compliance

  	
  o  Yes,
  in complianceExhibit 10.2

 

UTSTARCOM, INC.

 

2006 EQUITY
INCENTIVE PLAN

 

As amended June 27,
2008

 

        1.    Purposes of the Plan.    The
purposes of this Plan are:

 

·  to attract and retain the best available personnel for positions of
substantial responsibility,

 

·  to provide incentives to individuals who perform services to the Company,
and

 

·  to promote the success of the Company’s business.

 

        The
Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options,
Restricted Stock, Restricted Stock Units, Stock Appreciation Rights,
Performance Units, Performance Shares and other stock or cash awards as the
Administrator may determine.

 

        2.    Definitions.    As
used herein, the following definitions will apply:

 

        (a)   “Administrator” means the Board or any of
its Committees as will be administering the Plan, in accordance with Section 4
of the Plan.

 

        (b)   “Affiliate” means any corporation or any
other entity (including, but not limited to, partnerships and joint ventures)
controlling, controlled by, or under common control with the Company.

 

        (c)   “Annual Revenue” means the Company’s or a
business unit’s net sales for the Performance Period, determined in accordance
with generally accepted accounting principles; provided, however, that prior to
the Performance Period, the Administrator shall determine whether any
significant item(s) shall be excluded or included from the calculation of
Annual Revenue with respect to one or more Participants.

 

        (d)   “Applicable Laws” means the requirements
relating to the administration of equity-based awards under U.S. state
corporate laws, U.S. federal and state securities laws, the Code, any stock
exchange or quotation system on which the Common Stock is listed or quoted and
the applicable laws of any foreign country or jurisdiction where Awards are, or
will be, granted under the Plan.

 

        (e)   “Award” means, individually or
collectively, a grant under the Plan of Options, Restricted Stock, Restricted
Stock Units, Stock Appreciation Rights, Performance Units, Performance Shares
and other stock or cash awards as the Administrator may determine.

 

        (f)    “Award Agreement” means the written or
electronic agreement setting forth the terms and provisions applicable to each
Award granted under the Plan. The Award Agreement is subject to the terms and
conditions of the Plan.

 

 

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

 

        (h)   “Cash Collections” means the actual cash or
other freely negotiable consideration, in any currency, received in
satisfaction of accounts receivable created by the sale of any Company products
or services.

 

        (i)    “Change in Control” means the occurrence of
any of the following events:

 

          (i)  Any
“person” (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of
the Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting power represented
by the Company’s then outstanding voting securities;

 

         (ii)  The
consummation of the sale or disposition by the Company of all or substantially
all of the Company’s assets;

 

        (iii)  A
change in the composition of the Board occurring within a two-year period, as a
result of which fewer than a majority of the directors
are Incumbent Directors. “Incumbent Directors” means directors who either (A) are
Directors as of the effective date of the Plan, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but will not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company); or

 

        (iv)  The
consummation of a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity or its parent) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity or its parent outstanding immediately
after such merger or consolidation.

 

        (j)    “Code” means the Internal Revenue Code of
1986, as amended. Any reference to a section of the Code herein will be a
reference to any successor or amended section of the Code.

 

        (k)   “Committee” means a committee of Directors
or of other individuals satisfying Applicable Laws appointed by the Board in
accordance with Section 4 hereof.

 

        (l)    “Common Stock” means the common stock of
the Company.

 

        (m)  “Company” means UTStarcom, Inc., a
Delaware corporation, or any successor thereto.

 

        (n)   “Consultant” means any person, including an
advisor, engaged by the Company or its Affiliates to render services to such
entity.

 

 

        (o)   “Customer Satisfaction MBOs” means as to
any Participant, the objective and measurable individual goals set by a “management
by objectives” process and approved by the Administrator, which goals relate to
the satisfaction of external or internal customer requirements.

 

        (p)   “Determination Date” means the latest
possible date that will not jeopardize the qualification of an Award granted
under the Plan as “performance-based compensation” under Section 162(m) of
the Code.

 

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

 

        (r)   “Disability” means total and permanent
disability as defined in Section 22(e)(3) of
the Code, provided that in the case of Awards other than Incentive Stock
Options, the Administrator in its discretion may determine whether a permanent
and total disability exists in accordance with uniform and non-discriminatory
standards adopted by the Administrator from time to time.

 

        (s)   “Earnings Per Share”
means as to any Performance Period, the Company’s Net Income or a business unit’s
Pro Forma Net Income, divided by a weighted average number of Shares
outstanding and dilutive common equivalent Shares deemed outstanding.

 

        (t)    “Employee” means any person, including
Officers and Directors, employed by the Company or its Affiliates. Neither
service as a Director nor payment of a director’s fee by the Company will be
sufficient to constitute “employment” by the Company.

 

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

 

        (v)   “Fair Market Value” means, as of any date,
the value of Common Stock as the Administrator may determine in good faith by
reference to the price of such stock on any established stock exchange or a
national market system on the day of determination if the Common Stock is so
listed on any established stock exchange or a national market system. If the
Common Stock is not listed on any established stock exchange or a national
market system, the value of the Common Stock will be determined by the
Administrator in good faith.

 

        (w)  “Fiscal Year” means the fiscal year of the
Company.

 

        (x)   “Incentive Stock Option” means an Option
that by its terms qualifies and is otherwise intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.

 

        (y)   “Net Income” means as to any Performance
Period, the income after taxes of the Company determined in accordance with
generally accepted accounting principles, provided that prior to the
Performance Period, the Administrator shall determine whether any significant
item(s) shall be included or excluded from the calculation of Net Income
with respect to one or more participants.

 

 

        (z)   “New Orders” means as to any Performance
Period, the firm orders for a system, product, part, or service that are being
recorded for the first time as defined in the Company’s order recognition
policy.

 

        (aa) “Nonstatutory
Stock Option” means an Option that by its terms does not qualify or
is not intended to qualify as an Incentive Stock Option.

 

        (bb) “Officer”
means a person who is an officer of the Company within the meaning of Section 16
of the Exchange Act and the rules and regulations promulgated thereunder.

 

        (cc) “Operating Profit” means as to any
Performance Period, the difference between revenue and related costs and
expenses, excluding income derived from sources other than regular activities
and before income deductions.

 

        (dd) “Option”
means a stock option granted pursuant to the Plan.

 

        (ee) “Parent”
means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of
the Code.

 

        (ff)  “Participant”
means the holder of an outstanding Award.

 

        (gg) “Performance
Goals” will have the meaning set forth in Section 11 of the
Plan.

 

        (hh) “Performance
Period” means any Fiscal Year of the Company or such other period as
determined by the Administrator in its sole discretion.

 

        (ii)   “Performance Share” means an Award
denominated in Shares which may be earned in whole or in part upon attainment
of Performance Goals or other vesting criteria as the Administrator may
determine pursuant to Section 10.

 

        (jj)   “Performance
Unit” means an Award which may be earned in whole or in part upon
attainment of Performance Goals or other vesting criteria as the Administrator
may determine and which may be settled for cash, Shares or other securities or
a combination of the foregoing pursuant to Section 10.

 

        (kk) “Period of
Restriction” means the period during which the transfer of Shares of
Restricted Stock are subject to restrictions and therefore, the Shares are
subject to a substantial risk of forfeiture. Such restrictions may be based on
the passage of time, the achievement of target levels of performance, or the
occurrence of other events as determined by the Administrator.

 

        (ll)   “Plan”
means this 2006 Equity Incentive Plan.

 

        (mm) “Pro Forma Net
Income” means as to any business unit for any Performance Period,
the Net Income of such business unit, minus allocations of designated corporate
expenses.

 

 

        (nn) “Product
Shipments” means as to any Performance Period, the quantitative and
measurable number of units of a particular product that shipped during such
Performance Period.

 

        (oo) “Restricted
Stock” means Shares issued pursuant to an Award of Restricted Stock
under Section 8 of the Plan, or issued pursuant to the early exercise of
an Option.

 

        (pp) “Restricted Stock Unit” means a bookkeeping
entry representing an amount equal to the Fair Market Value of one Share,
granted pursuant to Section 9. Each Restricted Stock Unit represents an
unfunded and unsecured obligation of the Company.

 

        (qq) “Return on
Designated Assets” means as to any Performance Period, the Pro Forma
Net Income of a business unit, divided by the average of beginning and ending
business unit designated assets, or Net Income of the Company, divided by the
average of beginning and ending designated corporate assets.

 

        (rr)  “Return on
Equity” means, as to any Performance Period, the percentage equal to
the value of the Company’s or any business unit’s common stock investments at
the end of such Performance Period, divided by the value of such common stock
investments at the start of such Performance Period, excluding any common stock
investments so designated by the Administrator.

 

        (ss)  “Return on Sales” means as to any
Performance Period, the percentage equal to the Company’s Net Income or the
business unit’s Pro Forma Net Income, divided by the Company’s or the business
unit’s Annual Revenue.

 

        (tt)  “Rule 16b-3”
means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3,
as in effect when discretion is being exercised with respect to the Plan.

 

        (uu) “Section 16(b)”
means Section 16(b) of the Exchange Act.

 

        (vv) “Service
Provider” means an Employee, Director or Consultant.

 

        (ww) “Share”
means a share of the Common Stock, as adjusted in accordance with Section 14
of the Plan.

 

        (xx) “Stock Appreciation Right” means an Award,
granted alone or in connection with an Option, that pursuant to Section 7
is designated as a Stock Appreciation Right.

 

        (yy) “Subsidiary”
means a “subsidiary corporation,” whether now or hereafter existing, as defined
in Section 424(f) of the Code.

 

        (zz) “Successor
Corporation” has the meaning given to such term in Section 14(c) of
the Plan.

 

 

        3.    Stock Subject to the Plan.

 

        (a)    Stock Subject to the Plan.    Subject
to the provisions of Section 14 of the Plan, the maximum aggregate number
of Shares that may be awarded and sold under the Plan is 4,500,000 Shares plus (i) any
Shares that, as of the date of stockholder approval of this Plan, have been
reserved but not issued pursuant to any awards granted under the Company’s 1997
Stock Plan (the “1997 Plan”), the
Company’s Amended 2001 Director Option Plan (the “2001 Plan”), and the Company’s 2003 Non-Statutory Stock
Option Plan (the “2003 Plan”) and
are not subject to any awards granted thereunder, and (ii) any Shares
subject to stock options or similar awards granted under the 1997 Plan, the
2001 Plan, and the 2003 Plan that expire or otherwise terminate without having
been exercised in full and Shares issued pursuant to awards granted under the
1997 Plan, the 2001 Plan, and the 2003 Plan that are forfeited to or
repurchased by the Company. The Shares may be authorized, but unissued, or reacquired Common Stock.

 

        (b)    Lapsed Awards.    If
an Award expires or becomes unexercisable without having been exercised in
full, or, with respect to Restricted Stock, Restricted Stock Units, Performance
Shares or Performance Units, is forfeited to or repurchased by the Company, the
unpurchased Shares (or for Awards other than Options and Stock Appreciation
Rights, the forfeited or repurchased Shares) which were subject thereto will
become available for future grant or sale under the Plan (unless the Plan has
terminated). With respect to Stock Appreciation Rights, all of the Shares
covered by the Award (that is, Shares actually issued pursuant to a Stock
Appreciation Right, as well as the Shares that represent payment of the
exercise price) will cease to be available under the Plan. However, Shares that
have actually been issued under the Plan under any Award will not be returned
to the Plan and will not become available for future distribution under the
Plan; provided, however, that if unvested Shares of Restricted Stock,
Restricted Stock Units, Performance Shares or Performance Units are repurchased
by the Company or are forfeited to the Company, such Shares will become
available for future grant under the Plan. Shares used to pay the tax and
exercise price of an Award will not become available for future grant or sale
under the Plan. To the extent an Award under the Plan is paid out in cash
rather than Shares, such cash payment will not result in reducing the number of
Shares available for issuance under the Plan. Notwithstanding the foregoing
and, subject to adjustment provided in Section 14, the maximum number of
Shares that may be issued upon the exercise of Incentive Stock Options will
equal the aggregate Share number stated in Section 3(a), plus, to the
extent allowable under Section 422 of the Code, any Shares that become
available for issuance under the Plan under this Section 3(b).

 

(c)  Shares Subject to Options Surrendered in the
2008 Option Exchange Program. 
Notwithstanding anything to the contrary in Section 3(a), no more
than 3.2 million shares covered by stock options granted under the 1997 Plan
that are tendered to the Company pursuant to the stock option exchange program
approved by the Company’s stockholders on June 27, 2008 will become
available for future grant or sale under the Plan.  Shares covered by stock options granted under
the 1997 Plan that are not tendered in the stock option exchange program may
become available for future grant or sale under the Plan as provided in Section 3(b) without
regard to the foregoing limitation.

 

(d)  Determining Number of Shares Awarded and
Available Under the Plan.  For
purposes of determining the number of shares awarded and sold under the Plan as
well as the number of shares remaining available for future grant or sale award
under the Plan, the Administrator will count shares as follows: (i) all
awards granted prior to June 27, 2008 count as one share for every one
share subject to such awards; (ii) all awards granted on or after June 27,
2008 with an exercise price equal to or greater than the fair market value on
the date of grant (such as awards of stock options and stock appreciation
rights) count as one share for every one share subject to such awards; and (iii) all
awards 

 

 

granted on or after June 27, 2008 with an exercise price less than the
fair market value on the date of grant (such as awards of restricted stock and
restricted stock units) count as 1.33 shares for every one share subject to
such awards.  To the extent that a share
that was subject to an award that counted as 1.33 shares pursuant to the
preceding sentence is returned to the Plan as provided in Section 3(b),
the Plan reserve will be credited with 1.33 shares that thereafter will be
available for future grant or sale.

 

        4.    Administration of the Plan.

 

        (a)    Procedure.

 

        (i)    Multiple Administrative Bodies.    Different
Committees with respect to different groups of Service Providers may administer
the Plan.

 

        (ii)    Section 162(m).    To
the extent that the Administrator determines it to be desirable to qualify
Awards granted hereunder as “performance-based compensation” within the meaning
of Section 162(m) of the Code, the Plan will be administered by a
Committee of two or more “outside directors” within the meaning of Section 162(m)
of the Code.

 

        (iii)    Rule 16b-3.    To
the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3,
the transactions contemplated hereunder will be structured to satisfy the
requirements for exemption under Rule 16b-3.

 

        (iv)    Other Administration.    Other than as provided above, the Plan will be administered by (A) the
Board or (B) a Committee, which committee will be constituted to satisfy
Applicable Laws.

 

        (b)    Powers of the Administrator.    Subject
to the provisions of the Plan, and in the case of a Committee, subject to the
specific duties delegated by the Board to such Committee, the Administrator
will have the authority, in its discretion:

 

          (i)  to determine the Fair Market Value;

 

         (ii)  to select the Service Providers to whom Awards may be
granted hereunder;

 

        (iii)  to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Award granted hereunder;

 

        (iv)  to construe and interpret the terms of the Plan and Awards
granted pursuant to the Plan;

 

         (v)  to
prescribe, amend and rescind rules and regulations relating to the Plan,
including rules and regulations relating to sub-plans established for the
purpose of satisfying applicable foreign laws;

 

 

        (vi)  to modify or amend each Award (subject to Section 19(c) of
the Plan). Notwithstanding the previous sentence, the Administrator may not
modify or amend an Option or Stock Appreciation Right to reduce the exercise
price of such Option or Stock Appreciation Right after it has been granted
(except for adjustments made pursuant to Section 14), and neither may the
Administrator cancel any outstanding Option or Stock Appreciation Right and
immediately replace it with a new Option or Stock Appreciation Right with a
lower exercise price;

 

       (vii)  to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Award previously granted by
the Administrator;

 

      (viii)  to
allow a Participant to defer the receipt of the payment of cash or the delivery
of Shares that would otherwise be due to such Participant under an Award pursuant
to such procedures as the Administrator may determine; and

 

        (ix)  to make all other determinations deemed necessary or
advisable for administering the Plan.

 

        (c)    Effect
of Administrator’s Decision.    The
Administrator’s decisions, determinations and interpretations will be final and
binding on all Participants and any other holders of Awards.

 

5.    Eligibility.    Nonstatutory
Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation
Rights, Performance Units, Performance Shares and such other cash or stock
awards as the Administrator determines may be granted to Service Providers.
Incentive Stock Options may be granted only to employees of the Company or any
Parent or Subsidiary of the Company.

 

        6.    Stock Options.

 

        (a)    Limitations.    Each
Option will be designated in the Award Agreement as either an Incentive Stock
Option or a Nonstatutory Stock Option. However, notwithstanding such
designation, to the extent that the aggregate Fair Market Value of the Shares
with respect to which Incentive Stock Options are exercisable for the first
time by the Participant during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options will be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options will be taken into account in the order in which they
were granted. The Fair Market Value of the Shares will be determined as of the
time the Option with respect to such Shares is granted.

 

        (b)    Number of Shares.    The
Administrator will have complete discretion to determine the number of Options
granted to any Participant, provided that during any Fiscal Year, no
Participant will be granted Options covering more than 1,000,000 Shares.
Notwithstanding the foregoing limitation, in connection with a Participant’s
initial service as an Employee, an Employee may be granted Options covering up
to an additional 2,000,000 Shares.

 

 

        (c)    Term of Option.    The
Administrator will determine the term of each Option in its sole discretion.
Any Option granted under the Plan will not be exercisable after the expiration
of seven (7) years from the date of grant or such shorter term as may be
provided in the Award Agreement. Moreover, in the case of an Incentive Stock
Option granted to a Participant who, at the time the Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Incentive Stock Option will be five (5) years
from the date of grant or such shorter term as may be provided in the Award
Agreement.

 

        (d)    Option Exercise Price and
Consideration.

 

        (i)    Exercise Price.    The
per share exercise price for the Shares to be issued pursuant to exercise of an
Option will be determined by the Administrator, but will be no less than 100%
of the Fair Market Value per Share on the date of grant. In addition, in the
case of an Incentive Stock Option granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price will be no less than
110% of the Fair Market Value per Share on the date of grant. Notwithstanding
the foregoing provisions of this Section 6(c), Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a transaction described in, and in a manner
consistent with, Section 424(a) of the Code. The Administrator may
not modify or amend an Option to reduce the exercise price of such Option after
it has been granted (except for adjustments made pursuant to Section 14 of
the Plan) nor may the Administrator cancel any outstanding Option and replace
it with a new Option, Stock Appreciation Right, or other Award with a lower
exercise price, unless, in either case, such action is approved by the Company’s
stockholders.

 

        (ii)    Waiting Period and Exercise Dates.    At
the time an Option is granted, the Administrator will fix the period within
which the Option may be exercised and will determine any conditions that must
be satisfied before the Option may be exercised.

 

        (iii)    Form of Consideration.    The
Administrator will determine the acceptable form(s) of consideration for
exercising an Option, including the method of payment, to the extent permitted
by Applicable Laws.

 

        (e)    Exercise of Option.

 

        (i)    Procedure for Exercise; Rights as a
Stockholder.    Any Option granted hereunder
will be exercisable according to the terms of the Plan and at such times and
under such conditions as determined by the Administrator and set forth in the
Award Agreement. An Option may not be exercised for a fraction of a Share.

 

        An
Option will be deemed exercised when the Company receives: (i) notice of
exercise (in such form as the Administrator specify from time to time) from the
person entitled to exercise the Option, and (ii) full payment for the
Shares with respect to which the Option is exercised (together with an
applicable withholding taxes). No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 14 of the Plan.

 

 

        (ii)    Termination of Relationship as a
Service Provider.    If a Participant ceases to
be a Service Provider, other than upon the Participant’s termination as the
result of the Participant’s death or Disability, the Participant may exercise
his or her Option within such period of time as is specified in the Award Agreement
to the extent that the Option is vested on the date of termination (but in no
event later than the expiration of the term of such Option as set forth in the
Award Agreement). In the absence of a specified time in the Award Agreement,
the Option will remain exercisable for three (3) months following the
Participant’s termination. Unless otherwise provided by the Administrator, if
on the date of termination the Participant is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option will
revert to the Plan. If after termination the Participant does not exercise his
or her Option within the time specified by the Administrator, the Option will
terminate, and the Shares covered by such Option will revert to the Plan.

 

        (iii)    Disability of Participant.    If
a Participant ceases to be a Service Provider as a result of the Participant’s
Disability, the Participant may exercise his or her Option within such period
of time as is specified in the Award Agreement to the extent the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Award Agreement). In the absence of
a specified time in the Award Agreement, the Option will remain exercisable for
twelve (12) months following the Participant’s termination. Unless
otherwise provided by the Administrator, if on the date of termination the
Participant is not vested as to his or her entire Option, the Shares covered by
the unvested portion of the Option will revert to the Plan. If after
termination the Participant does not exercise his or her Option within the time
specified herein, the Option will terminate, and the Shares covered by such
Option will revert to the Plan.

 

        (iv)    Death of Participant.    If
a Participant dies while a Service Provider, the Option may be exercised
following the Participant’s death within such period of time as is specified in
the Award Agreement to the extent that the Option is vested on the date of death
(but in no event may the option be exercised later than the expiration of the
term of such Option as set forth in the Award Agreement), by the Participant’s
designated beneficiary, provided such beneficiary has been designated prior to
Participant’s death in a form acceptable to the Administrator. If no such
beneficiary has been designated by the Participant, then such Option may be
exercised by the personal representative of the Participant’s estate or by the
person(s) to whom the Option is transferred pursuant to the Participant’s
will or in accordance with the laws of descent and distribution. In the absence
of a specified time in the Award Agreement, the Option will remain exercisable
for twelve (12) months following Participant’s death. Unless otherwise
provided by the Administrator, if at the time of death Participant is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option will immediately revert to the
Plan. If the Option is not so exercised within the time specified herein, the
Option will terminate, and the Shares covered by such Option will revert to the
Plan.

 

 

        (v)    Other Termination.    A
Participant’s Award Agreement may also provide that if the exercise of the
Option following the termination of Participant’s status as a Service Provider
(other than upon the Participant’s death or Disability) would result in
liability under Section 16(b), then the Option will terminate on the
earlier of (A) the expiration of the term of the Option set forth in the
Award Agreement, or (B) the 10th day after the last date on which such
exercise would result in such liability under Section 16(b). Finally, a
Participant’s Award Agreement may also provide that if the exercise of the
Option following the termination of the Participant’s status as a Service
Provider (other than upon the Participant’s death or disability) would be
prohibited at any time solely because the issuance of Shares would violate the
registration requirements under the Securities Act, then the Option will
terminate on the earlier of (A) the expiration of the term of the Option,
or (B) the expiration of a period of three (3) months after the
termination of the Participant’s status as a Service Provider during which the
exercise of the Option would not be in violation of such registration
requirements.

 

        7.    Stock Appreciation Rights.

 

        (a)    Grant of Stock Appreciation Rights.    Subject
to the terms and conditions of the Plan, a Stock Appreciation Right may be
granted to Service Providers at any time and from time to time as will be
determined by the Administrator, in its sole discretion.

 

        (b)    Number of Shares.    The
Administrator will have complete discretion to determine the number of Stock
Appreciation Rights granted to any Participant, provided that during any Fiscal
Year, no Participant will be granted Stock Appreciation Rights covering more
than 1,000,000 Shares. Notwithstanding the foregoing limitation, in connection
with a Participant’s initial service as an Employee, an Employee may be granted
Stock Appreciation Rights covering up to an additional 2,000,000 Shares.

 

        (c)    Exercise Price and Other Terms.    The
Administrator, subject to the provisions of the Plan, will have complete
discretion to determine the terms and conditions of Stock Appreciation Rights
granted under the Plan, provided, however, that the exercise price will be not
less than 100% of the Fair Market Value of a Share on the date of grant. The
Administrator may not modify or amend a Stock Appreciation Right to reduce the
exercise price of such Stock Appreciation Right after it has been granted
(except for adjustments made pursuant to Section 14 of the Plan) nor may
the Administrator cancel any outstanding Stock Appreciation Right and replace
it with a new Stock Appreciation Right, Option, or other Award with a lower
exercise price, unless, in either case, such action is approved by the Company’s
stockholders.

 

        (d)    Stock Appreciation Right Agreement.    Each
Stock Appreciation Right grant will be evidenced by an Award Agreement that
will specify the exercise price, the term of the Stock Appreciation Right, the
conditions of exercise, and such other terms and conditions as the
Administrator, in its sole discretion, will determine.

 

        (e)    Expiration of Stock Appreciation
Rights.    A Stock Appreciation Right granted
under the Plan will expire upon the date determined by the Administrator, in
its sole discretion, and set forth in the Award Agreement. Notwithstanding the
foregoing, the rules of Section 6(e) also will apply to Stock
Appreciation Rights.

 

 

        (f)    Payment of Stock Appreciation Right
Amount.    Upon exercise of a Stock Appreciation
Right, a Participant will be entitled to receive payment from the Company in an
amount determined by multiplying:

 

          (i)  The
difference between the Fair Market Value of a Share on the date of exercise
over the exercise price; times

 

         (ii)  The
number of Shares with respect to which the Stock Appreciation Right is
exercised.

 

        At
the discretion of the Administrator, the payment upon Stock Appreciation Right
exercise may be in cash, in Shares of equivalent value, or in some combination
thereof

 

(g)  Term of Stock Appreciation Rights.  The Administrator will determine the term of
each Stock Appreciation Right in its sole discretion.  Any Stock Appreciation Right granted under
the Plan will not be exercisable after the expiration of seven (7) years
from the date of grant or such shorter term as may be provided in the Award
Agreement.

 

        8.    Restricted Stock.

 

        (a)    Grant of Restricted Stock.    Subject
to the terms and provisions of the Plan, the Administrator, at any time and
from time to time, may grant Shares of Restricted Stock to Service Providers in
such amounts as the Administrator, in its sole discretion, will determine.

 

        (b)    Restricted
Stock Agreement.    Each Award of Restricted
Stock will be evidenced by an Award Agreement that will specify the Period of
Restriction, the number of Shares granted, and such other terms and conditions
as the Administrator, in its sole discretion, will determine. Notwithstanding
the foregoing sentence, during any Fiscal Year no Participant will receive more
than an aggregate of 300,000 Shares of Restricted Stock; provided, however,
that in connection with a Participant’s initial service as an Employee, an
Employee may be granted an aggregate of up to an additional 600,000 Shares of
Restricted Stock. Unless the Administrator determines otherwise, Shares of
Restricted Stock will be held by the Company as escrow agent until the
restrictions on such Shares have lapsed.

 

        (c)    Transferability.    Except
as provided in this Section 8, Shares of Restricted Stock may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated until
the end of the applicable Period of Restriction.

 

        (d)    Other Restrictions.    The
Administrator, in its sole discretion, may impose such other restrictions on
Shares of Restricted Stock as it may deem advisable or appropriate.

 

        (e)    Removal of Restrictions.    Except
as otherwise provided in this Section 8, Shares of Restricted Stock
covered by each Restricted Stock grant made under the Plan will be released
from escrow as soon as practicable after the last day of the Period of
Restriction. The Administrator, in its discretion, may accelerate the time at
which any restrictions will lapse or be removed.

 

 

        (f)    Voting Rights.    During
the Period of Restriction, Service Providers holding Shares of Restricted Stock
granted hereunder may exercise full voting rights with respect to those Shares,
unless the Administrator determines otherwise.

 

        (g)    Dividends and Other Distributions.    During
the Period of Restriction, Service Providers holding Shares of Restricted Stock
will be entitled to receive all dividends and other distributions paid with
respect to such Shares unless otherwise provided in the Award Agreement. If any
such dividends or distributions are paid in Shares, the Shares will be subject
to the same restrictions on transferability and forfeitability as the Shares of
Restricted Stock with respect to which they were paid.

 

        (h)    Return of Restricted Stock to
Company.    On the date set forth in the Award
Agreement, the Restricted Stock for which restrictions have not lapsed will
revert to the Company and again will become available for grant under the Plan.

 

        9.    Restricted Stock Units.

 

        (a)    Grant.    Restricted
Stock Units may be granted at any time and from time to time as determined by
the Administrator. Each Restricted Stock Unit grant will be evidenced by an
Award Agreement that will specify such other terms and conditions as the
Administrator, in its sole discretion, will determine, including all terms,
conditions, and restrictions related to the grant, the number of Restricted
Stock Units and the form of payout, which, subject to Section 9(d), may be
left to the discretion of the Administrator. Notwithstanding the anything to
the contrary in this subsection (a), during any Fiscal Year of the Company, no
Participant will receive more than an aggregate of 300,000 Restricted Stock
Units; provided, however, that in connection with a Participant’s initial
service as an Employee, an Employee may be granted an aggregate of up to an
additional 600,000 Restricted Stock Units.

 

        (b)    Vesting Criteria and Other Terms.    The
Administrator will set vesting criteria in its discretion, which, depending on
the extent to which the criteria are met, will determine the number of
Restricted Stock Units that will be paid out to the Participant. After the grant of Restricted Stock Units, the Administrator, in
its sole discretion, may reduce or waive any restrictions for such Restricted
Stock Units. Each Award of Restricted Stock Units will be evidenced by
an Award Agreement that will specify the vesting criteria, and such other terms
and conditions as the Administrator, in its sole discretion, will determine.

 

        (c)    Earning Restricted Stock Units.    Upon
meeting the applicable vesting criteria, the Participant will be entitled to
receive a payout as specified in the Award Agreement. Notwithstanding the
foregoing, at any time after the grant of Restricted Stock Units, the Administrator,
in its sole discretion, may reduce or waive any vesting criteria that must be
met to receive a payout.

 

        (d)    Form and Timing of Payment.    Payment
of earned Restricted Stock Units will be made as soon as practicable after the
date(s) set forth in the Award Agreement. The Administrator, in its sole
discretion, may pay earned Restricted Stock Units in cash, Shares, or a
combination thereof. Shares represented by Restricted Stock Units that are
fully paid in cash again will be available for grant under the Plan.

 

 

        (e)    Cancellation.    On
the date set forth in the Award Agreement, all unearned Restricted Stock Units
will be forfeited to the Company.

 

        10.    Performance Units and
Performance Shares.

 

        (a)    Grant of Performance Units/Shares.    Performance
Units and Performance Shares may be granted to Service Providers at any time
and from time to time, as will be determined by the Administrator, in its sole
discretion. The Administrator will have complete discretion in determining the
number of Performance Units/Shares granted to each Participant provided that
during any Fiscal Year, (a) no Participant will receive Performance Units
having an initial value greater than $2,000,000, and (b) no Participant
will receive more than 300,000 Performance Shares. Notwithstanding the
foregoing limitation, in connection with a Participant’s initial service as an
Employee, an Employee may be granted up to an additional 600,000 Performance
Shares and additional Performance Units having an initial value up to
$2,000,000.

 

        (b)    Value of Performance Units/Shares.    Each
Performance Unit will have an initial value that is established by the
Administrator on or before the date of grant. Each Performance Share will have
an initial value equal to the Fair Market Value of a Share on the date of
grant.

 

        (c)    Performance Objectives and Other
Terms.    The Administrator will set performance
objectives or other vesting provisions (including, without limitation, continued
status as a Service Provider) in its discretion which, depending on the extent
to which they are met, will determine the number or value of Performance
Units/Shares that will be paid out to the Participant. The Administrator may
set performance objectives based upon the achievement of Company-wide,
divisional, or individual goals, or any other basis determined by the
Administrator in its discretion. Each Award of Performance Units/Shares will be
evidenced by an Award Agreement that will specify the Performance Period, and
such other terms and conditions as the Administrator, in its sole discretion,
will determine.

 

        (d)    Earning of Performance Units/Shares.    After
the applicable Performance Period has ended, the holder of Performance
Units/Shares will be entitled to receive a payout of the number of Performance
Units/Shares earned by the Participant over the Performance Period, to be
determined as a function of the extent to which the corresponding performance
objectives or other vesting provisions have been achieved. After the grant of a
Performance Unit/Share, the Administrator, in its sole discretion, may reduce
or waive any performance objectives or other vesting provisions for such
Performance Unit/Share.

 

        (e)    Form and Timing of Payment of
Performance Units/Shares.    Payment of earned
Performance Units/Shares will be made as soon as practicable after the
expiration of the applicable Performance Period. The Administrator, in its sole
discretion, may pay earned Performance Units/Shares in the form of cash, in
Shares (which have an aggregate Fair Market Value equal to the value of the
earned Performance Units/Shares at the close of the applicable Performance
Period) or in a combination thereof.

 

 

        (f)    Cancellation of Performance
Units/Shares.    On the date set forth in the
Award Agreement, all unearned or unvested Performance Units/Shares will be
forfeited to the Company, and again will be available for grant under the Plan.

 

        11.    Performance Goals.    The
granting and/or vesting of Awards of Restricted Stock, Restricted Stock Units,
Performance Shares and Performance Units and other incentives under the Plan
may be made subject to the attainment of performance goals relating to one or
more business criteria within the meaning of Section 162(m) of the
Code and may provide for a targeted level or levels of achievement (“Performance
Goals”) including one or more of the following measures: (a) Annual
Revenue, (b) Cash Collections, (c) Customer Satisfaction MBOs, (d) Earnings
Per Share, (e) Net Income, (f) New Orders, (g) Operating Profit,
(h) Pro Forma Net Income, (i) Return on Designated Assets, (j) Return
on Equity, (k) Return on Sales, and (l) Product Shipments. Any
Performance Goals may be used to measure the performance of the Company as a
whole or a business unit of the Company and may be measured relative to a peer
group or index. The Performance Goals may differ from Participant to
Participant and from Award to Award. Any criteria used may be (i) measured
in absolute terms, (ii) compared to another company or companies, (iii) measured
against the performance of the Company as a whole or a segment of the Company
and/or (iv) measured on a pre-tax or post-tax basis (if applicable). Prior
to the Determination Date, the Administrator will determine whether any
significant element(s) will be included in or excluded from the
calculation of any Performance Goal with respect to any Participant.

 

        12.    Leaves of Absence/Transfer
Between Locations.    Unless the Administrator
provides otherwise, vesting of Awards granted hereunder will be suspended
during any unpaid leave of absence. A Service Provider will not cease to be an
Employee in the case of (i) any leave of absence approved by the Company
or (ii) transfers between locations of the Company or between the Company
and its Affiliates. For purposes of Incentive Stock Options, no such leave may
exceed ninety (90) days, unless reemployment upon expiration of such leave
is guaranteed by statute or contract. If reemployment upon expiration of a
leave of absence approved by the Company is not so guaranteed, then three (3) months
following the ninety-first (91st) day of such leave any Incentive
Stock Option held by the Participant will cease to be treated as an Incentive
Stock Option and will be treated for tax purposes as a Nonstatutory Stock
Option.

 

        13.    Transferability of Awards.    Unless
determined otherwise by the Administrator, an Award may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Participant, only by the Participant. With the approval of the
Administrator, a Participant may, in a manner specified by the Administrator, (a) transfer
an Award to a Participant’s spouse or former spouse pursuant to a
court-approved domestic relations order which relates to the provision of child
support, alimony payments or marital property rights, and (b) transfer an
Option by bona fide gift and not for any consideration, to (i) a member or
members of the Participant’s immediate family, (ii) a trust established
for the exclusive benefit of the Participant and/or member(s) of the
Participant’s immediate family, (iii) a partnership, limited liability
company of other entity whose only partners or members are the Participant
and/or member(s) of the Participant’s immediate family, or (iv) a
foundation in which the Participant and/or member(s) of the Participant’s
immediate family control the management of the foundation’s assets. For
purposes of this Section 13, “immediate family” shall mean the Participant’s
spouse, former spouse, children, grandchildren, parents, grandparents,
siblings, nieces, nephews, parents-in-law, sons-in-law, daughters-in-law,
brothers-in-law, sisters-in-law, including adoptive or step relationships and
any person sharing the Participant’s household (other than as a tenant or
employee).

 

 

        14.    Adjustments; Dissolution or
Liquidation; Merger or Change in Control.

 

        (a)    Adjustments.    In
the event that any dividend or other distribution (whether in the form of cash,
Shares, other securities, or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Shares or other securities of the
Company, or other change in the corporate structure of the Company affecting
the Shares occurs, the Administrator, in order to prevent diminution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, may (in its sole discretion) adjust the number and class of
Shares that may be delivered under the Plan and/or the number, class, and price
of Shares covered by each outstanding Award, and the numerical Share limits set
forth in Sections 3, 6, 7, 8, 9 and 10.

 

        (b)    Dissolution or Liquidation.    In
the event of the proposed dissolution or liquidation of the Company, the
Administrator will notify each Participant as soon as practicable prior to the
effective date of such proposed transaction. To the extent it has not been
previously exercised, an Award will terminate immediately prior to the
consummation of such proposed action.

 

        (c)    Change
in Control.    In the event of a Change in
Control, each outstanding Award will be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation (the “Successor
Corporation”). In the event that the Successor Corporation refuses
to assume or substitute for the Award, the Participant will fully vest in and
have the right to exercise all of his or her outstanding Options and Stock
Appreciation Rights, including Shares as to which such Awards would not
otherwise be vested or exercisable, all restrictions on Restricted Stock will
lapse, and, with respect to Restricted Stock Units, Performance Shares and
Performance Units, all Performance Goals or other vesting criteria will be
deemed achieved at target levels and all other terms and conditions met. In
addition, if the Successor Corporation refuses to assume or substitute an
Option or Stock Appreciation Right in the event of a Change in Control, the
Administrator will notify the Participant in writing or electronically that the
Option or Stock Appreciation Right will be fully vested and exercisable for a
period of time determined by the Administrator in its sole discretion, and the
Option or Stock Appreciation Right will terminate upon the expiration of such
period.

 

        For
the purposes of this subsection (c), an Award will be considered assumed if,
following the Change in Control, the Award confers the right to purchase or
receive, for each Share subject to the Award immediately prior to the Change in
Control, the consideration (whether stock, cash, or other securities or
property) or, in the case of a Stock Appreciation Right upon the exercise of
which the Administrator determines to pay cash or a Performance Share or
Performance Unit which the Administrator can determine to pay in cash, the fair
market value of the consideration received in the merger or Change in Control
by holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the Change in Control
is not solely 

 

 

common stock of the
Successor Corporation, the Administrator may, with the consent of the Successor
Corporation, provide for the consideration to be received upon the exercise of
an Option or Stock Appreciation Right or upon the payout of a Restricted Stock
Unit, Performance Share or Performance Unit, for each Share subject to such
Award (or in the case of an Award settled in cash, the number of implied shares
determined by dividing the value of the Award by the per share consideration
received by holders of Common Stock in the Change in Control), to be solely
common stock of the Successor Corporation equal in fair market value to the per
share consideration received by holders of Common Stock in the Change in
Control.

 

        Notwithstanding
anything in this Section 14(c) to the contrary, an Award that vests,
is earned or paid-out upon the satisfaction of one or more Performance Goals
will not be considered assumed if the Company or its successor modifies any of
such Performance Goals without the Participant’s consent; provided, however, a
modification to such Performance Goals only to reflect the Successor
Corporation’s post-Change in Control corporate structure will not be deemed to
invalidate an otherwise valid Award assumption.

 

        15.    Tax Withholding

 

        (a)    Withholding Requirements.    Prior
to the delivery of any Shares or cash pursuant to an Award (or exercise
thereof), the Company will have the power and the right to deduct or withhold,
or require a Participant to remit to the Company, an amount sufficient to
satisfy federal, state, local, foreign or other taxes required to be withheld
with respect to such Award (or exercise thereof).

 

        (b)    Withholding Arrangements.    The
Administrator, in its sole discretion and pursuant to such procedures as it may
specify from time to time, may permit a Participant to satisfy such tax
withholding obligation, in whole or in part by (without limitation) (a) paying
cash, (b) electing to have the Company withhold otherwise deliverable cash
or Shares having a Fair Market Value equal to the amount required to be
withheld, (c) delivering to the Company already-owned Shares having a Fair
Market Value equal to the amount required to be withheld, or (d) selling a
sufficient number of Shares otherwise deliverable to the Participant through such
means as the Administrator may determine in its sole discretion (whether
through a broker or otherwise) equal to the amount required to be withheld. The
amount of the withholding requirement will be deemed to include any amount
which the Administrator agrees may be withheld at the time the election is
made, not to exceed the amount determined by using the maximum federal, state
or local marginal income tax rates applicable to the Participant with respect
to the Award on the date that the amount of tax to be withheld is to be
determined. The Fair Market Value of the Shares to be withheld or delivered
will be determined as of the date that the taxes are required to be withheld.

 

        16.    No Effect on Employment or
Service.    Neither the Plan nor any Award will
confer upon a Participant any right with respect to continuing the Participant’s
relationship as a Service Provider with the Company, nor will they interfere in
any way with the Participant’s right or the Company’s right to terminate such
relationship at any time, with or without cause, to the extent permitted by
Applicable Laws.

 

 

        17.    Date of Grant.    The
date of grant of an Award will be, for all purposes, the date on which the
Administrator makes the determination granting such Award, or such other later
date as is determined by the Administrator. Notice of the determination will be
provided to each Participant within a reasonable time after the date of such
grant.

 

        18.    Term of Plan.    Subject
to Section 22 of the Plan, the Plan will become effective upon its
adoption by the Board. It will continue in effect for a term of ten (10) years
unless terminated earlier under Section 19 of the Plan.

 

        19.    Amendment and Termination of
the Plan.

 

        (a)    Amendment and Termination.    The
Administrator may at any time amend, alter, suspend or terminate the Plan.

 

        (b)    Stockholder Approval.    The
Company will obtain stockholder approval of any Plan amendment to the extent
necessary and desirable to comply with Applicable Laws.

 

        (c)    Effect of Amendment or Termination.    No
amendment, alteration, suspension or termination of the Plan will impair the
rights of any Participant, unless mutually agreed otherwise between the
Participant and the Administrator, which agreement must be in writing and
signed by the Participant and the Company. Termination of the Plan will not
affect the Administrator’s ability to exercise the powers granted to it
hereunder with respect to Awards granted under the Plan prior to the date of
such termination.

 

        20.    Conditions Upon
Issuance of Shares.

 

        (a)    Legal Compliance.    Shares
will not be issued pursuant to the exercise of an Award unless the exercise of
such Award and the issuance and delivery of such Shares will comply with
Applicable Laws and will be further subject to the approval of counsel for the
Company with respect to such compliance.

 

        (b)    Investment Representations.    As
a condition to the exercise of an Award, the Company may require the person
exercising such Award to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required.

 

        21.    Inability to Obtain Authority.    The
inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company’s counsel to be necessary
to the lawful issuance and sale of any Shares hereunder, will relieve the
Company of any liability in respect of the failure to issue or sell such Shares
as to which such requisite authority will not have been obtained.

 

        22.    Stockholder Approval.    The
Plan will be subject to approval by the stockholders of the Company within
twelve (12) months after the date the Plan is adopted. Such stockholder
approval will be obtained in the manner and to the degree required under
Applicable Laws.

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