Document:

tibb8k07072010ex10_1.htm

 

 

Exhibit 10.1

 

FEDERAL DEPOSIT INSURANCE CORPORATION

WASHINGTON, D.C.

STATE OF FLORIDA

OFFICE OF FINANCIAL REGULATION

TALLAHASSEE, FLORIDA

 

 

 

)

In the Matter of                                                                            )                           CONSENT ORDER

)

)

TIB BANK                                                                                    )

NAPLES, FLORIDA                                                                    )                                FDIC 10-358b

)                           OFR 0747-FI-05/10

)

(Insured State Nonmember Bank)                                             )

)

The Federal Deposit Insurance Corporation (“FDIC”) is the appropriate Federal banking agency for TIB Bank, Naples, Florida (“Bank”), under 12 U.S.C. § 1813(q).

The Bank, by and through its duly elected and acting Board  (“Board”), has executed a “Stipulation to the Issuance of a Consent Order” (“STIPULATION”), dated June 29, 2010, that is accepted by the FDIC and the Florida Office of Financial Regulation (“OFR”).  The OFR may issue an order pursuant to Chapter 120 and Section 655.033, Florida Statutes (2009).

With this Stipulation, the Bank has consented, without admitting or denying any charges of unsafe or unsound banking practices relating to weaknesses in asset quality, capital adequacy, earnings, liquidity, and management effectiveness, to the issuance of this Consent Order (“ORDER”) by the FDIC and the OFR.

Having determined that the requirements for issuance of an order under 12 U.S.C. § 1818(b) and under Chapter 120 and Section 655.033, Florida Statutes have been satisfied, the FDIC and the OFR hereby order that:

1.           BOARD OF DIRECTORS

(a) Immediately upon issuance of this ORDER, the Board shall continue to increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank's activities, consistent with the role and expertise commonly expected for directors of banks of comparable size.  The Board shall continue to prepare in advance and follow a detailed written agenda for each meeting, including consideration of the actions of any committees.  Nothing in the foregoing sentences shall preclude the Board from considering matters other than those contained in the agenda.  This participation shall be consistent with its past practices and continue to include meetings to be held no less frequently than monthly at which, at a minimum, the following areas shall be reviewed and approved:  reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee actions.  Board minutes shall continue to document these reviews and approvals, including the names of any dissenting directors.

       (b) Within 30 days from the effective date of this ORDER, the Board shall establish a Board committee (“Directors’ Committee”), consisting of at least four members, to oversee the Bank’s compliance with the ORDER.  Three of the members of the Directors’ Committee shall not be officers of the Bank.  The Directors’ Committee shall receive from Bank management monthly reports detailing the Bank’s actions with respect to compliance with the ORDER.  The Directors’ Committee shall present a report detailing the Bank’s adherence to the ORDER to the Board at each regularly scheduled Board meeting.  Such report shall be recorded in the appropriate minutes of the Board’s meeting and shall be retained in the Bank’s records.  Establishment of this committee does not in any way diminish the responsibility of the entire Board to ensure compliance with the provisions of this ORDER.

2.           MANAGEMENT

(a) Within 60 days from the effective date of this ORDER, the Bank shall continue to have and retain qualified management with the qualifications and experience commensurate with assigned duties and responsibilities at the Bank.  Each member of management shall be provided appropriate written authority from the Bank's Board to implement the provisions of this ORDER.  At a minimum, management shall include the following:

(i) a chief executive officer with proven ability in managing a bank of comparable size and in effectively implementing lending, investment and operating policies in accordance with sound banking practices;

(ii) a senior lending officer with a significant amount of appropriate lending, collection, and loan supervision experience, and experience in upgrading a low quality loan portfolio; and

(iii) a chief operating officer with a significant amount of appropriate experience in managing the operations of a bank of similar size and complexity in accordance with sound banking practices.

(b) The qualifications of management shall be assessed on its ability to:

(i) comply with the requirements of this ORDER;

(ii) operate the Bank in a safe and sound manner;

(iii) comply with applicable laws and regulations; and

(iv) restore all aspects of the Bank to a safe and sound condition, including, but not limited to, asset quality, capital adequacy, earnings, management effectiveness, risk management, liquidity, and sensitivity to market risk.

(c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's Atlanta Regional Office ("Regional Director") and the OFR (collectively, "Supervisory Authorities"), in writing and within ten business days, of the resignation or termination of any of the Bank’s directors or senior executive officers and provide the reason for the resignation or termination of the individual.  Prior to the addition of any individual to the Board or the employment of any individual as a senior executive officer or executive officer, as those terms are defined in Subpart F of Part 303 of the FDIC Rules and Regulations, 12 C.F.R. §§ 303.101 and Section 655.005, Florida Statutes (2009), the Bank shall comply with the requirements of section 32 of the Federal Deposit Insurance Act (“Act”), 12 U.S.C. § 1831i, and Subpart F of Part 303 of the FDIC Rules and Regulations, 12 C.F.R. §§ 303.100-303.104, and Section 655.0385, Florida Statutes (2009), and Rule 69U-100.03852, Florida Administrative Code.  The notification shall include a description of the background and experience of the individual or individuals to be added or employed and must be received at least 60 days before such addition or employment is intended to become effective.  If the Regional Director or OFR issues a notice of disapproval pursuant to section 32 of the Act, 12 U.S.C. § 1831i, or Section 655.0385(2)  Florida Statutes (2009), with respect to any proposed individual, then such individual may not be added or employed by the Bank.

(d) Within 60 days from the effective date of this ORDER, the Bank shall develop and approve a written analysis and assessment of the Bank's management and staffing needs (“Management Plan”) for the purpose of providing qualified management for the Bank.  The Management Plan shall include, at a minimum:

(i) identification of both the type and number of officer positions needed to properly manage and supervise the affairs of the Bank;

(ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;

(iii) annual written evaluations of all Bank officers, and staff members to determine whether those individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including, but not limited to, adherence to the Bank's established policies and practices, and restoration and maintenance of the Bank in a safe and sound condition;

(iv) a plan to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications to fill those officer or staff member positions consistent with the needs identified in the Management Plan; and

(v) an organizational chart.

(e) The written Management Plan shall also include the requirement that the Board, or a committee thereof consisting of not less than a majority of the individuals who are independent with respect to the Bank, provide supervision over lending, investment and operating policies of the Bank sufficient to ensure that the Bank complies with the provisions of this ORDER.

(f) Such Management Plan and its implementation shall be satisfactory to the Supervisory Authorities.

3.           CAPITAL

(a)           Within 90 days from the effective date of this ORDER, the Bank shall have Tier 1 Capital Ratio in such amount as to equal or exceed eight percent (8%) of its total assets, and shall have Total Risk-Based Capital Ratio in such an amount as to equal or exceed twelve percent (12%) of the Bank’s total risk-based assets.

(b)           Thereafter during the life of this ORDER, the Bank shall maintain a Tier 1 Capital Ratio of at least eight percent (8%) and Total Risk Based Capital Ratio of at least twelve percent (12%).

(c)           The level of Tier 1 Capital to be maintained during the life of this ORDER pursuant to this paragraph shall be in addition to a fully funded allowance for loan and lease losses (“ALLL”), the adequacy of which shall be satisfactory to the Supervisory Authorities as determined at subsequent examinations and/or visitations.

(d)           Any increase in Tier 1 Capital necessary to meet the requirements of this paragraph may be accomplished by the following:

(i) sale of common stock; or

(ii) sale of noncumulative perpetual preferred stock; or

(iii) direct contribution of cash by the Board, shareholders, and/or parent holding company; or

(iv) any other means acceptable to the Supervisory Authorities; or

(v) any combination of the above means.

Any increase in Tier 1 Capital necessary to meet the requirements of this paragraph may not be accomplished through a deduction from the Bank's ALLL.

(e)           If all or part of any necessary increase in Tier 1 Capital required by this paragraph is accomplished by the sale of new securities, the Board shall forthwith take all necessary steps to adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan.  Should the implementation of the plan involve a public distribution of the Bank’s securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws.  Prior to the implementation of the plan and, in any event, not less than fifteen (15) days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Division of Supervision and Consumer Protection, Accounting and Securities Disclosure Section, 550 17th Street, N.W., Room F-6066, Washington, D.C. 20429, and the OFR, Division of Financial Institutions, 200 East Gaines Street, Tallahassee, Florida 32399-0371, for review.  Any changes requested to be made in the plan or materials by the FDIC or the OFR shall be made prior to their dissemination.  If the increase in Tier 1 Capital is provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue, including but not limited to those terms and conditions relative to interest rate and convertibility factor, shall be presented to the Supervisory Authorities for prior approval.

(f)           In complying with the provisions of this paragraph, the Bank shall provide to any subscriber and/or purchaser of the Bank’s securities a written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities.  The written notice required by this paragraph shall be furnished within ten (10) days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.

(g)           For the purposes of this ORDER, the terms "Tier 1 Capital", "total assets",  “Total Risk-Based Capital” and “Total Risk-Based Capital Ratio” shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325 and Appendix A thereto.

4.          CHARGE-OFF

While this ORDER remains in effect, the Bank shall, within 30 days from the receipt of any official Report of Examination of the Bank from the FDIC or the OFR, eliminate from its books, by collection, charge-off, or other proper entries, the remaining balance of any asset classified “Loss” and 50 percent of the those classified “Doubtful” unless otherwise approved in writing by the Supervisory Authorities.

5.           REDUCTION OF CLASSIFIED ASSETS

(a)           Within 60 days from the effective date of this ORDER, the Bank shall update its written plan to reduce the Bank’s risk exposure in each asset in excess of $1,000,000 classified as “Substandard” or “Doubtful” in the FDIC Report of Examination dated January 25, 2010 (“Report”).  In developing the plan mandated by this paragraph, the Bank shall, at a minimum, with respect to each adversely classified loan, review, analyze, and document the financial position of the borrower, including source of repayment, repayment ability, and alternative repayment sources, as well as the value and accessibility of any pledged or assigned collateral, and any possible actions to improve the Bank’s collateral position.

(b)           Within 60 days from the effective date of this ORDER, the Bank shall formulate a written plan to reduce the aggregate balance of assets classified “Substandard” and “Doubtful” in the Report in accordance with the following schedule:

 (i)           within 180 days from the effective date of this ORDER, the Bank shall have reduced the items classified “Substandard” and “Doubtful” in the Report by twenty percent (20%);

(ii)           within 360 days from the effective date of this ORDER, the Bank shall have reduced the items classified “Substandard” and “Doubtful” in the Report by forty percent (40%);

(iii)           within 540 days from the effective date of this ORDER, the Bank shall have reduced the items classified “Substandard” and “Doubtful” in the Report by fifty-five percent (55%); and

(iv)           within 720 days from the effective date of this ORDER, the Bank shall have reduced the items classified “Substandard” and “Doubtful” in the Report by seventy  percent (70%).

(c)           Within 60 days from the effective date of this ORDER, the Bank shall submit the plans required in this paragraph to the Supervisory Authorities for review and comment.  Within 30 days from the receipt of any comment from the Supervisory Authorities, and after due consideration of any recommended changes, the Bank shall approve the plans, which approval shall be recorded in the minutes of the meeting of the Board.  Thereafter, the Bank shall implement and fully comply with the plans.  Such plans shall be monitored and progress reports thereon shall be submitted to the Supervisory Authorities at 90-day intervals concurrently with the other reporting requirements set forth in the PROGRESS REPORTS paragraph of this ORDER.

(d)           The requirements of this paragraph are not to be construed as standards for future operations.  Following compliance with the above reduction schedule, the Bank shall continue to reduce the total volume of adversely classified assets.  As used in this paragraph, the word “reduce” means:

(i) to collect;

(ii) to charge-off; or

to sufficiently improve the quality of assets adversely classified to warrant removing anyadverse classification, as determined by the Supervisory Authorities.

6. RESTRICTION ON FUTURE ADVANCES ON CLASSIFIED CREDITS

(a)           Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “Doubtful” or “Loss” and is uncollected.  The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.

(b)           Additionally, during the life of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been classified, in whole or part, “Substandard”, or is listed for “Special Mention”, and is uncollected.

(c)           Paragraphs 6(a) and (b) shall not apply if the Bank’s failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.  Prior to the extension of any additional credit pursuant to this paragraph, either in the form of a renewal, extension, or further advance of funds, such additional credit shall be approved by a majority of the Board or a designated committee thereof, who shall certify in writing as follows:

(i) why the failure of the Bank to extend such credit would be detrimental to the best interests of the Bank;

(ii) that the Bank’s position would be improved thereby, including an explanatory statement of how the Bank’s position would be improved; and

(iii) that an appropriate workout plan has been developed and will be implemented in conjunction with the additional credit to be extended.

(d)           The signed certification shall be made a part of the minutes of the Board or its designated committee and a copy of the signed certification shall be retained in the borrower’s credit file.

7.           CONCENTRATIONS

Within 60 days from the effective date of this ORDER, the Bank shall update its risk segmentation analysis with respect to the concentrations of credit listed on the Concentrations page of the Report.  Concentrations should be identified by product type, geographic distribution, underlying collateral or other asset groups, which are considered economically related and in the aggregate represent a large portion of the Bank’s Tier 1 Capital.  The Bank should refer to Financial Institution Letter 104-2006 dated December 12, 2006, titled Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, for information regarding risk segmentation analysis.  A copy of this analysis shall be provided to the Supervisory Authorities and the Board shall develop a plan to reduce any segment of the portfolio which the Supervisory Authorities deem to be an undue concentration of credit in relation to the Bank's Tier 1 Capital.  The plan and its implementation shall be in a form and manner acceptable to the Supervisory Authorities as determined at subsequent examinations and/or visitations.

8.           WRITTEN STRATEGIC/BUSINESS PLAN

(a)           Within 30 days from the effective date of this ORDER, the Bank shall prepare and submit to the Supervisory Authorities for review and comment an updated written business/strategic plan covering the overall operation of the Bank.  At a minimum, the plan shall establish objectives for the Bank’s earnings performance, growth, balance sheet mix, liability structure, capital adequacy, and reduction of nonperforming and underperforming assets, together with strategies for achieving those objectives.  The plan shall also identify capital, funding, managerial and other resources needed to accomplish its objectives.  Such plan shall specifically provide for the following:

(i) goals for the composition of the loan portfolio by loan type including strategies to diversify the type and improve the quality of loans held;

(ii) goals for the composition of the deposit base including strategies to reduce reliance on volatile and costly deposits; and

(iii) plans for effective risk management and collection practices.

(b) Within 15 days from the receipt of any comments from the Supervisory Authorities, and after due consideration of any recommended changes, the Board shall approve the business/strategic plan, which approval shall be recorded in the minutes of a Board meeting.

9.           PROFIT PLAN

(a)           Within 60 days from the effective date of this ORDER, the Bank update its written plan to improve and/or sustain Bank earnings.  This plan shall be forwarded to the Supervisory Authorities for review and comment and shall address, at a minimum, the following:

(i) goals and strategies for improving and sustaining the earnings of the Bank;

(ii) the major areas in, and means by which the Bank will seek to improve the Bank’s operating performance;

(iii) realistic and comprehensive budgets;

(iv) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections;

(v) the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and

(vi) coordination of the Bank’s loan, investment, and operating policies and budget and profit planning with the funds management policy.

(b)           Following the end of each calendar quarter, the Board shall continue to evaluate the Bank’s actual performance in relation to the plan required by this paragraph and shall record the results of the evaluation, and any actions taken by the Bank in the minutes of the Board meeting at which such evaluation is undertaken.

(c)           Thereafter, the Bank shall formulate such a plan and budget by November 30 of each subsequent year.  These plans and budgets shall be submitted to the Supervisory Authorities for review and comment by December 15 of each subsequent year.

10.           ALLOWANCE FOR LOAN AND LEASE LOSSES

Throughout the life of this ORDER, the Board shall continue to maintain the adequacy of the ALLL.  For the purpose of this determination, the adequacy of the ALLL shall continue to be determined after the charge-off of all loans or other items classified "Loss".  The policy shall continue to provide for a review of the ALLL at least once each calendar quarter.  Said review shall be completed in time to properly report the ALLL in the quarterly Reports of Condition and Income.  The review shall continue to focus on the results of the Bank's internal loan review, loan and lease loss experience, trends of delinquent and non-accrual loans, an estimate of potential loss exposure of significant credits, concentrations of credit, and present and prospective economic conditions.  Any deficiency in the ALLL shall be remedied in the calendar quarter it is discovered, prior to submitting the Reports of Condition and Income, by a charge to current operating earnings.  The minutes of the Board meeting at which such review is undertaken shall indicate the results of the review.  The Bank's policy for determining the adequacy of the ALLL and its implementation shall continue to be satisfactory to the Supervisory Authorities.

11.           INTEREST RATE RISK MANAGEMENT

Within 60 days from the effective date of this ORDER, the Bank shall revise and implement a written policy for managing interest rate risk in a manner that is appropriate to the size of the Bank and the complexity of its assets recommended in the Report.  The policy shall comply with the Joint Inter-Agency Policy Statement on Interest Rate Risk, shall be consistent with the comments and recommendations detailed in the Report and shall include, at a minimum, the means by which the interest rate risk position will be monitored, the establishment of risk parameters, and provision for periodic reporting to management and the Board regarding interest rate risk with adequate information provided to assess the level of risk.  Such policy and its implementation shall be satisfactory to the Supervisory Authorities.

12.           LIQUIDITY/ASSET/LIABILITY MANAGEMENT

(a)           Within 60 days from the effective date of this ORDER, the Bank shall revise and submit to the Supervisory Authorities for review and comment a written plan relating to  liquidity to include the recommendations included in the Report.  Annually thereafter, while this ORDER is in effect, the Bank shall review this plan for adequacy and, based upon such review, shall make necessary revisions to the plan to strengthen funds management procedures and maintain adequate provisions to meet the Bank’s liquidity needs.

(b)           Within 30 days after the receipt of all such comments from the Supervisory Authorities, and after revising the plan as necessary, the Bank shall adopt the plan, which adoption shall be recorded in the minutes of a Board meeting.  Thereafter, the Bank shall implement and fully comply with the plan.

13.           RESTRICTIONS ON CERTAIN PAYMENTS

(a)           While this ORDER is in effect, the Bank shall not declare or pay dividends or bonuses without the prior written approval of the Supervisory Authorities.  All requests for prior approval shall be received at least 30 days prior to the proposed payment declaration date (at least 5 days with respect to any request filed within the first 30 days after the date of this ORDER) and shall contain, but not be limited to, an analysis demonstrating that the Bank meets criteria set forth in Section 658.37, Florida Statutes, and detailing the impact such dividend or bonus payment would have on the Bank's capital, income, and/or liquidity positions.  The Supervisory Authorities will not approve a dividend or bonus payment unless the Supervisory Authorities determine that such dividend or payment will not have an adverse or unacceptable impact on the Bank’s capital position, cash flow, concentration of credit, asset quality, and ALLL needs.

(b)           During the term of this ORDER, the Bank shall not issue, or make any distributions of interest, principal or other sums on, subordinated debentures without the prior written approval of the Supervisory Authorities.

14.           BROKERED DEPOSITS

(a)           Throughout the effective life of this ORDER, the Bank shall not accept, renew, or rollover any brokered deposit, as defined by 12 C.F.R. § 337.6(a)(2), unless it is in compliance with the requirements of 12 C.F.R. § 337.6(b) governing solicitation and acceptance of brokered deposits by insured depository institutions.

(b)           The Bank shall comply with the restrictions on the effective yields on deposits as described in 12 C.F.R. § 337.6.

15.           NO MATERIAL GROWTH WITHOUT NOTICE

While this ORDER is in effect, the Bank shall notify the Supervisory Authorities at least 60 days prior to undertaking asset growth to five percent (5%) or more per annum or initiating material changes in asset or liability composition.  In no event shall asset growth result in noncompliance with the capital maintenance provisions of this ORDER unless the Bank receives prior written approval from the Supervisory Authorities.

16.           PROGRESS REPORTS

Within 45 days from the end of the first quarter following the effective date of this ORDER, and within 45 days of the end of each quarter thereafter, the Bank shall furnish written progress reports to the Supervisory Authorities detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof.  Such reports shall include a copy of the Bank's Reports of Condition and Income.  Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Supervisory Authorities have released the Bank in writing from making further reports.  All progress reports and other written responses to this ORDER shall be reviewed by the Board and made a part of the minutes of the appropriate Board meeting.

17.          DISCLOSURE

Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Bank's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting.  The description shall fully describe the ORDER in all material respects.  The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Division of Supervision and Consumer Compliance, Accounting and Securities Disclosure Section, 550 17th Street, N.W., Room F-6066, Washington, D.C. 20429, and to the OFR, Division of Financial Institutions, 200 East Gaines Street, Tallahassee, FL 32399-0371, at least fifteen (15) days prior to dissemination to shareholders.  Any changes requested to be made by the FDIC or the OFR shall be made prior to dissemination of the description, communication, notice, or statement.

The provisions of this ORDER shall not bar, estop, or otherwise prevent the FDIC, the OFR, or any other federal or state agency or department from taking any other action against the Bank or any of the Bank’s current or former institution-affiliated parties.

This ORDER shall be effective on the date of issuance.

The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and any successors and assigns thereof.

The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated,

suspended, or set aside in writing.

Issued Pursuant to Delegated Authority.

Dated this 2nd day of July, 2010.

/s/

By:           ________________________

Thomas J. Dujenski

Regional Director

Division of Supervision and Consumer Protection

Atlanta Region

Federal Deposit Insurance Corporation

  

  

  

The Commissioner of the OFR having duly approved the foregoing ORDER, and the Bank, through its Board, agree that the issuance of said ORDER by the FDIC shall be binding as between the Bank and the OFR to the same degree and to the same legal effect that such ORDER would be binding if the OFR had issued a separate ORDER that included and incorporated all of the provisions of the foregoing ORDER, pursuant to Chapters 120, 655, and 658, Florida Statutes (2009), including specifically Sections 655.033 and 655.041, Florida Statutes (2009).

Dated this 1st day of July, 2010.

/s/

_______________________________

 

Linda B. Charity

Director

Division of Financial Institutions

Office of Financial Regulation

By Delegated Authority for theCommissioner,

Office of Financial InstitutionsExhibit 10.1

 

GAMEFLY, INC.

 

2002 STOCK PLAN

(as amended)

 

1.                                       Purposes
of the Plan.  The purposes of this 2002  Stock
Plan, as amended June 22, 2010, are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to Employees and Consultants and to promote the success of
the Company’s business.  Options granted
under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant of an option and subject
to the applicable provisions of Section 422 of the Code and the
regulations and interpretations promulgated thereunder.  Stock purchase rights may also be granted
under the Plan.

 

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

 

(a)                                  “Administrator” means the
Board or its Committee appointed pursuant to Section 4 of the Plan.

 

(b)                                 “Affiliate” means an
entity other than a Subsidiary (as defined below) which, together with the
Company, is under common control of a third person or entity.

 

(c)                                  “Applicable
Laws” means the legal requirements relating to the
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any Stock Exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations
and requirements shall be in place from time to time.

 

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

 

(e)                                  “Change
of Control” means a sale of all or substantially all of the
Company’s assets, or any merger, consolidation or other transaction of the
Company with or into another corporation, entity or person, other than a
transaction in which the holders of at least a majority of the voting
securities of the Company outstanding immediately prior to such transaction
continue to hold (either by the voting securities remaining outstanding or by
their being converted into voting securities of the surviving entity) a
majority of the total voting power represented by the voting securities of the
Company, or such surviving entity, outstanding immediately after such
transaction.

 

(f)                                    “Code” means the
Internal Revenue Code of 1986, as amended.

 

(g)                                 “Committee” means one or
more committees or subcommittees of the Board appointed by the Board to
administer the Plan in accordance with Section 4 below.

 

(h)                                 “Common
Stock” means the Common Stock of the Company.

 

 

(i)                                     “Company” means GameFly, Inc.,
a Delaware corporation.

 

(j)                                     “Consultant” means any
person, including an advisor, who is engaged by the Company or any Parent,
Subsidiary or Affiliate to render services and is compensated for such
services, and any director of the Company whether compensated for such services
or not.

 

(k)                                  “Continuous
Service Status” means the absence of any interruption or
termination of service as an Employee or Consultant.  Continuous Service Status as an Employee or
Consultant shall not be considered interrupted in the case of:  (i) sick leave; (ii) military
leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than ninety (90) days,
unless reemployment upon the expiration of such leave is guaranteed by contract
or statute, or unless provided otherwise pursuant to Company policy adopted
from time to time; or (iv) in the case of transfers between locations of
the Company or between the Company, its Parents, Subsidiaries, Affiliates or
their respective successors.  A change in
status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute an interruption of Continuous Service Status.

 

(l)                                     “Corporate
Transaction” means a sale of all or substantially all of the
Company’s assets, or a merger, consolidation or other capital reorganization of
the Company with or into another corporation, entity or person, and includes a
Change of Control.

 

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

 

(n)                                 “Employee” means any
person employed by the Company or any Parent, Subsidiary or Affiliate, with the
status of employment determined based upon such factors as are deemed
appropriate by the Administrator in its discretion, subject to any requirements
of the Code or the Applicable Laws.  The
payment by the Company of a director’s fee to a Director shall not be
sufficient to constitute “employment” of such Director by the Company.

 

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

 

(p)                                 “Fair
Market Value” means, as of any date, the fair market value of the
Common Stock, as determined by the Administrator in good faith on such basis as
it deems appropriate and applied consistently with respect to
Participants.  Whenever possible, the
determination of Fair Market Value shall be based upon the closing price for
the Shares as reported in the Wall Street Journal for the applicable
date.

 

(q)                                 “Incentive
Stock Option” means an Option intended to qualify as an incentive
stock option within the meaning of Section 422 of the Code, as designated
in the applicable Option Agreement.

 

(r)                                    “Listed Security” means any security
of the Company that is listed or approved for listing on a national securities
exchange or designated or approved for designation as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc.

 

2

 

(s)                                  “Named
Executive” means any individual who, on the last day of the
Company’s fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer).  Such officer status shall be determined pursuant
to the executive compensation disclosure rules under the Exchange Act.

 

(t)                                    “Nonstatutory
Stock Option” means an Option not intended to qualify as an
Incentive Stock Option, as designated in the applicable Option Agreement.

 

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

 

(v)                                 “Option
Agreement” means a written document, the form(s) of which
shall be approved from time to time by the Administrator, reflecting the terms
of an Option granted under the Plan and includes any documents attached to or
incorporated into such Option Agreement, including, but not limited to, a
notice of stock option grant and a form of exercise notice.

 

(w)                               “Option
Exchange Program” means a program approved by the
Administrator whereby outstanding Options are exchanged for Options with a
lower exercise price or are amended to decrease the exercise price as a result
of a decline in the Fair Market Value of the Common Stock.

 

(x)                                   “Optioned
Stock” means the Common Stock subject to an Option.

 

(y)                                 “Optionee” means an
Employee or Consultant who receives an Option.

 

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

 

(aa)                            “Participant” means any
holder of one or more Options or Stock Purchase Rights, or the Shares issuable
or issued upon exercise of such awards, under the Plan.

 

(bb)                          “Plan” means this
2002 Stock Plan.

 

(cc)                            “Reporting
Person” means an officer, Director, or greater than ten
percent stockholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.

 

(dd)                          “Restricted
Stock” means Shares of Common Stock acquired pursuant to a
grant of a Stock Purchase Right under Section 11 below.

 

(ee)                            “Restricted
Stock Purchase Agreement” means a written document,
the form(s) of which shall be approved from time to time by the
Administrator, reflecting the terms of a Stock Purchase Right granted under the
Plan and includes any documents attached to such agreement.

 

3

 

(ff)                                “Rule 16b-3” means Rule 16b-3
promulgated under the Exchange Act, as amended from time to time, or any
successor provision.

 

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

 

(hh)                          “Stock
Exchange” means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.

 

(ii)                                  “Stock
Purchase Right” means the right to purchase Common Stock pursuant
to Section 11 below.

 

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

 

(kk)                            “Ten
Percent Holder” means a person who 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.

 

3.                                       Stock
Subject to the Plan.  Subject to the provisions of Section 14
of the Plan, the maximum aggregate number of Shares that may be sold under the
Plan is 5,937,382 Shares of Common Stock. 
The Shares may be authorized, but unissued, or reacquired Common
Stock.  If an award should expire or
become unexercisable for any reason without having been exercised in full, or
is surrendered pursuant to an Option Exchange Program, the unpurchased Shares
that were subject thereto shall, unless the Plan shall have been terminated,
become available for future grant under the Plan.  In addition, any Shares of Common Stock which
are retained by the Company upon exercise of an award in order to satisfy the
exercise or purchase price for such award or any withholding taxes due with
respect to such exercise or purchase shall be treated as not issued and shall
continue to be available under the Plan. 
Shares issued under the Plan and later repurchased by the Company
pursuant to any repurchase right which the Company may have shall not be
available for future grant under the Plan.

 

4.                                       Administration
of the Plan.

 

(a)                                  General.  The Plan shall be administered by the Board
or a Committee, or a combination thereof, as determined by the Board.  The Plan may be administered by different
administrative bodies with respect to different classes of Participants and, if
permitted by the Applicable Laws, the Board may authorize one or more officers
to make awards under the Plan.

 

(b)                                 Committee
Composition.  If a Committee
has been appointed pursuant to this Section 4, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board.  From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) and remove all members of a Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws and, in the case of a Committee administering the Plan in
accordance with the 

 

4

 

requirements
of Rule 16b-3 or Section 162(m) of the Code, to the extent
permitted or required by such provisions.

 

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

 

(i)                                     to determine
the Fair Market Value of the Common Stock, in accordance with Section 2(p) of
the Plan, provided that such determination shall be applied consistently with
respect to Participants under the Plan;

 

(ii)                                  to select the
Employees and Consultants to whom Plan awards may from time to time be granted;

 

(iii)                               to determine
whether and to what extent Plan awards are granted;

 

(iv)                              to determine
the number of Shares of Common Stock to be covered by each award granted;

 

(v)                                 to approve the
form(s) of agreement(s) used under the Plan;

 

(vi)                              to determine
the terms and conditions, not inconsistent with the terms of the Plan, of any
award granted hereunder, which terms and conditions include but are not limited
to the exercise or purchase price, the time or times when awards may be
exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, any pro rata adjustments to
vesting as a result of a Participant’s transitioning from full- to part-time
service (or vice versa), and any restriction or limitation regarding any
Option, Optioned Stock, Stock Purchase Right or Restricted Stock, based in each
case on such factors as the Administrator, in its sole discretion, shall
determine;

 

(vii)                           to determine
whether and under what circumstances an Option may be settled in cash under Section 10(c) instead
of Common Stock;

 

(viii)                        to implement an
Option Exchange Program on such terms and conditions as the Administrator in
its discretion deems appropriate, provided that no amendment or adjustment to
an Option that would materially and adversely affect the rights of any Optionee
shall be made without the prior written consent of the Optionee;

 

(ix)                                to adjust the
vesting of an Option held by an Employee or Consultant as a result of a change
in the terms or conditions under which such person is providing services to the
Company;

 

(x)                                   to construe and
interpret the terms of the Plan and awards granted under the Plan, which
constructions, interpretations and decisions shall be final and binding on all
Participants; and

 

5

 

(xi)                                in order to
fulfill the purposes of the Plan and without amending the Plan, to modify
grants of Options or Stock Purchase Rights to Participants who are foreign
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.

 

5.                                       Eligibility.

 

(a)                                  Recipients
of Grants.  Nonstatutory Stock Options and Stock Purchase
Rights may be granted to Employees and Consultants.  Incentive Stock Options may be granted only
to Employees, provided that Employees of Affiliates shall not be eligible to
receive Incentive Stock Options.

 

(b)                                 Type
of Option.  Each Option shall be designated in the Option
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.

 

(c)                                  ISO
$100,000 Limitation.  Notwithstanding any designation under Section 5(b),
to the extent that the aggregate Fair Market Value of Shares with respect to
which Options designated as Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under all plans of the
Company or any Parent or Subsidiary) exceeds $100,000, such excess Options
shall be treated as Nonstatutory Stock Options. 
For purposes of this Section 5(c), Incentive Stock Options
shall be taken into account in the order in which they were granted, and the
Fair Market Value of the Shares subject to an Incentive Stock Option shall be
determined as of the date of the grant of such Option.

 

(d)                                 No
Employment Rights.  The Plan shall
not confer upon any Participant any right with respect to continuation of an
employment or consulting relationship with the Company, nor shall it interfere
in any way with such Participant’s right or the Company’s right to terminate
the employment or consulting relationship at any time for any reason.

 

6.                                       Term
of Plan.  The Plan shall become effective upon its
adoption by the Board of Directors.  It
shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 16 of the Plan.

 

7.                                       Term
of Option.  The term of each Option shall be the term
stated in the Option Agreement; provided that the term shall be no more than
ten years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Incentive Stock Option granted to a person who at the time of such grant is a Ten
Percent Holder, the term of the Option shall be five years from the date of
grant thereof or such shorter term as may be provided in the Option Agreement.

 

6

 

8.                                       [Reserved.]

 

9.                                       Option
Exercise Price and Consideration.

 

(a)                                  Exercise
Price.  The per
Share exercise price for the Shares to be issued pursuant to exercise of an
Option shall be such price as is determined by the Administrator and set forth
in the Option Agreement, but shall be subject to the following:

 

(i)                                     In the case of
an Incentive Stock Option

 

(A)                              granted to an
Employee who at the time of grant is a Ten Percent Holder, the per Share
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant; or

 

(B)                                granted to any
other Employee, the per Share exercise price shall be no less than 100% of the
Fair Market Value per Share on the date of grant.

 

(ii)                                  In the case of
a Nonstatutory Stock Option

 

(A)                              granted on any
date on which the Common Stock is not a Listed Security to a person who is at
the time of grant is a Ten Percent Holder, the per Share exercise price shall
be no less than 110% of the Fair Market Value per Share on the date of grant if
required by the Applicable Laws and, if not so required, shall be such price as
is determined by the Administrator;

 

(B)                                granted on any
date on which the Common Stock is not a Listed Security to any other eligible
person, the per Share exercise price shall be no less than 85% of the Fair
Market Value per Share on the date of grant if required by the Applicable Laws
and, if not so required, shall be such price as is determined by the
Administrator; or

 

(C)                                granted on any
date on which the Common Stock is a Listed Security to any eligible person, the
per share Exercise Price shall be such price as determined by the Administrator
provided that if such eligible person is, at the time of the grant of such
Option, a Named Executive of the Company, the per share Exercise Price shall be
no less than 100% of the Fair Market Value on the date of grant if such Option
is intended to qualify as performance-based compensation under Section 162(m) of
the Code.

 

(iii)                               Notwithstanding
the foregoing, Options may be granted with a per Share exercise price other
than as required above pursuant to a merger or other corporate transaction.

 

(b)                                 Permissible
Consideration.  The
consideration to be paid for the Shares to be issued upon exercise of an
Option, including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash;
(2) check; (3) delivery of Optionee’s promissory note having such
recourse, interest, security and redemption provisions as the Administrator
determines to be appropriate (subject to the provisions of Section 153 of
the 

 

7

 

Delaware
General Corporation Law); (4) cancellation of indebtedness; (5) other
Shares that have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which the Option is exercised,
provided that in the case of Shares acquired, directly or indirectly, from the
Company, such Shares must have been owned by the Optionee for more than six months
on the date of surrender (or such other period as may be required to avoid the
Company’s incurring an adverse accounting charge); (6) delivery of a
properly executed exercise notice together with such other documentation as the
Administrator and a securities broker approved by the Company shall require to
effect exercise of the Option and prompt delivery to the Company of the sale or
loan proceeds required to pay the exercise price and any applicable withholding
taxes; or (7) any combination of the foregoing methods of payment.  In making its determination as to the type of
consideration to accept, the Administrator shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company and the
Administrator may, in its sole discretion, refuse to accept a particular form
of consideration at the time of any Option exercise.

 

10.                                 Exercise
of Option.

 

(a)                                  General.

 

(i)                                     Exercisability.  Any Option granted hereunder
shall be exercisable at such times and under such conditions as determined by
the Administrator, consistent with the term of the Plan and reflected in the
Option Agreement, including vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee; provided however that, if
required by the Applicable Laws, any Option granted on a date on which the
Common Stock is not a Listed Security shall become exercisable at the rate of
at least 20% per year over five years from the date the Option is
granted.  In the event that any of the
Shares issued upon exercise of an Option (which exercise occurs on a date on
which the Common Stock is not a Listed Security) should be subject to a right
of repurchase in the Company’s favor, such repurchase right shall, if required
by the Applicable Laws, lapse at the rate of at least 20% per year over five
years from the date the Option is granted. 
Notwithstanding the above, in the case of an Option granted to an
officer, Director or Consultant of the Company or any Parent, Subsidiary or
Affiliate of the Company, the Option may become fully exercisable, or a
repurchase right, if any, in favor of the Company shall lapse, at any time or
during any period established by the Administrator.

 

(ii)                                  Leave
of Absence. The Administrator shall have
the discretion to determine whether and to what extent the vesting of Options
shall be tolled during any unpaid leave of absence; provided, however, that in
the absence of such determination, vesting of Options shall be tolled during
any such unpaid leave (unless otherwise required by the Applicable Laws).  In the event of military leave, vesting shall
toll during any unpaid portion of such leave, provided that, upon a Participant’s
returning from military leave (under conditions that would entitle him or her
to protection upon such return under the Uniform Services Employment and
Reemployment Rights Act), he or she shall be given vesting credit with respect
to Options to the same extent as would have applied had the Participant
continued to provide services to the Company throughout the leave on the same
terms as he or she was providing services immediately prior to such leave.

 

8

 

(iii)                               Minimum
Exercise Requirements.  An Option may
not be exercised for a fraction of a Share. 
The Administrator may require that an Option be exercised as to a
minimum number of Shares, provided that such requirement shall not prevent an
Optionee from exercising the full number of Shares as to which the Option is
then exercisable.

 

(iv)                              Procedures
for and Results of Exercise. 
An Option shall be deemed exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised.  Full payment may, as
authorized by the Administrator, consist of any consideration and method of
payment allowable under Section 9(b) of the Plan, provided that the
Administrator may, in its sole discretion, refuse to accept any form of
consideration at the time of any Option exercise.

 

Exercise
of an Option in any manner shall result in a decrease in the number of Shares
that thereafter may be available, both for purposes of the Plan and for sale
under the Option, by the number of Shares as to which the Option is exercised.

 

(v)                                 Rights
as Stockholder.  Until the
issuance of the Shares (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company), no right to
vote or receive dividends or any other rights as a stockholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.  No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 14 of the Plan.

 

(b)                                 Termination
of Employment or Consulting Relationship.  Except as otherwise set forth in this Section 10(b),
the Administrator shall establish and set forth in the applicable Option
Agreement the terms and conditions upon which an Option shall remain
exercisable, if at all, following termination of an Optionee’s Continuous
Service Status, which provisions may be waived or modified by the Administrator
at any time.  Unless the Administrator
otherwise provides in the Option Agreement, to the extent that the Optionee is
not vested in Optioned Stock at the date of termination of his or her
Continuous Service Status, or if the Optionee (or other person entitled to
exercise the Option) does not exercise the Option to the extent so entitled
within the time specified in the Option Agreement or below (as applicable), the
Option shall terminate and the Optioned Stock underlying the unexercised
portion of the Option shall revert to the Plan. 
In no event may any Option be exercised after the expiration of the
Option term as set forth in the Option Agreement (and subject to Section 7).

 

The
following provisions (1) shall apply to the extent an Option Agreement
does not specify the terms and conditions upon which an Option shall terminate
upon termination of an Optionee’s Continuous Service Status, and (2) establish
the minimum post-termination exercise periods that may be set forth in an
Option Agreement:

 

(i)                                     Termination
other than Upon Disability or Death. 
In the event of termination of an Optionee’s Continuous Service Status,
such Optionee may exercise an Option for 30 days following such termination to
the extent the Optionee was vested in the Optioned Stock as of the date of such
termination.  No termination shall be
deemed to occur and 

 

9

 

this
Section 10(b)(i) shall not apply if (i) the Optionee is a
Consultant who becomes an Employee, or (ii) the Optionee is an Employee
who becomes a Consultant.

 

(ii)                                  Disability
of Optionee.  In the event of
termination of an Optionee’s Continuous Service Status as a result of his or
her disability (including a disability within the meaning of Section 22(e)(3) of
the Code), such Optionee may exercise an Option at any time within six months
following such termination to the extent the Optionee was vested in the
Optioned Stock as of the date of such termination.

 

(iii)                               Death
of Optionee.  In the event of the death of an Optionee
during the period of Continuous Service Status since the date of grant of the
Option, or within thirty days following termination of Optionee’s Continuous
Service Status, the Option may be exercised by Optionee’s estate or by a person
who acquired the right to exercise the Option by bequest or inheritance at any
time within twelve months following the date of death, but only to the extent
the Optionee was vested in the Optioned Stock as of the date of death or, if
earlier, the date the Optionee’s Continuous Service Status terminated.

 

(c)                                  Buyout
Provisions.  The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted under the
Plan based on such terms and conditions as the Administrator shall establish
and communicate to the Optionee at the time that such offer is made.

 

11.                                 Stock
Purchase Rights.

 

(a)                                  Rights
to Purchase.  When the Administrator determines that it
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing of the terms, conditions and restrictions related to the offer,
including the number of Shares that such person shall be entitled to purchase,
the price to be paid, and the time within which such person must accept such
offer.  In the case of a Stock Purchase
Right granted prior to the date, if any, on which the Common Stock becomes a
Listed Security and if required by the Applicable Laws at that time, the purchase
price of Shares subject to such Stock Purchase Rights shall not be less than
85% of the Fair Market Value of the Shares as of the date of the offer, or, in
the case of a Ten Percent Holder, the price shall not be less than 100% of the
Fair Market Value of the Shares as of the date of the offer.  If the Applicable Laws do not impose the
requirements set forth in the preceding sentence and with respect to any Stock
Purchase Rights granted after the date, if any, on which the Common Stock
becomes a Listed Security, the purchase price of Shares subject to Stock
Purchase Rights shall be as determined by the Administrator.  The offer to purchase Shares subject to Stock
Purchase Rights shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.

 

(b)                                 Repurchase
Option.

 

(i)                                     General. Unless the
Administrator determines otherwise, the Restricted Stock Purchase Agreement
shall grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser’s employment with the Company for any
reason (including death or disability). 
The purchase price for Shares repurchased 

 

10

 

pursuant
to the Restricted Stock Purchase Agreement shall be the original purchase price
paid by the purchaser and may be paid by cancellation of any indebtedness of
the purchaser to the Company. The repurchase option shall lapse at such rate as
the Administrator may determine, provided that with respect to a Stock Purchase
Right granted prior to the date, if any, on which the Common Stock becomes a
Listed Security to a purchaser who is not an officer, Director or Consultant of
the Company or of any Parent or Subsidiary of the Company, it shall lapse at a
minimum rate of 20% per year if required by the Applicable Laws.

 

(ii)                                  Leave
of Absence. The Administrator shall have
the discretion to determine whether and to what extent the lapsing of Company
repurchase rights shall be tolled during any unpaid leave of absence; provided,
however, that in the absence of such determination, such lapsing shall be
tolled during any such unpaid leave (unless otherwise required by the
Applicable Laws).  In the event of
military leave, the lapsing of Company repurchase rights shall toll during any
unpaid portion of such leave, provided that, upon a Participant’s returning
from military leave (under conditions that would entitle him or her to
protection upon such return under the Uniform Services Employment and
Reemployment Rights Act), he or she shall be given “vesting” credit with
respect to Shares purchased pursuant to the Restricted Stock Purchase Agreement
to the same extent as would have applied had the Participant continued to
provide services to the Company throughout the leave on the same terms as he or
she was providing services immediately prior to such leave.

 

(c)                                  Other
Provisions.  The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.  In addition, the provisions of Restricted
Stock Purchase Agreements need not be the same with respect to each purchaser.

 

(d)                                 Rights
as a Stockholder.  Once the Stock Purchase Right is exercised, the
purchaser shall have the rights equivalent to those of a stockholder, and shall
be a stockholder when his or her purchase is entered upon the records of the
duly authorized transfer agent of the Company. 
No adjustment will be made for a dividend or other right for which the
record date is prior to the date the Stock Purchase Right is exercised, except
as provided in Section 14 of the Plan.

 

12.                                 Taxes.

 

(a)                                  As a condition
of the exercise of an Option or Stock Purchase Right granted under the Plan,
the Participant (or in the case of the Participant’s death, the person
exercising the Option or Stock Purchase Right) shall make such arrangements as
the Administrator may require for the satisfaction of any applicable federal,
state, local or foreign withholding tax obligations that may arise in
connection with the exercise of the Option or Stock Purchase Right and the
issuance of Shares.  The Company shall
not be required to issue any Shares under the Plan until such obligations are
satisfied.  If the Administrator allows
the withholding or surrender of Shares to satisfy a Participant’s tax
withholding obligations under this Section 12 (whether pursuant to Section 12(c),
(d) or (e), or otherwise), the Administrator shall not allow Shares to be
withheld in an amount that exceeds the minimum statutory withholding rates for
federal and state tax purposes, including payroll taxes.

 

11

 

(b)                                 In the case of
an Employee and in the absence of any other arrangement, the Employee shall be
deemed to have directed the Company to withhold or collect from his or her
compensation an amount sufficient to satisfy such tax obligations from the next
payroll payment otherwise payable after the date of an exercise of the Option
or Stock Purchase Right.

 

(c)                                  This Section 12(c) shall
apply only after the date, if any, upon which the Common Stock becomes a Listed
Security.  In the case of Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option or Stock Purchase Right that number of Shares having a
Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the amount required to be withheld. 
For purposes of this Section 12, the Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined under the Applicable Laws (the “Tax Date”).

 

(d)                                 If permitted by
the Administrator, in its discretion, a Participant may satisfy his or her tax
withholding obligations upon exercise of an Option or Stock Purchase Right by
surrendering to the Company Shares that have a Fair Market Value determined as
of the applicable Tax Date equal to the amount required to be withheld.  In the case of shares previously acquired
from the Company that are surrendered under this Section 12(d), such
Shares must have been owned by the Participant for more than six (6) months
on the date of surrender (or such other period of time as is required for the
Company to avoid adverse accounting charges).

 

(e)                                  Any election or
deemed election by a Participant to have Shares withheld to satisfy tax
withholding obligations under Section 12(c) or (d) above shall
be irrevocable as to the particular Shares as to which the election is made and
shall be subject to the consent or disapproval of the Administrator.  Any election by a Participant under Section 12(d) above
must be made on or prior to the applicable Tax Date.

 

(f)                                    In the event an
election to have Shares withheld is made by a Participant and the Tax Date is
deferred under Section 83 of the Code because no election is filed under Section 83(b) of
the Code, the Participant shall receive the full number of Shares with respect
to which the Option or Stock Purchase Right is exercised but such Participant
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.

 

13.                                 Non-Transferability
of Options and Stock Purchase Rights.

 

(a)                                  General.  Except as set forth in this Section 13,
Options and Stock Purchase Rights 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.  The
designation of a beneficiary by an Optionee will not constitute a
transfer.  An Option or Stock Purchase
Right may be exercised, during the lifetime of the holder of an Option or Stock
Purchase Right, only by such holder or a transferee permitted by this
Section 13.

 

12

 

(b)                                 Limited
Transferability Rights. 
Notwithstanding anything else in this Section 13, prior to the
date, if any, on which the Common Stock becomes a Listed Security, the
Administrator may in its discretion grant Nonstatutory Stock Options that may
be transferred by instrument to an inter vivos or testamentary trust in which
the Options are to be passed to beneficiaries upon the death of the trustor
(settlor) or by gift to “Immediate Family” (as defined below), on such terms
and conditions as the Administrator deems appropriate.  Following the date, if any, on which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying the manner in which such Nonstatutory Stock Options are
transferable.  “Immediate Family”
means any child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and shall include adoptive relationships.

 

14.                                 Adjustments
Upon Changes in Capitalization, Merger or Certain Other Transactions.

 

(a)                                  Changes
in Capitalization.  Subject to any action required under
Applicable Laws by the stockholders of the Company, the number of Shares of
Common Stock covered by each outstanding award, the numbers of Shares set forth
in Sections 3(a) and 8 above, and the number of Shares of Common Stock
that have been authorized for issuance under the Plan but as to which no awards
have yet been granted or that have been returned to the Plan upon cancellation
or expiration of an award, as well as the price per Share of Common Stock
covered by each such outstanding award, shall be proportionately adjusted for
any increase or decrease in the number of issued Shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued Shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been “effected
without receipt of consideration.”  Such
adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive. 
Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of Shares of Common Stock subject to an award.

 

(b)                                 Dissolution
or Liquidation.  In the event of the dissolution or liquidation
of the Company, each Option and Stock Purchase Right will terminate immediately
prior to the consummation of such action, unless otherwise determined by the
Administrator.

 

(c)                                  Corporate
Transaction.  In the event of a Corporate Transaction, each
outstanding Option or Stock Purchase Right shall be assumed or an equivalent
option or right shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation (the “Successor Corporation”),
unless the Successor Corporation does not agree to assume the award or to
substitute an equivalent option or right, in which case such Option or Stock
Purchase Right shall terminate upon the consummation of the transaction.

 

13

 

For
purposes of this Section 14(c), an Option or a Stock Purchase Right shall
be considered assumed, without limitation, if, at the time of issuance of the
stock or other consideration upon a Corporate Transaction or a Change of
Control, as the case may be, each holder of an Option or Stock Purchase Right
would be entitled to receive upon exercise of the award the same number and
kind of shares of stock or the same amount of property, cash or securities as
such holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the award at such
time (after giving effect to any adjustments in the number of Shares covered by
the Option or Stock Purchase Right as provided for in this Section 14);
provided that if such consideration received in the transaction 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 exercise of the award to be solely common stock of the Successor
Corporation equal to the Fair Market Value of the per Share consideration
received by holders of Common Stock in the transaction.

 

(d)                                 Certain
Distributions.  In the event of any distribution to the
Company’s stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.

 

15.                                 Time
of Granting Options and Stock Purchase Rights.  The date of grant of an Option or Stock
Purchase Right shall, for all purposes, be the date on which the Administrator
makes the determination granting such Option or Stock Purchase Right, or such
other date as is determined by the Administrator, provided that in the case of
any Incentive Stock Option, the grant date shall be the later of the date on
which the Administrator makes the determination granting such Incentive Stock
Option or the date of commencement of the Optionee’s employment relationship
with the Company.  Notice of the
determination shall be given to each Employee or Consultant to whom an Option
or Stock Purchase Right is so granted within a reasonable time after the date
of such grant.

 

16.                                 Amendment
and Termination of the Plan.

 

(a)                                  Authority
to Amend or Terminate.  The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation (other than an adjustment pursuant to Section 14 above)
shall be made that would materially and adversely affect the rights of any
Optionee or holder of Stock Purchase Rights under any outstanding grant,
without his or her consent.  In addition,
to the extent necessary and desirable to comply with the Applicable Laws, the
Company shall obtain stockholder approval of any Plan amendment in such a
manner and to such a degree as required.

 

(b)                                 Effect
of Amendment or Termination.  Except as to amendments which the
Administrator has the authority under the Plan to make unilaterally, no
amendment or termination of the Plan shall materially and adversely affect
Options or Stock Purchase Rights already granted, unless mutually agreed
otherwise between the Optionee or holder of the Stock 

 

14

 

Purchase
Rights and the Administrator, which agreement must be in writing and signed by
the Optionee or holder and the Company.

 

17.                                 Conditions
Upon Issuance of Shares.  Notwithstanding any other provision of the
Plan or any agreement entered into by the Company pursuant to the Plan, the
Company shall not be obligated, and shall have no liability for failure, to
issue or deliver any Shares under the Plan unless such issuance or delivery
would comply with the Applicable Laws, with such compliance determined by the
Company in consultation with its legal counsel. 
As a condition to the exercise of an Option or Stock Purchase Right, the
Company may require the person exercising the 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 by law.

 

18.                                 Reservation
of Shares.  The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

 

19.                                 Agreements.  Options and Stock Purchase Rights shall be
evidenced by Option Agreements and Restricted Stock Purchase Agreements, respectively,
in such form(s) as the Administrator shall from time to time approve.

 

20.                                 Stockholder
Approval.  If required by the Applicable Laws,
continuance of the Plan shall be subject to approval by the stockholders of the
Company within twelve (12) months before or after the date the Plan is
adopted.  Such stockholder approval shall
be obtained in the manner and to the degree required under the Applicable Laws.

 

21.                                 Information
and Documents to Optionees and Purchasers. Prior to the
date, if any, upon which the Common Stock becomes a Listed Security and if
required by the Applicable Laws, the Company shall provide financial statements
at least annually to each Optionee and to each individual who acquired Shares
pursuant to the Plan, during the period such Optionee or purchaser has one or
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares.  The Company
shall not be required to provide such information if the issuance of Options or
Stock Purchase Rights under the Plan is limited to key employees whose duties
in connection with the Company assure their access to equivalent information.

 

15

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