Document:

exv10w1

 

Exhibit 10.1

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”) is entered into this 9th day of November,
2005, between EMAK Worldwide, Inc. (the “Company”) and Jim Holbrook (the
“Executive”).

RECITAL

     The Company desires to employ the Executive, and the Executive desires to be so employed by
the Company, on the terms and subject to the conditions set forth in this Agreement.

AGREEMENT

     NOW, THEREFORE, in consideration of the premises and the mutual promises set forth in this
Agreement, the Company and the Executive hereby agree as follows:

     1. Employment.

          (a) Subject to the terms and conditions contained herein, the Company hereby agrees to employ
the Executive, and the Executive accepts such employment commencing on November 14, 2005 (the
“Effective Date”) until the earlier of (i) December 31, 2010, or (ii) the date such
employment is terminated pursuant to Section 4 of this Agreement (the “Employment Term”).

          (b) The Executive shall have the title of Chief Executive Officer of the Company, and such
other title or titles, if any, as from time to time may be assigned to the Executive by the Board
of Directors of the Company (the “Board”). In such capacity, the Executive shall be the
highest-ranking officer of the Company and shall have the same status, privileges, and
responsibilities normally inherent in such capacity in public corporations of similar size and
character. The Executive shall also perform such duties for the Company as may from time to time
be assigned to the Executive by the Board which are consistent with Executive’s Chief Executive
Officer position. In addition, for so long as the Executive remains Chief Executive Officer, the
Board shall nominate him as a director of the Company. In addition, the Executive shall serve as
an officer and director of such Company subsidiaries and affiliates (domestic and foreign) as
requested by the Board. As Chief Executive Officer and Board Member, the Executive shall abide by
all of the policies, procedures and codes of ethics of the Company applicable to senior executives
and employees of the Company, including, without limitation, any restrictions on purchase and/or
sale of Company securities.

          (c) The Executive will devote his entire business time, energy, attention and skill to the
services of the Company and its affiliates and to the promotion of their interests. So long as the
Executive is employed by the Company, except as provided in

Appendix F-1

 

 

the last paragraph of Section 1(c), the Executive shall not, without the written consent of
the Company:

               (i) engage in any other activity for compensation, profit or other pecuniary advantage,
whether received during or after the term of this Agreement;

               (ii) render or perform services of a business, professional, or commercial nature other than
to or for the Company, either alone or as an employee, consultant, director, officer, or partner of
another business entity, whether or not for compensation, and whether or not such activity,
occupation or endeavor is similar to, competitive with, or adverse to the business or welfare of
the Company; or

               (iii) invest in or become a shareholder of another corporation or other entity;
provided, that the Executive’s investment solely as a shareholder in another corporation
shall not be prohibited hereby so long as such investment is not in excess of two percent (2%) of
any class of shares that are traded on a national securities exchange.

Notwithstanding the foregoing, Executive shall have the right to devote a de minimis portion of his
business time to personal investments and civic commitments that are not in any way competitive
with the Company’s business, provided that the time devoted thereto shall not interfere in any
material respect with the performance of Executive’s duties.

          (d) The Executive shall sign and adhere to the Confidentiality and Invention Assignment
Agreement (the “Confidentiality Agreement”) attached as Appendix A.

     2. Location of Employment. The Executive’s principal place of employment shall be at
the executive offices of the Company, currently located at 6330 San Vicente Blvd., Los Angeles, CA
90048; provided, that the Executive will routinely be required to travel to various domestic and
foreign locations.

     3. Compensation.

          (a) Base Salary. In exchange for full performance of the Executive’s obligations and duties
under this Agreement, the Company shall pay the Executive an annual base salary (the “Base
Salary”) equal to $500,000, payable in installments in accordance with the Company’s standard
payroll practices. On April 1, 2007 and on April 1 of each subsequent year during the term of this
Agreement, the Base Salary shall be increased (but not decreased) to reflect cost of living changes
as determined by the Board. In addition, the Board shall review the Base Salary annually during
the period of the Executive’s employment hereunder and, in its sole discretion, the Board may
increase the Base Salary from time to time based upon the performance of the Executive, the
financial condition of the Company, prevailing industry salary levels and such other factors as the
Board determines.

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          (b) Signing/Retention Bonus. The Company shall pay the Executive a signing/retention bonus
consisting of the following:

               (i) Cash Bonus. The sum of $75,000, which shall be paid within 10 business days after the
Effective Date. If Executive’s employment is terminated under Section 4(c) or (d) prior to January
1, 2007, the Executive shall repay the Company a pro-rata portion of such bonus.

               (ii) Restricted Stock Units. On the Effective Date, the Company shall grant the Executive a
number of restricted stock units (the “RSUs”) pursuant to the Company’s 2000 Stock Option
Plan having a value on the date of grant, as determined by the Board, based on the average closing
price for the 30 calendar days preceding the Effective Date, of $225,000. The RSUs shall vest
monthly over the two year period ending December 31, 2007, with the shares of Common Stock
underlying such RSUs issuable on December 31, 2007, subject to the Executive remaining employed
with the Company through such date. The terms and conditions of the RSUs shall be governed by the
2000 Stock Option Plan and the Restricted Stock Unit Agreement in the form attached as Appendix B
executed by the Company and the Executive.

          (c) Annual Incentive Bonus. Executive shall be eligible to receive an annual incentive bonus
(the “Annual Incentive Bonus”) after the end of each fiscal year that is included within
the Employment Term (not including 2005). The Annual Incentive Bonus shall consist of two
components: the “Annual EBITDA Bonus” and the “Strategic Performance Bonus.”

               (i) Annual EBITDA Bonus. The Annual EBITDA Bonus shall be based upon the targeted EBITDA (as
defined below) of the Company as approved by the Board at the beginning of the calendar year and as
set forth in the Company’s business or operating plan for such year prepared in the ordinary course
of business (the “Earnings Target”). The Annual EBITDA Bonus shall be 25% of the Base
Salary for the applicable year if the Company’s EBITDA is equal to 100% of the Earnings Target.
The Annual EBITDA Bonus shall be 50% of the Base Salary for the applicable year if the Company’s
EBITDA equals or exceeds 150% of the Earnings Target. If the EBITDA is between 100% and 150% of
the Earnings Target, the Annual EBITDA Bonus shall be prorated between 25% and 50% of the Base
Salary. If the EBITDA is between 80% and 100% of the Earnings Target, the Annual EBITDA Bonus
shall be prorated between 0% and 25% of the Base Salary. Executive shall not receive such Annual
EBITDA Bonus if the EBITDA is less than 80% of the Earnings Target.

For purposes of this Agreement, “EBITDA” shall be defined as the earnings before interest, taxes,
depreciation, and amortization of the Company, derived from its audited consolidated financial
statements less a “Capital Charge” for acquisitions, if any. The Capital Charge shall be
calculated as the weighted average cost of capital (“WACC”)

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multiplied by “Average Invested Capital” over the measurement period. WACC shall be
calculated as: 

	 	 	 	 	 
	 
	RE = cost of equity

	 	D = market value of
the firm’s debt
	 	D/V = percentage of
financing that is debt
	 
	RD = cost of debt

	 	V = E + D
	 	TC = corporate tax rate
	 
	E = market value of
the firm’s equity

	 	E/V = percentage of
financing that is
equity	 	 
	 

For purposes of this Agreement, “Average Invested Capital” shall mean the total cost of
acquisitions of businesses (stock or asset acquisitions) since the Effective Date. A sample WACC
calculation is set forth on Appendix C.

               (ii) Strategic Performance Bonus. Subject to the discretion of the Board, the Company may pay
Executive an annual Strategic Performance Bonus, after taking into account the Company’s long-term
prospects and position and the accomplishment of strategic goals as devised by mutual agreement of
the Board and Executive. Such annual bonus shall be targeted at 25% of Base Salary for achievement
of strategic goals and may be increased up to 50% of the Base Salary for extraordinary performance.

          (d) Cumulative EBITDA Bonus. Executive shall be eligible to receive an additional bonus (the
“Cumulative EBITDA Bonus”) based upon the EBITDA (as defined in Section 4(c) above)
performance of the Company over the five fiscal years commencing January 1, 2006 and ending
December 31, 2010 (the “Performance Period”). The Cumulative EBITDA Bonus will be based
upon the Company exceeding the “Minimum EBITDA Threshold” established for the fiscal years
during the Performance Period. The Minimum EBITDA Thresholds are set forth on Appendix D.

At the end of each fiscal year during the Performance Period, the cumulative EBITDA of the Company
since the commencement of the Performance Period will be measured (i.e., January 1, 2006 to
December 31, 2006, January 1, 2006 to December 31, 2007, etc., each a “Measurement
Period”). If the cumulative EBITDA for the Measurement Period exceeds the cumulative Minimum
EBITDA Thresholds for such Measurement Period (the “Excess EBITDA”), the Executive will be
entitled to a Cumulative EBITDA Bonus payment equal to 8% of the Excess EBITDA, less the amount of
any Cumulative EBITDA Bonus payment for prior Measurement Periods. Notwithstanding the foregoing,
Cumulative EBITDA Bonus payments will be subject to a maximum of 200% of the cumulative Base Salary
paid to Executive over the Measurement Period less the cumulative Annual Incentive Bonus paid or
payable over such Measurement Period. Each Cumulative EBITDA Bonus payment shall be paid on the
April 1 following the end of the Measurement Period at issue.

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In the event that at any time during the Performance Period a fiscal year’s earnings are restated
downward, the Company shall offset the excess Annual Incentive Bonus payment, if any, to Executive
from the Cumulative EBITDA Bonus. If doing so would create any legal issues for the Company, the
Executive agrees to repay any such excess Annual Incentive Bonus immediately on demand. If a
fiscal year’s earnings are restated upward, the Company shall promptly make payment of any under
paid Annual Incentive Bonus. A sample Cumulative EBITDA Bonus calculation is set forth on Appendix
D.

          (e) Stock Option. On the Effective Date, the Company shall grant the Executive a
non-qualified option to purchase 500,000 shares of common stock of the Company (the
“Option”) pursuant to the Company’s 2000 Stock Option Plan and/or the Company’s 2004 Stock
Incentive Plan. The Option shall vest in four equal annual installments of 25% each on each of the
first, second, third and fourth anniversaries of the date of grant, subject to the Executive’s
continued employment with the Company through the applicable vesting dates. 25% of the installment
that vests on each anniversary shall have an exercise price equal to fair market value (determined
in accordance with Section 3(b)(ii)) as of the date of grant; 25% shall have an exercise price
equal to $10 per share; 25% shall have an exercise price equal to $12.50 per share; and 25% shall
have an exercise price equal to $15 per share. The terms and conditions of the Option shall be
governed by the applicable Company plan and the form of Stock Option Agreement attached hereto as
Appendix E executed by the Company and the Executive.

          (f) Business Expenses. During the Executive’s employment under this Agreement, the Executive
shall be reimbursed by the Company for reasonable business expenses actually incurred or paid by
the Executive, consistent with the policies of the Company, in rendering to the Company the
services provided for in this Agreement, upon presentation of expense statements or such other
supporting information as is consistent with the policies of the Company. Executive shall be
subject to the Company’s travel policy as applicable to senior Company executives, with the
following exceptions: (i) any length of flight limitations for business class upgrades shall not
apply to Executive (i.e., Executive may upgrade any domestic flight, as long as the upgrade
otherwise complies with the Company’s travel policy described above); and (ii) Executive shall be
entitled to book business class tickets for all international flights.

          (g) Vacation. In accordance with the Company’s policy for executives at the rank of vice
president and above, no specific amount of vacation time will be accrued by Executive. Executive
shall be entitled to such vacation days as permitted by the Board, which shall be scheduled to
minimize the disruption of the Executive’s absence on the Company’s business.

          (h) Employee Benefits. During the Executive’s employment under this Agreement, the Executive
shall be entitled to participate in all benefit plans (including deferred compensation plans and
any medical, dental, healthcare reimbursement, long term disability or life insurance plans) which
shall be available from time to time to

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senior executives of the Company generally, except to the extent such participation in any
plan would, in the opinion of the Board, alter the intended tax treatment of such plan. The
Executive acknowledges and agrees that the Board may in its discretion terminate at any time or
modify from time to time any such benefit plans.

          (i) Executive Perquisites. During the Executive’s employment under this Agreement, the
Executive shall be entitled to participate in all special benefit or perquisite programs generally
available from time to time to senior executives of the Company (including reasonable relocation
expenses and temporary housing expenses, auto allowance and cell phone allowance), on the terms and
conditions then prevailing under each such program. The Executive acknowledges and agrees that the
Board may in its discretion terminate at any time or modify from time to time any such benefits or
programs. The Company shall promptly reimburse the Executive for all reasonable expenses actually
incurred or paid by the Executive in setting up a home office for purposes of rendering to the
Company the services provided for in this Agreement, upon the presentation of statements of such
expenses.

          (j) Other than as expressly set forth in this Section 3 or Section 4 below, the Executive
shall not receive any other compensation or benefits except to the extent provided by the Board.

     4. Termination. Except as specifically set forth in this Section 4, if the
Executive’s employment is terminated for any reason, the Executive shall not be entitled to any
compensation or benefits from the Company, under this Agreement or otherwise, except for the
following: (i) the Base Salary and reasonable business expenses incurred but not yet reimbursed,
under Section 3 of this Agreement through the date of such termination; and (ii) such benefits, if
any, as may be required to be provided by the Company under the Consolidated Omnibus Budget
Reconciliation Act (COBRA). The foregoing sentence does not limit any rights that the Executive
may have to vested benefits under any plan governed by the Employee Retirement Income Security Act
of 1974 (ERISA) or with respect to any equity awards the Executive may have outstanding.

          (a) Disability. The employment of the Executive under this Agreement may be terminated by the
Company immediately upon giving the Executive notice if (i) the Board determines that the Executive
is unable to discharge his essential job duties by reason of illness or injury or (ii) the
Executive has been unable to discharge his essential job duties by reason of illness or injury for
either (A) a period of two consecutive months or (B) twelve weeks in any twelve-month period.

If the Executive’s employment is terminated pursuant to this subsection (a), subject to the
Executive’s execution of a general release and waiver in a form provided to the Executive by the
Company, which shall be substantially in the form attached as Appendix F (the “Release”),
but which may be modified to reflect the terms of this Agreement and to ensure that the Release
meets applicable legal requirements, prior to the 45th day following such termination, the Company
shall pay to the Executive (subject to the

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Executive continuing to honor his commitments under the attached Confidentiality Agreement) the
Annual Incentive Bonus, if any, that the Executive would have earned in the calendar year in which
the employment terminated had the Executive’s employment not been terminated, multiplied by a
fraction, the numerator of which is the number of days in that calendar year through the date of
termination and the denominator of which is 365. Payment under this provision shall be made to the
Executive on the later of (i) seven months after the date the Executive terminated employment; or
(ii) the date that it would have been paid had the Executive remained employed.

          (b) Death. The employment of the Executive under this Agreement shall terminate on the date
of the Executive’s death.

          (c) Cause. The employment of the Executive under this Agreement may be terminated by the
Company upon written notice from the Board that Cause exists for termination. For the purposes of
this Agreement, the term “Cause” shall mean that, in the opinion of the Board, the Executive has
(i) refused or failed to perform, to the reasonable satisfaction of the Board, any duties assigned
to the Executive by the Board (consistent with his Chief Executive officer position) or
contemplated or obligated under this Agreement, provided that such refusal or failure is not
curable or cured within ten (10) days after written notice thereof from the Company specifying such
refusal or failure in reasonable detail, (ii) committed a breach of the terms of this Agreement or
any other legal obligation to the Company, provided that such breach is not curable or cured within
ten (10) days after written notice thereof from the Company specifying such breach in reasonable
detail, (iii) failed to perform any of the Executive’s obligations under the Confidentiality
Agreement, (iv) demonstrated gross negligence or willful misconduct in the execution of the
Executive’s duties, (v) been convicted of or pleaded nolo contendere to a felony or
other serious crime, (vi) repeatedly and intemperately used alcohol or drugs in a manner that
interferes with the performance of Executive’s duties, (vii) engaged in business practices or
personal conduct which, in the reasonable opinion of the Board, are unethical or reflect adversely
on the Company, (viii) misappropriated assets of the Company; (ix) been repeatedly absent from work
during normal business hours for reasons other than disability, appropriate vacation, or sick time;
or (x) improperly used any former employer’s trade secrets.

For the purposes of this Section, no act or failure to act on Executive’s part shall be considered
“willful” unless it is done, or omitted to be done, by him in bad faith or without reasonable
belief that his action or omission was in the best interests of the Company. Any act or failure to
act by Executive that is either based upon authority given pursuant to a resolution duly adopted by
the Board, or based upon the advice of counsel for the Company, and that does not violate law or
Executive’s fiduciary obligations to the Company shall be presumed to be done, or omitted to be
done, in good faith and in the best interests of the Company.

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Notwithstanding the foregoing, if Executive is terminated for Cause and it is subsequently
determined by an arbitrator that such termination was not for Cause, then such termination shall be
deemed a termination without Cause. By the same token, if the Executive’s employment terminates
for (i) Good Reason, but at a time when an arbitrator determines that the Company had Cause to
terminate the Executive (or would have had Cause if it then knew all relevant facts) under (a)
Section 4(c)(iii) – (viii), (b) Section 4(c)(x), (c) 4(c)(i) or (ii) and the Company gave Executive
written notice of its intent to assert that it had cause under either of those subsections within
10 business days of Executive having terminated his employment for Good Reason, or (d) under
Section 4(c)(ii) as to any material breach by Executive; or (ii) any other reason, but at a time
when an arbitrator determines that the Company had Cause to terminate the Executive under Section
4(c)(iii) or (viii) (or would have had Cause under either of those provisions if it then knew all
relevant facts), Executive’s termination shall be treated as a discharge by the Company for Cause
and the Executive shall repay the Company all benefits that he received on account of his
termination in excess of those he would have received in a for Cause termination.

          (d) Notice by Executive. The employment of the Executive under this Agreement shall terminate
upon receipt by the Board of twelve (12) months prior written notice of resignation signed by the
Executive. The Executive promises not to terminate his employment without first providing such
12-month written notice.

          (e) Without Cause. In addition to the circumstances described in subsections (a), (b), (c),
and (d) above, the Company may terminate the Executive’s employment for any reason or no reason and
with or without cause or prior notice. The Executive understands that, subject to subsections (d)
above, he is an at-will employee and may be terminated by the Company without cause or prior notice
pursuant to this subsection (e) notwithstanding any other provision contained in this Agreement.
This at-will relationship will remain in effect during the term of this Agreement and so long
thereafter provided that the Executive remains employed by the Company, unless such at-will
employment relationship is modified by a specific, express written agreement signed by the
Company’s Chairman of the Board.

If the Executive’s employment is terminated pursuant to this subsection (e), subject to the
Executive’s execution of a Release prior to the 45th day following such termination, the Company
shall pay to the Executive (subject to the Executive continuing to honor his commitments under the
attached Confidentiality Agreement):

               (i) an amount equal to the Base Salary that would have been payable to the Executive for the
period beginning on the employment termination and ending on the later of December 31, 2007 or the
first anniversary of the employment termination if the Executive had remained employed during such
period in the form of salary continuation (each such payment under this provision shall be paid to
the Executive

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seven months after the date it would have been paid had the Executive remained employed), and

               (ii) the Annual Incentive Bonus, if any, that the Executive would have earned in the calendar
year in which the employment terminated had the Executive’s employment not been terminated,
multiplied by a fraction, the numerator of which is the number of days in that calendar year
through the date of termination and the denominator of which is 365 (each such payment under this
provision shall be paid to the Executive on the later of (i) seven months after the date the
Executive terminated employment; or (ii) the date that it would have been paid had the Executive
remained employed.

          (f) Without Cause Following A Change In Control. If the Company terminates the Executive’s
Employment without Cause during the 12 months following a Change in Control (as defined below),
subject to the Executive’s execution of a Release prior to the 45th day following such termination
the Company shall pay (on the later of (i) the 7th month following such termination; or (ii) the
date that a bonus otherwise would be payable under Section 3(d) but for such termination) the
Executive a lump sum equal to two years Base Salary, plus the amount set forth in Section 4(e)(ii)
above.

For purposes of this Agreement, the term “Change in Control” shall mean the occurrence of
any of the following events with respect to the Company:

               (i) all or substantially all of the assets of the Company are sold or transferred to another
corporation or entity; or

               (ii) the Company is sold, transferred, merged, consolidated, ventured or reorganized into or
with another corporation or entity, with the result that upon conclusion of the transaction less
than a majority of the outstanding securities entitled to vote generally in the election of
directors or other capital interests of the acquiring corporation or entity are owned, directly or
indirectly, by the shareholders of the Company immediately prior to the sale, transfer, merger,
consolidation, venture or reorganization; or

               (iii) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule,
form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), disclosing that any person (as the term “person” is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term
“beneficial owner” is defined under Rule 13d-3 or any successor rule or regulation promulgated
under the Exchange Act) of securities representing more than 50% of the combined voting power of
the then-outstanding voting securities of the Company; or

               (iv) the individuals who, at the beginning of any period of two consecutive calendar years,
constituted members of the Board cease for any reason to constitute at least a majority thereof
unless the nomination for election by the Company’s

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stockholders of each new director of the Company was approved by a vote of at least two-thirds
of the directors of the Company still in office who were directors of the Company at the beginning
of any such period.

          (g) Good Reason. The Executive may terminate his employment hereunder for “Good Reason.” For
the purposes of this Agreement, “Good Reason” shall mean either (i) a material breach of
this Agreement by the Company; (ii) a material diminution in the Executive’s position, duties or
responsibilities as Chief Executive Officer as contemplated by Section 1 of this Agreement
(however, replacement as a member of the Boards of Directors shall not constitute Good Reason); or
(iii) the Company requiring relocation of Executive’s principal place of employment from Southern
California to a location other than Chicago, Illinois or St. Louis, Missouri.

Notwithstanding the foregoing, a termination shall not be treated as a termination for Good Reason
(i) if the Executive specifically consented in writing to the occurrence of the event giving rise
to the claim of termination for Good Reason; or (ii) unless the Executive, within 30 days after
such Good Reason event occurs, provides written notice to the Company specifying in reasonable
detail the occurrence of one of such events and stating that he intends to terminate his employment
for Good Reason and specifying the factual basis for such Good Reason event, and if capable of
being cured, such Good Reason event shall not have been cured within 30 days of the receipt by the
Company of such notice.

If the Executive shall terminate his employment for Good Reason under this subsection (g), subject
to the Executive’s execution of the Release within 45 days of termination of employment, the
Company shall seven months following such termination of employment pay the amounts determined
under Sections 4(e)(i) and (ii) at the times determined under such sections (subject to the
Executive continuing to honor his commitments under the attached Confidentiality Agreement).

          (h) The Executive shall not have a duty to mitigate the costs to the Company under Section 4.

     5. Golden Parachute & 162(m) Limitation. The Executive agrees that his payments and
benefits under this Agreement and all other contracts, arrangements, or programs shall not, in the
aggregate, exceed the maximum amount that may be paid to him without triggering golden parachute
penalties under Section 280G and related provisions of the Internal Revenue Code, as determined in
good faith by the Company’s independent auditors. If any benefits must be cut back to avoid
triggering such penalties, his benefits shall be cut back in the priority order designated by the
Company. If an amount in excess of the limit set forth in this section is paid to him, the
Executive will repay the excess amount to the Company upon demand, with interest at the rate
provided for in Internal Revenue Code (the, “Code”) Section 1274(b)(2)(B). The Company and the
Executive agree to cooperate with each other in connection with any administrative or judicial
proceedings concerning the existence or amount of golden parachute penalties

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with respect to payments or benefits the Executive receives. Similarly, the Executive agrees
that no payment under this Agreement or any other contract, arrangement, or program shall be made
to him if Code Section 162(m) would prevent the Company from receiving a deduction for such
payment. If, however, any payment is not made pursuant to the previous sentence, the Company shall
make such payment as soon as practicable in the first calendar year that it reasonably determines
that it can do so and still receive a deduction for such payment.

     6. Executive’s Representations.

          (a) The Executive represents that he has full authority to enter into this Agreement and that
he is free to enter into this Agreement and not under any contractual restraint which would
prohibit the Executive from satisfactorily performing his duties to the Company under this
Agreement.

          (b) The Executive hereby agrees to indemnify and hold harmless the Company, its officers,
directors and stockholders from and against any losses, liabilities, damages or costs (including
reasonable attorneys’ fees) arising out of a breach, or claimed breach, of any of the
representations, warranties and covenants of the Executive set forth in this Agreement.

          (c) The Executive acknowledges that he is free to seek advice from independent counsel with
respect to this Agreement. The Executive has obtained such advice. The Executive is not relying
on any representation or advice from the Company or any of its officers, directors, attorneys or
other representatives regarding this Agreement, its content or effect.

     7. Arbitration. Any controversy or claim arising out of or relating to this Agreement
or any breach hereof or the Executive’s employment by the Company or termination thereof, shall be
settled by arbitration by one arbitrator in accordance with the rules of the American Arbitration
Association, and judgment upon such award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. The arbitration shall be held in the City in which the Executive was
last employed or such other place as may be agreed upon at the time by the parties to the
arbitration.

     8. Equitable Relief. The Executive acknowledges that the Company is relying for its
protection upon the existence and validity of the provisions of this Agreement, that the services
to be rendered by the Executive are of a special, unique and extraordinary character, and that
irreparable injury will result to the Company from any violation or continuing violation of the
provisions of this Agreement for which damages may not be an adequate remedy. Accordingly, the
Executive hereby agrees that in addition to the remedies available to the Company by law or under
this Agreement, the Company shall be entitled to obtain such equitable relief as may be permitted
by law in a court of competent jurisdiction including, without limitation, injunctive relief from
any violation or continuing violation by the Executive of any term or provision of this Agreement.

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     9. Governing Law. This Agreement shall be governed by and construed and enforced in
accordance with the internal substantive laws (and not the laws of conflicts) of the State of
California.

     10. Entire Agreement. This Agreement constitutes the whole agreement of the parties
hereto in reference to any employment of the Executive by the Company and in reference to any of
the matters or things herein provided for or hereinabove discussed or mentioned in reference to
such employment; all prior agreements, promises, representations and understandings relative
thereto being herein merged.

     11. Assignability.

          (a) In the event the Company shall merge or consolidate with any other corporation,
partnership or business entity, or all or substantially all of the Company’s business or assets
shall be transferred in any manner to any other corporation, partnership or business entity, then
such successor to the Company shall thereupon succeed to, and be subject to, all rights, interests,
duties and obligations of, and shall thereafter be deemed for all purposes hereof to be, the
“Company” under this Agreement. This Agreement shall inure to the benefit of and be enforceable by
the Executive’s personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die, any amounts payable to him
hereunder shall be paid in accordance with the terms of this Agreement to the Executive’s devisee,
legatee, or other designee or, if there be no such designee and Executive is married, then to
Executive’s spouse, or if there be no such designee or spouse, to his estate.

          (b) This Agreement is personal in nature and the Executive shall not, except as set forth in
subsection (a) hereof, without the written consent of the Company, assign or transfer this
Agreement or any rights or obligations hereunder.

          (c) Except as set forth in subsection (a) above, nothing expressed or implied in this
Agreement is intended or shall be construed to confer upon or give to any person, other than the
parties to this Agreement, any right, remedy or claim under or by reason of this Agreement or of
any term, covenant or condition of this Agreement.

     12. Amendments; Waivers. This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants of this Agreement may be waived only by a
written instrument executed by the parties to this Agreement or, in the case of a waiver, by the
party waiving compliance. Any such written instrument must be approved by the Board to be
effective as against the Company. The failure of any party at any time or times to require
performance of any provision of this Agreement shall in no manner affect the right at a later time
to enforce the same. No waiver by any party of the breach of any term or provision contained in
this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach
of any other term or covenant contained in this Agreement.

12

 

     13. Notice. All notices, requests or consents required or permitted under this
Agreement shall be made in writing and shall be given to the other parties by personal delivery,
overnight air courier (with receipt signature) or facsimile transmission (with “answerback”
confirmation of transmission), sent to such parties’ addresses or telecopy numbers as are set forth
below such parties’ signatures to this Agreement, or such other addresses or telecopy numbers of
which the parties have given notice pursuant to this Section 13. Each such notice, request or
consent shall be deemed effective upon the date of actual receipt, receipt signature or
confirmation of transmission, as applicable.

     14. Severability. Any provision of this Agreement that is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable
such provision in any other jurisdiction.

     15. Survival. The representations and agreements of the Executive set forth in
Sections 6, 7, and 8 of this Agreement and in the attached Confidentiality Agreement shall survive
the expiration or termination of this Agreement (irrespective of the reason for such expiration or
termination).

     16. Taxes. The Company may withhold from any payments made under this Agreement all
applicable taxes, including but not limited to Federal, state and local income, employment and
social insurance taxes, as shall be required by law.

     17. Attorneys’ Fees. The Company shall reimburse the Executive for reasonable
attorneys’ fees and expenses incurred in connection with the preparation and negotiation of this
Agreement and the documents contemplated under this Agreement (but no more than $15,000, based on a
reasonable hourly rate), upon presentation to the Company of documents supporting and describing
such fees and expenses. If any party to this Agreement seeks to enforce his or its rights under
this Agreement, the prevailing party or parties shall be entitled to recover reasonable fees, costs
and expenses incurred in connection therewith including, without limitation, the fees, costs and
expenses of attorneys, accountants and experts, whether or not litigation is instituted, and
including such fees, costs and expenses of appeals.

     18. Company Representation. The Company represents that prior to the Effective Date
it will have received all necessary Board approval for entering into and executing this Agreement
and granting the restricted stock units and stock options provided for herein.

[Signature page follows]

13

 

     IN WITNESS WHEREOF, the parties to this Agreement have executed this Agreement as of the date
first above written.

	 	 	 	 	 
	 	EMAK WORLDWIDE, INC.

 	 
	 	
 	 
	 	By:  Teresa L. Tormey 	 
	 	Its EVP, General Counsel & Secretary 	 
	 
	 	Address for Notices:	 
	 
	 	EMAK Worldwide, Inc.

6330 San Vicente Blvd.

Los Angeles, CA 90048

(323) 930-8346 (fax)

Attention: General Counsel	 
	 
	 	
 	 
	 	JIM HOLBROOK 	 
	 	 	 
	 	Address for Notices:	 
	 
	 	Jim Holbrook’s home address reflected in the
    Company’s payroll records at the time notice is
given.	 
	 
	 	With a copy to:	 
	 
	 	Richard N. Tishler

Riezman Berger, P.C.

7700 Bonhomme, 7th Floor

Clayton, Missouri 63105

(314) 727-6458 (fax)	 
	 

14exv10w1

 

Exhibit 10.1

DIRECT METHANOL FUEL CELL CORPORATION

2002 STOCK OPTION/STOCK ISSUANCE PLAN

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

     This 2002 Stock Option/Stock Issuance Plan is intended to promote the interests of Direct
Methanol Fuel Cell Corporation, a Delaware corporation, by providing eligible persons in the
Corporation’s employ or service with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an incentive for them to
continue in such employ or service.

     Capitalized terms herein shall have the meanings assigned to such terms in the attached
Appendix.

II. STRUCTURE OF THE PLAN

     A. The Plan shall be divided into two (2) separate equity programs:

          (i) the Option Grant Program under which eligible persons may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock, and

          (ii) the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock directly,
either through the immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary).

     B. The provisions of Articles One and Four shall apply to both equity programs under the Plan
and shall accordingly govern the interests of all persons under the Plan.

III. ADMINISTRATION OF THE PLAN

     A. The Plan shall be administered by the Board. However, any or all administrative functions
otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee
shall serve for such period of time as the Board may determine and shall be subject to removal by
the Board at any time. The Board may also at any time terminate the functions of the Committee and
reassume all powers and authority previously delegated to the Committee.

 

 

     B. The Plan Administrator shall have full power and authority (subject to the provisions of the
Plan) to establish such rules and regulations as it may deem appropriate for proper administration
of the Plan and to make such determinations under, and issue such interpretations of, the Plan and
any outstanding options or stock issuances thereunder as it may deem necessary or advisable.
Decisions of the Plan Administrator shall be final and binding on all parties who have an interest
in the Plan or any option or stock issuance thereunder.

IV. ELIGIBILITY

     A. The persons eligible to participate in the Plan are as follows:

          (i) Employees,

          (ii) non-employee members of the Board or the non-employee members of the board
of directors of any Parent or Subsidiary, and

          (iii) consultants and other independent advisors who provide services to the
Corporation (or any Parent or Subsidiary).

     B. The Plan Administrator shall have full authority to determine, (i) with respect to the
grants made under the Option Grant Program, which eligible persons are to receive the option
grants, the time or times when those grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting schedule (if any)
applicable to the option shares and the maximum term for which the option is to remain outstanding,
and (ii) with respect to stock issuances made under the Stock Issuance Program, which eligible
persons are to receive such stock issuances, the time or times when those issuances are to be made,
the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to
the issued shares and the consideration to be paid by the Participant for such shares.

     C. The Plan Administrator shall have the absolute discretion either to grant options in
accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock
Issuance Program.

V. STOCK SUBJECT TO THE PLAN

     A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired
Common Stock. The maximum number of shares of Common Stock which may be issued over the term of
the Plan shall not exceed 2,000,000 shares.

     B. Shares of Common Stock subject to outstanding options shall be available for subsequent
issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to
exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant
provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by
the Corporation, at the option exercise or direct issue price paid

2.

 

per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added back
to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly
be available for reissuance through one or more subsequent option grants or direct stock issuances
under the Plan.

     C. Should any change be made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities issuable under the
Plan and (ii) the number and/or class of securities and the exercise price per share in effect
under each outstanding option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be final, binding and
conclusive. In no event shall any such adjustments be made in connection with the conversion of
one or more outstanding shares of the Corporation’s preferred stock into shares of Common Stock.

3.

 

ARTICLE TWO

OPTION GRANT PROGRAM

I. OPTION TERMS

     Each option shall be evidenced by one or more documents in the form approved by the Plan
Administrator; provided, however, that each such document shall comply with the
terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject
to the provisions of the Plan applicable to such options.

     A. Exercise Price.

          1. The exercise price per share shall be fixed by the Plan Administrator in accordance with
the following provisions:

          (i) The exercise price per share shall not be less than eighty-five percent
(85%) of the Fair Market Value per share of Common Stock on the option grant date.

          (ii) If the person to whom the option is granted is a 10% Stockholder, then the
exercise price per share shall not be less than one hundred ten percent (110%) of
the Fair Market Value per share of Common Stock on the option grant date.

          2. The exercise price shall become immediately due upon exercise of the option and shall,
subject to the provisions of Section I of Article Four and the documents evidencing the option, be
payable in cash or check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the exercise price may
also be paid as follows:

          (i) in shares of Common Stock held for the requisite period necessary to avoid
a charge to the Corporation’s earnings for financial reporting purposes and valued
at Fair Market Value on the Exercise Date, or

          (ii) to the extent the option is exercised for vested shares, through a special
sale and remittance procedure pursuant to which the Optionee shall concurrently
provide irrevocable instructions (A) to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (B) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order to
complete the sale.

4.

 

     Except to the extent such sale and remittance procedure is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.

     B. Exercise and Term of Options. Each option shall be exercisable at such time or
times, during such period and for such number of shares as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option grant. However, no option shall
have a term in excess of ten (10) years measured from the option grant date.

     C. Effect of Termination of Service.

          1. The following provisions shall govern the exercise of any options held by the Optionee at
the time of cessation of Service or death:

          (i) Should the Optionee cease to remain in Service for any reason other than
death, Disability or Misconduct, then the Optionee shall have a period of three (3)
months following the date of such cessation of Service during which to exercise each
outstanding option held by such Optionee.

          (ii) Should Optionee’s Service terminate by reason of Disability, then the
Optionee shall have a period of twelve (12) months following the date of such
cessation of Service during which to exercise each outstanding option held by such
Optionee.

          (iii) If the Optionee dies while holding an outstanding option, then the
personal representative of his or her estate or the person or persons to whom the
option is transferred pursuant to the Optionee’s will or the laws of inheritance
shall have a twelve (12)-month period following the date of the Optionee’s death to
exercise such option.

          (iv) Under no circumstances, however, shall any such option be exercisable
after the specified expiration of the option term.

          (v) During the applicable post-Service exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares for which the
option is exercisable on the date of the Optionee’s cessation of Service. Upon the
expiration of the applicable exercise period or (if earlier) upon the expiration of
the option term, the option shall terminate and cease to be outstanding for any
vested shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee’s cessation of Service, terminate and cease to
be outstanding with respect to any and all option shares for which the option is not
otherwise at the time exercisable or in which the Optionee is not otherwise at that
time vested.

          (vi) Should Optionee’s Service be terminated for Misconduct, then all
outstanding options held by the Optionee shall terminate immediately and cease to
remain outstanding.

5.

 

          2. The Plan Administrator shall have the discretion, exercisable either at the time an option
is granted or at any time while the option remains outstanding, to:

          (i) extend the period of time for which the option is to remain exercisable
following Optionee’s cessation of Service or death from the limited period otherwise
in effect for that option to such greater period of time as the Plan Administrator
shall deem appropriate, but in no event beyond the expiration of the option term,
and/or

          (ii) permit the option to be exercised, during the applicable post-Service
exercise period, not only with respect to the number of vested shares of Common
Stock for which such option is exercisable at the time of the Optionee’s cessation
of Service but also with respect to one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued in Service.

     D. Stockholder Rights. The holder of an option shall have no stockholder rights with
respect to the shares subject to the option until such person shall have exercised the option, paid
the exercise price and become the recordholder of the purchased shares.

     E. Unvested Shares. The Plan Administrator shall have the discretion to grant options
which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while
holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and the appropriate
vesting schedule for the purchased shares) shall be established by the Plan Administrator and set
forth in the document evidencing such repurchase right. The Plan Administrator may not impose a
vesting schedule upon any option grant or the shares of Common Stock subject to that option which
is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur
not later than one (1) year after the option grant date. However, such limitation shall not be
applicable to any option grants made to individuals who are officers of the Corporation,
non-employee Board members or independent consultants.

     F. First Refusal Rights. Until such time as the Common Stock is first registered
under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal with
respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of
Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the document evidencing such
right.

     G. Limited Transferability of Options. During the lifetime of the Optionee, the
option shall be exercisable only by the Optionee and shall not be assignable or transferable other
than by will or by the laws of descent and distribution following the Optionee’s death.

6.

 

     H. Withholding. The Corporation’s obligation to deliver shares of Common Stock upon
the exercise of any options granted under the Plan shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding requirements.

II. INCENTIVE OPTIONS

     The terms specified below shall be applicable to all Incentive Options. Except as modified by
the provisions of this Section II, all the provisions of Articles One, Two and Four shall be
applicable to Incentive Options. Options which are specifically designated as Non-Statutory
Options shall not be subject to the terms of this Section II.

     A. Eligibility. Incentive Options may only be granted to Employees.

     B. Exercise Price. The exercise price per share shall not be less than one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

     C. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock
(determined as of the respective date or dates of grant) for which one or more options granted to
any Employee under the Plan (or any other option plan of the Corporation or any Parent or
Subsidiary) may for the first time become exercisable as Incentive Options during any one (1)
calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are granted.

     D. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10%
Stockholder, then the option term shall not exceed five (5) years measured from the option grant
date.

III. CORPORATE TRANSACTION

     A. The Accelerated Shares (as defined below) subject to each option outstanding under the Plan
at the time of a Corporate Transaction shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the Accelerated Shares of Common Stock at the time subject to that option
and may be exercised for any or all of those Accelerated Shares as fully-vested shares of Common
Stock. However, the Accelerated Shares subject to an outstanding option shall not vest on such an
accelerated basis if and to the extent: (i) such option is assumed by the successor corporation
(or parent thereof) in the Corporate Transaction and any repurchase rights of the Corporation with
respect to the unvested option shares are concurrently assigned to such successor corporation (or
parent thereof) or (ii) such option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing on the unvested option shares at the time
of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting
schedule applicable to

7.

 

those unvested option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant. For purposes of
this Section III, the “Accelerated Shares” shall, with respect to each option outstanding under the
Plan, be defined as that portion of the shares subject to such option but not otherwise vested as
of the time of the Corporate Transaction and that would become vested pursuant to the vesting
schedule applicable to such option if the Optionee to whom such option was granted completed
eighteen (18) additional months of Service measured from the effective date of the Corporate
Transaction.

     B. All outstanding repurchase rights shall also terminate automatically, and the shares of
Common Stock subject to those terminated rights shall immediately vest in full, in the event of any
Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii)
such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the
time the repurchase right is issued.

     C. Immediately following the consummation of the Corporate Transaction, all outstanding
options shall terminate and cease to be outstanding, except to the extent assumed by the successor
corporation (or parent thereof).

     D. Each option which is assumed in connection with a Corporate Transaction shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and
class of securities which would have been issuable to the Optionee in consummation of such
Corporate Transaction, had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities
available for issuance under the Plan following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same.

     E. The Plan Administrator shall have the discretion, exercisable either at the time the option
is granted or at any time while the option remains outstanding, to structure one or more options so
that those options shall automatically accelerate and vest in full (and any repurchase rights of
the Corporation with respect to the unvested shares subject to those options shall immediately
terminate) upon the occurrence of a Corporate Transaction, whether or not those options are to be
assumed in the Corporate Transaction.

     F. The Plan Administrator shall also have full power and authority, exercisable either at the
time the option is granted or at any time while the option remains outstanding, to structure such
option so that the shares subject to that option will automatically vest on an accelerated basis
should the Optionee’s Service terminate by reason of an Involuntary Termination within a designated
period (not to exceed eighteen (18) months) following the effective date of any Corporate
Transaction in which the option is assumed and the repurchase rights applicable to those shares do
not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested
option shares until the expiration or sooner termination of the option term. In addition, the Plan
Administrator may provide that one or more of the Corporation’s outstanding repurchase rights with
respect to shares held by the Optionee at the

8.

 

time of such Involuntary Termination shall immediately terminate on an accelerated basis, and
the shares subject to those terminated rights shall accordingly vest at that time.

     G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction
shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the
accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal
tax laws.

     H. The grant of options under the Plan shall in no way affect the right of the Corporation to
adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

     The Plan Administrator shall have the authority to effect, at any time and from time to time,
with the consent of the affected option holders, the cancellation of any or all outstanding options
under the Plan and to grant in substitution therefor new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on the Fair Market
Value per share of Common Stock on the new option grant date.

9.

 

ARTICLE THREE

STOCK ISSUANCE PROGRAM

I. STOCK ISSUANCE TERMS

     Shares of Common Stock may be issued under the Stock Issuance Program through direct and
immediate issuances without any intervening option grants. Each such stock issuance shall be
evidenced by a Stock Issuance Agreement which complies with the terms specified below.

     A. Purchase Price.

          1. The purchase price per share shall be fixed by the Plan Administrator but shall not be less
than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issue
date. However, the purchase price per share of Common Stock issued to a 10% Stockholder shall not
be less than one hundred and ten percent (110%) of such Fair Market Value.

          2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be
issued under the Stock Issuance Program for any of the following items of consideration which the
Plan Administrator may deem appropriate in each individual instance:

          (i) cash or check made payable to the Corporation, or

          (ii) past services rendered to the Corporation (or any Parent or Subsidiary).

     B. Vesting Provisions.

          1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of
the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more
installments over the Participant’s period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule upon any stock
issuance effected under the Stock Issuance Program which is more restrictive than twenty percent
(20%) per year vesting, with initial vesting to occur not later than one (1) year after the
issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers
of the Corporation, non-employee Board members or independent consultants.

          2. Any new, substituted or additional securities or other property (including money paid other
than as a regular cash dividend) which the Participant may have the right to receive with respect
to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s

10.

 

receipt of consideration shall be issued subject to (i) the same vesting requirements
applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements
as the Plan Administrator shall deem appropriate.

          3. The Participant shall have full stockholder rights with respect to any shares of Common
Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant’s
interest in those shares is vested. Accordingly, the Participant shall have the right to vote such
shares and to receive any regular cash dividends paid on such shares.

          4. Should the Participant cease to remain in Service while holding one or more unvested shares
of Common Stock issued under the Stock Issuance Program or should the performance objectives not be
attained with respect to one or more such unvested shares of Common Stock, then those shares shall
be immediately surrendered to the Corporation for cancellation, and the Participant shall have no
further stockholder rights with respect to those shares. To the extent the surrendered shares were
previously issued to the Participant for consideration paid in cash or cash equivalent (including
the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of
any outstanding purchase-money note of the Participant attributable to such surrendered shares.

          5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or
more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise
occur upon the non-completion of the vesting schedule applicable to those shares. Such waiver
shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock
as to which the waiver applies. Such waiver may be effected at any time, whether before or after
the Participant’s cessation of Service or the attainment or non-attainment of the applicable
performance objectives.

     C. First Refusal Rights. Until such time as the Common Stock is first registered
under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal with
respect to any proposed disposition by the Participant (or any successor in interest) of any shares
of Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator and set forth in the
document evidencing such right.

II. CORPORATE TRANSACTION

     A. Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically with respect to the Accelerated Shares, and
the Accelerated Shares of Common Stock subject to those terminated rights shall immediately vest in
full, except to the extent: (i) those repurchase rights are assigned to the successor corporation
(or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time the repurchase
right is issued. For purposes of this Section II, the “Accelerated Shares” shall, with respect to
each option outstanding under the Plan, be defined

11.

 

as that portion of the shares subject to such option but not otherwise vested as of the time
of the Corporate Transaction and that would become vested pursuant to the vesting schedule
applicable to such option if the Optionee to whom such option was granted completed eighteen (18)
additional months of Service measured from the effective date of the Corporate Transaction.

     B. The Plan Administrator shall have the discretionary authority, exercisable either at the
time the unvested shares are issued or any time while the Corporation’s repurchase rights with
respect to those shares remain outstanding, to provide that those rights shall automatically
terminate on an accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant’s Service should subsequently terminate
by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those repurchase rights
are assigned to the successor corporation (or parent thereof).

III. SHARE ESCROW/LEGENDS

     Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the
Corporation until the Participant’s interest in such shares vests or may be issued directly to the
Participant with restrictive legends on the certificates evidencing those unvested shares.

12.

 

ARTICLE FOUR

MISCELLANEOUS

I. FINANCING

     The Plan Administrator may permit any Optionee or Participant to pay the option exercise price
under the Option Grant Program or the purchase price for shares issued under the Stock Issuance
Program by delivering a full-recourse, interest bearing promissory note payable in one or more
installments and secured by the purchased shares. The terms of any such promissory note (including
the interest rate and the terms of repayment) shall be established by the Plan Administrator in its
sole discretion. In no event may the maximum credit available to the Optionee or Participant
exceed the sum of (i) the aggregate option exercise price or purchase price payable for the
purchased shares (less the par value of those shares) plus (ii) any Federal, state and local income
and employment tax liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

II. EFFECTIVE DATE AND TERM OF PLAN

     A. The Plan shall become effective when adopted by the Board, but no option granted under the
Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by
the Corporation’s stockholders. If such stockholder approval is not obtained within twelve (12)
months after the date of the Board’s adoption of the Plan, then all options previously granted
under the Plan shall terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator
may grant options and issue shares under the Plan at any time after the effective date of the Plan
and before the date fixed herein for termination of the Plan.

     B. The Plan shall terminate upon the earliest of (i) the expiration of the ten
(10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which
all shares available for issuance under the Plan shall have been issued as vested shares or (iii)
the termination of all outstanding options in connection with a Corporate Transaction. All options
and unvested stock issuances outstanding at the time of a clause (i) termination event shall
continue to have full force and effect in accordance with the provisions of the documents
evidencing those options or issuances.

III. AMENDMENT OF THE PLAN

     A. The Board shall have complete and exclusive power and authority to amend or modify the Plan
in any or all respects. However, no such amendment or modification shall adversely affect the
rights and obligations with respect to options or unvested stock issuances at the time outstanding
under the Plan unless the Optionee or the Participant consents to such amendment or modification.
In addition, certain amendments may require stockholder approval pursuant to applicable laws and
regulations.

13.

 

     B. Options may be granted under the Option Grant Program and shares may be issued under the
Stock Issuance Program which are in each instance in excess of the number of shares of Common Stock
then available for issuance under the Plan, provided any excess shares actually issued under those
programs shall be held in escrow until there is obtained stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for issuance under the Plan.
If such stockholder approval is not obtained within twelve (12) months after the date the first
such excess grants or issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall
promptly refund to the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest (at the applicable
Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.

IV. USE OF PROCEEDS

     Any cash proceeds received by the Corporation from the sale of shares of Common Stock under
the Plan shall be used for general corporate purposes.

V. WITHHOLDING

     The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any
options or upon the issuance or vesting of any shares issued under the Plan shall be subject to the
satisfaction of all applicable Federal, state and local income and employment tax withholding
requirements.

VI. REGULATORY APPROVALS

     The implementation of the Plan, the granting of any options under the Plan and the issuance of
any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance
Program shall be subject to the Corporation’s procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options granted under it and the
shares of Common Stock issued pursuant to it.

VII. NO EMPLOYMENT OR SERVICE RIGHTS

     Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in
Service for any period of specific duration or interfere with or otherwise restrict in any way the
rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of
the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate
such person’s Service at any time for any reason, with or without cause.

14.

 

VIII. FINANCIAL REPORTS

     The Corporation shall deliver a balance sheet and an income statement at least annually to
each individual holding an outstanding option under the Plan, unless such individual is a key
Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.

15.

 

APPENDIX

     The following definitions shall be in effect under the Plan:

     A. Board shall mean the Corporation’s Board of Directors.

     B. Code shall mean the Internal Revenue Code of 1986, as amended.

     C. Committee shall mean a committee of two (2) or more Board members appointed by the
Board to exercise one or more administrative functions under the Plan.

     D. Common Stock shall mean the Corporation’s common stock.

     E. Corporate Transaction shall mean either of the following stockholder-approved
transactions to which the Corporation is a party:

          (i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation’s outstanding
securities are transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or

          (ii) the sale, transfer or other disposition of all or substantially all of the
Corporation’s assets in complete liquidation or dissolution of the Corporation.

     F. Corporation shall mean Direct Methanol Fuel Cell Corporation, a Delaware
corporation, and any successor corporation to all or substantially all of the assets or voting
stock of Direct Methanol Fuel Cell Corporation which shall by appropriate action adopt the Plan.

     G. Disability shall mean the inability of the Optionee or the Participant to engage
in any substantial gainful activity by reason of any medically determinable physical or mental
impairment and shall be determined by the Plan Administrator on the basis of such medical evidence
as the Plan Administrator deems warranted under the circumstances.

     H. Employee shall mean an individual who is in the employ of the Corporation (or any
Parent or Subsidiary), subject to the control and direction of the employer entity as to both the
work to be performed and the manner and method of performance.

     I. Exercise Date shall mean the date on which the Corporation shall have received
written notice of the option exercise.

A-1.

 

     J. Fair Market Value per share of Common Stock on any relevant date shall be determined
in accordance with the following provisions:

          (i) If the Common Stock is at the time traded on the Nasdaq National Market,
then the Fair Market Value shall be the closing selling price per share of Common
Stock on the date in question, as such price is reported by the National Association
of Securities Dealers on the Nasdaq National Market. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such quotation
exists.

          (ii) If the Common Stock is at the time listed on any Stock Exchange, then the
Fair Market Value shall be the closing selling price per share of Common Stock on
the date in question on the Stock Exchange determined by the Plan Administrator to
be the primary market for the Common Stock, as such price is officially quoted in
the composite tape of transactions on such exchange. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such quotation
exists.

          (iii) If the Common Stock is at the time neither listed on any Stock Exchange
nor traded on the Nasdaq National Market, then the Fair Market Value shall be
determined by the Plan Administrator after taking into account such factors as the
Plan Administrator shall deem appropriate.

     K. Incentive Option shall mean an option which satisfies the requirements of Code
Section 422.

     L. Involuntary Termination shall mean the termination of the Service of any individual
which occurs by reason of:

          (i) such individual’s involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or

          (ii) such individual’s voluntary resignation following (A) a change in his or
her position with the Corporation which materially reduces his or her duties and
responsibilities or the level of management to which he or she reports, (B) a
reduction in his or her level of compensation (including base salary, fringe
benefits and target bonuses under any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of such
individual’s place of employment by more than fifty (50) miles, provided and only if
such change, reduction or relocation is effected without the individual’s consent.

A-2.

 

     M. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty
by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential
information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other
intentional misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or
other person in the Service of the Corporation (or any Parent or Subsidiary).

     N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

     O. Non-Statutory Option shall mean an option not intended to satisfy the requirements
of Code Section 422.

     P. Option Grant Program shall mean the option grant program in effect under the Plan.

     Q. Optionee shall mean any person to whom an option is granted under the Plan.

     R. Parent shall mean any corporation (other than the Corporation) in an unbroken chain
of corporations ending with the Corporation, provided each corporation in the unbroken chain (other
than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in one of the other corporations
in such chain.

     S. Participant shall mean any person who is issued shares of Common Stock under the
Stock Issuance Program.

     T. Plan shall mean the Corporation’s 2002 Stock Option/Stock Issuance Plan, as set
forth in this document.

     U. Plan Administrator shall mean either the Board or the Committee acting in its
capacity as administrator of the Plan.

     V. Service shall mean the provision of services to the Corporation (or any Parent or
Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of
directors or a consultant or independent advisor, except to the extent otherwise specifically
provided in the documents evidencing the option grant.

     W. Stock Exchange shall mean either the American Stock Exchange or the New York Stock
Exchange.

     X. Stock Issuance Agreement shall mean the agreement entered into by the Corporation
and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance
Program.

A-3.

 

     Y. Stock Issuance Program shall mean the stock issuance program in effect under the
Plan.

     Z. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation, provided each corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.

     AA. 10% Stockholder shall mean the owner of stock (as determined under Code Section
424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of
stock of the Corporation (or any Parent or Subsidiary).

A-4.

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