Exhibit 10.2

 

EXECUTION COPY

 

DUANE READE HOLDINGS, INC.

 

MANAGEMENT STOCK OPTION PLAN

 

(Effective as of July 30, 2004)

 

1.                          PURPOSE

 

The purpose of the Plan is to provide a means through which the Company and its
Affiliates may attract able persons to enter and remain in the employ of the
Company and Affiliates and to provide a means whereby employees, directors and
consultants of the Company and its Affiliates can acquire and maintain Common
Stock ownership, thereby strengthening their commitment to the welfare of the
Company and Affiliates and promoting an identity of interest between
stockholders and these employees.

 

The Plan provides for granting Incentive Stock Options and Nonqualified Stock
Options.

 

2.                          DEFINITIONS

 

The following definitions shall be applicable throughout the Plan:

 

(A)                                  “AFFILIATE” MEANS (I) ANY ENTITY THAT
DIRECTLY OR INDIRECTLY IS CONTROLLED BY, OR IS UNDER COMMON CONTROL WITH THE
COMPANY AND (II) ANY ENTITY IN WHICH THE COMPANY HAS A SIGNIFICANT EQUITY
INTEREST, IN EITHER CASE AS DETERMINED BY THE COMMITTEE.

 

(B)                                 “BOARD” MEANS THE BOARD OF DIRECTORS OF THE
COMPANY.

 

(C)                                  “CAUSE” MEANS (UNLESS OTHERWISE SET FORTH
IN A STOCK OPTION AGREEMENT), IN THE CASE OF A PARTICIPANT WHO HAS AN EMPLOYMENT
AGREEMENT WITH THE COMPANY IN EFFECT AT THE TIME OF HIS TERMINATION OF
EMPLOYMENT, THE DEFINITION OF “CAUSE” SET FORTH IN SUCH EMPLOYMENT AGREEMENT. 
OTHERWISE, “CAUSE” MEANS THE COMPANY OR AN AFFILIATE HAVING “CAUSE” TO TERMINATE
A PARTICIPANT’S EMPLOYMENT OR SERVICE, AS DEFINED IN ANY EXISTING EMPLOYMENT,
CONSULTING OR ANY OTHER AGREEMENT BETWEEN THE PARTICIPANT AND THE COMPANY OR AN
AFFILIATE, OR, IN THE ABSENCE OF SUCH AN EMPLOYMENT, CONSULTING OR OTHER
AGREEMENT, UPON (I) THE DETERMINATION BY THE COMMITTEE THAT THE PARTICIPANT HAS
CEASED TO PERFORM HIS DUTIES TO THE COMPANY OR AN AFFILIATE (OTHER THAN AS A
RESULT OF HIS INCAPACITY DUE TO PHYSICAL OR MENTAL ILLNESS OR INJURY), WHICH
FAILURE AMOUNTS TO AN INTENTIONAL AND EXTENDED NEGLECT OF HIS DUTIES TO SUCH
PARTY, (II) THE COMMITTEE’S DETERMINATION THAT THE PARTICIPANT HAS ENGAGED OR IS
ABOUT TO ENGAGE IN CONDUCT MATERIALLY INJURIOUS TO THE COMPANY OR AN AFFILIATE,
(III) THE PARTICIPANT HAVING BEEN CONVICTED OF, OR PLEAD GUILTY OR NO CONTEST
TO, A FELONY OR (IV) THE FAILURE OF THE PARTICIPANT TO FOLLOW THE LAWFUL
INSTRUCTIONS OF THE BOARD OR HIS DIRECT SUPERIORS.

 

(D)                                 “CHANGE IN CONTROL” MEANS, IN THE CASE OF A
PARTICIPANT WHO HAS AN EMPLOYMENT AGREEMENT WITH THE COMPANY IN EFFECT AT THE
TIME OF HIS TERMINATION OF EMPLOYMENT, THE DEFINITION OF “CHANGE IN CONTROL” SET
FORTH IN SUCH EMPLOYMENT AGREEMENT.  OTHERWISE, “CHANGE IN CONTROL” SHALL HAVE
MEANING SET FORTH IN THE APPLICABLE STOCK OPTION AGREEMENT.

 

--------------------------------------------------------------------------------

 

(E)                                  “CODE” MEANS THE INTERNAL REVENUE CODE OF
1986, AS AMENDED.  REFERENCE IN THE PLAN TO ANY SECTION OF THE CODE SHALL BE
DEEMED TO INCLUDE ANY AMENDMENTS OR SUCCESSOR PROVISIONS TO SUCH SECTION AND ANY
REGULATIONS UNDER SUCH SECTION.

 

(F)                                    “COMMITTEE” MEANS THE COMPENSATION
COMMITTEE OF THE BOARD ESTABLISHED UNDER THE BY-LAWS OF THE COMPANY, OR IF NO
SUCH COMMITTEE HAS YET BEEN ESTABLISHED, THE BOARD.  THE COMMITTEE SHALL CONSIST
OF AT LEAST TWO DIRECTORS AS THE BOARD MAY APPOINT TO ADMINISTER THE PLAN OR, IF
NO SUCH COMMITTEE HAS BEEN APPOINTED BY THE BOARD, THE BOARD.  ON AND AFTER THE
TIME THAT THE COMPANY BECOMES SUBJECT TO THE EXCHANGE ACT, UNLESS THE BOARD IS
ACTING AS THE COMMITTEE OR THE BOARD SPECIFICALLY DETERMINES OTHERWISE, EACH
MEMBER OF THE COMMITTEE SHALL, AT THE TIME HE TAKES ANY ACTION WITH RESPECT TO
AN OPTION UNDER THE PLAN, BE AN ELIGIBLE DIRECTOR; PROVIDED THAT THE MERE FACT
THAT A COMMITTEE MEMBER SHALL FAIL TO QUALIFY AS AN ELIGIBLE DIRECTOR SHALL NOT
INVALIDATE ANY OPTION GRANTED BY THE COMMITTEE WHICH OPTION IS OTHERWISE VALIDLY
MADE UNDER THE PLAN.

 

(G)                                 “COMMON STOCK” MEANS THE COMMON STOCK, PAR
VALUE $0.01 PER SHARE, OF THE COMPANY.

 

(H)                                 “COMPANY” MEANS DUANE READE HOLDINGS, INC.

 

(I)                                     “DISABILITY” MEANS, IN THE CASE OF A
PARTICIPANT WHO HAS AN EMPLOYMENT AGREEMENT WITH THE COMPANY IN EFFECT AT THE
TIME OF HIS TERMINATION OF EMPLOYMENT, THE DEFINITION OF “DISABILITY” SET FORTH
IN SUCH EMPLOYMENT AGREEMENT.  OTHERWISE, “DISABILITY” MEANS, UNLESS IN THE CASE
OF A PARTICULAR OPTION, THE APPLICABLE STOCK OPTION AGREEMENT STATES OTHERWISE,
A CONDITION ENTITLING A PERSON TO RECEIVE BENEFITS UNDER THE LONG-TERM
DISABILITY PLAN OF THE COMPANY OR AN AFFILIATE, AS MAY BE APPLICABLE TO THE
PARTICIPANT IN QUESTION, OR, IN THE ABSENCE OF SUCH A PLAN, THE COMPLETE AND
PERMANENT INABILITY BY REASON OF ILLNESS OR ACCIDENT TO PERFORM THE DUTIES OF
THE OCCUPATION AT WHICH A PARTICIPANT WAS EMPLOYED OR SERVED WHEN SUCH
DISABILITY COMMENCED OR, AS DETERMINED BY THE COMMITTEE BASED UPON MEDICAL
EVIDENCE ACCEPTABLE TO IT.

 

(J)                                     “DRS, LLC” MEANS DUANE READE
SHAREHOLDERS, LLC.

 

(K)                                  “EFFECTIVE DATE” MEANS JULY 30, 2004.

 

(L)                                     “ELIGIBLE DIRECTOR” MEANS A PERSON WHO
IS (I) A “NON-EMPLOYEE DIRECTOR” WITHIN THE MEANING OF RULE 16B-3 UNDER THE
EXCHANGE ACT, OR A PERSON MEETING ANY SIMILAR REQUIREMENT UNDER ANY SUCCESSOR
RULE OR REGULATION AND (II) AN “OUTSIDE DIRECTOR” WITHIN THE MEANING OF
SECTION 162(M) OF THE CODE, AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER;
PROVIDED, HOWEVER, THAT CLAUSE (II) SHALL APPLY ONLY ON AND AFTER THE 162(M)
EFFECTIVE DATE.

 

(M)                               “ELIGIBLE PERSON” MEANS ANY (I) INDIVIDUAL
REGULARLY EMPLOYED BY THE COMPANY OR AN AFFILIATE WHO SATISFIES ALL OF THE
REQUIREMENTS OF SECTION 6, (II) DIRECTOR OF THE COMPANY OR AN AFFILIATE OR (III)
CONSULTANT OR ADVISOR TO THE COMPANY OR AN AFFILIATE WHO IS ENTITLED TO
PARTICIPATE IN AN “EMPLOYEE BENEFIT PLAN” WITHIN THE MEANING OF 17 CFR § 230.405
(WHICH, AS OF THE EFFECTIVE DATE, INCLUDES THOSE WHO (A) ARE NATURAL PERSONS AND
(B) PROVIDE BONA FIDE SERVICES TO THE COMPANY OTHER THAN IN CONNECTION WITH THE
OFFER OR SALE OF SECURITIES IN

 

2

--------------------------------------------------------------------------------

 

A CAPITAL-RAISING TRANSACTION, AND DO NOT DIRECTLY OR INDIRECTLY PROMOTE OR
MAINTAIN A MARKET FOR THE COMPANY’S SECURITIES).

 

(N)                                 “EQUITY SECURITIES” HAS THE MEANING ASCRIBED
TO SUCH TERM IN RULE 405 PROMULGATED UNDER THE SECURITIES ACT AS IN EFFECT ON
THE EFFECTIVE DATE, AND IN ANY EVENT INCLUDES ANY COMMON STOCK, ANY LIMITED
PARTNERSHIP INTEREST, ANY LIMITED LIABILITY COMPANY INTEREST AND ANY OTHER
INTEREST OR SECURITY HAVING THE ATTENDANT RIGHT TO VOTE FOR DIRECTORS OR SIMILAR
REPRESENTATIVES.

 

(O)                                 “EXCHANGE ACT” MEANS THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED.

 

(P)                                 “FAIR MARKET VALUE” ON A GIVEN DATE MEANS,
EXCEPT TO THE EXTENT OTHERWISE PROVIDED IN AN APPLICABLE STOCK OPTION AGREEMENT,
(I) IF THE STOCK IS LISTED ON A NATIONAL SECURITIES EXCHANGE, THE MEAN BETWEEN
THE HIGHEST AND LOWEST SALE PRICES REPORTED AS HAVING OCCURRED ON THE PRIMARY
EXCHANGE WITH WHICH THE STOCK IS LISTED AND TRADED ON THE DATE PRIOR TO SUCH
DATE, OR, IF THERE IS NO SUCH SALE ON THAT DATE, THEN ON THE LAST PRECEDING DATE
ON WHICH SUCH A SALE WAS REPORTED; (II) IF THE STOCK IS NOT LISTED ON ANY
NATIONAL SECURITIES EXCHANGE BUT IS QUOTED IN THE NATIONAL MARKET SYSTEM OF THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION SYSTEM (“NASDAQ”)
ON A LAST SALE BASIS, THE AVERAGE BETWEEN THE HIGH BID PRICE AND LOW ASK PRICE
REPORTED ON THE DATE PRIOR TO SUCH DATE, OR, IF THERE IS NO SUCH SALE ON THAT
DATE, THEN ON THE LAST PRECEDING DATE ON WHICH A SALE WAS REPORTED; OR (III) IF
THE STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE NOR QUOTED IN THE
NASDAQ ON A LAST SALE BASIS, THE AMOUNT DETERMINED BY THE COMMITTEE TO BE THE
FAIR MARKET VALUE BASED UPON A GOOD FAITH ATTEMPT TO VALUE THE STOCK ACCURATELY.

 

(Q)                                 “GRANT DATE” MEANS THE DATE ON WHICH THE
GRANTING OF AN OPTION IS AUTHORIZED, OR SUCH OTHER DATE AS MAY BE SPECIFIED IN
SUCH AUTHORIZATION OR, IF THERE IS NO SUCH DATE, THE DATE INDICATED ON THE
APPLICABLE STOCK OPTION AGREEMENT.

 

(R)                                    “INCENTIVE STOCK OPTION” MEANS AN OPTION
GRANTED BY THE COMMITTEE TO A PARTICIPANT UNDER THE PLAN WHICH IS DESIGNATED BY
THE COMMITTEE AS AN INCENTIVE STOCK OPTION AS DESCRIBED IN SECTION 422 OF THE
CODE.

 

(S)                                  “IPO” MEANS AN UNDERWRITTEN PUBLIC SALE OF
EQUITY SECURITIES OF AN IPO ENTITY PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT THAT (Y) RESULTS IN THE LISTING FOR TRADING
ON AN INTERNATIONALLY RECOGNIZED SECURITIES EXCHANGE OR INTER-DEALER QUOTATION
SYSTEM AND (Z) EITHER INVOLVES (ALONE OR IN COMBINATION WITH ANY PRIOR SUCH
OFFERINGS) EITHER (I) A PUBLIC SALE OF AT LEAST 20% OF SUCH EQUITY SECURITIES OR
(II) AN OFFERING OF EQUITY SECURITIES WHICH GENERATES GROSS PROCEEDS OF AT LEAST
$100 MILLION.

 

(T)                                    “IPO ENTITY” MEANS ANY OF DRS, LLC, THE
COMPANY, ANY SUBSIDIARY OF THE COMPANY, INCLUDING DUANE READE INC., OR ANY OF
THEIR RESPECTIVE SUCCESSORS.

 

(U)                                 “NONQUALIFIED STOCK OPTION” MEANS AN OPTION
GRANTED BY THE COMMITTEE TO A PARTICIPANT UNDER THE PLAN WHICH IS NOT DESIGNATED
BY THE COMMITTEE AS AN INCENTIVE STOCK OPTION.

 

3

--------------------------------------------------------------------------------

 

(V)                                 “OH” MEANS OAK HILL CAPITAL PARTNERS, L.P.
AND/OR, AS THE CASE MAY BE, OAK HILL CAPITAL MANAGEMENT PARTNERS, L.P.

 

(W)                               “OH AFFILIATES” MEANS OH, ANY RELATED OH
PARTNERSHIP OR ANY OTHER MEMBER OF THE OH INVESTOR GROUP THAT IS AN AFFILIATE OF
OH OR OAK HILL CAPITAL MANAGEMENT, INC., BUT EXCLUDING ANTHONY J. CUTI AND THE
PARTICIPANTS.  FOR THE AVOIDANCE OF DOUBT, AS OF THE EFFECTIVE DATE, THE TERM OH
AFFILIATE INCLUDES OHCP MGP, LLC.

 

(X)                                   “OH INVESTOR GROUP” MEANS OAK HILL CAPITAL
PARTNERS, L.P., RELATED OAK HILL PARTNERSHIPS AND THEIR RESPECTIVE LIMITED
PARTNERS AND AFFILIATES AND OTHER INITIAL INVESTORS (SUCH OTHER INVESTORS,
“CO-INVESTORS”) IN DRS, LLC DIRECT OR INDIRECT INCLUDING THOSE THAT PARTICIPATE
WITH 90 DAYS FOLLOWING THE EFFECTIVE DATE, BUT EXCLUDING, ANTHONY J. CUTI.

 

(Y)                                 “162(M) EFFECTIVE DATE” MEANS THE FIRST DATE
ON WHICH OPTIONS GRANTED UNDER THE PLAN DO NOT QUALIFY FOR AN EXEMPTION FROM THE
DEDUCTION LIMITATIONS OF SECTION 162(M) OF THE CODE ON ACCOUNT OF AN EXEMPTION,
OR A TRANSITION OR GRANDFATHER RULE.

 

(Z)                                   “OPTION” MEANS AN OPTION GRANTED UNDER
SECTION 7.

 

(AA)                            “OPTION PERIOD” MEANS THE PERIOD DESCRIBED IN
SECTION 7(C).

 

(BB)                          “OPTION PRICE” MEANS THE EXERCISE PRICE FOR AN
OPTION AS DESCRIBED IN SECTION 7(A).

 

(CC)                            “PARTICIPANT” MEANS AN ELIGIBLE PERSON WHO HAS
BEEN SELECTED BY THE COMMITTEE TO PARTICIPATE IN THE PLAN AND TO RECEIVE AN
OPTION PURSUANT TO SECTION 6.

 

(DD)                          “PLAN” MEANS THIS DUANE READE HOLDINGS, INC.
MANAGEMENT STOCK OPTION PLAN.

 

(EE)                            “PUBLIC SALE” MEANS ANY SALE OF EQUITY
SECURITIES TO THE PUBLIC (I) PURSUANT TO AN OFFERING REGISTERED UNDER THE
SECURITIES ACT OR (II) THROUGH A BROKER, DEALER OR MARKET MAKER PURSUANT TO THE
PROVISIONS OF RULE 144 (OR ANY SIMILAR PROVISION THEN IN EFFECT) ADOPTED UNDER
THE SECURITIES ACT, OTHER THAN RULE 144(K) OR ANY SIMILAR PROVISION THEN IN
EFFECT.

 

(FF)                                “SECURITIES ACT” MEANS THE SECURITIES ACT OF
1933, AS AMENDED.

 

(GG)                          “STOCK” MEANS THE COMMON STOCK OR SUCH OTHER
AUTHORIZED SHARES OF STOCK OF THE COMPANY AS THE COMMITTEE MAY FROM TIME TO TIME
AUTHORIZE FOR USE UNDER THE PLAN.

 

(HH)                          “STOCK OPTION AGREEMENT” MEANS THE AGREEMENT
BETWEEN THE COMPANY AND A PARTICIPANT WHO HAS BEEN GRANTED AN OPTION PURSUANT TO
SECTION 7 WHICH DEFINES THE RIGHTS AND OBLIGATIONS OF THE PARTIES AS REQUIRED IN
SECTION 7(D)

 

(II)                                  “STOCKHOLDERS AGREEMENT” MEANS THE
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT, DATED JULY 30, 2004, BY AND
AMONG THE COMPANY, DRS, LLC AND CERTAIN MEMBERS OF THE MANAGEMENT OF THE
COMPANY, AS IT MAY BE AMENDED FROM TIME TO TIME.

 

4

--------------------------------------------------------------------------------

 

(JJ)                                  “SUBSIDIARY” MEANS, WITH RESPECT TO ANY
PERSON, ANY ENTITY OF WHICH:

 

(I)                                     IF A CORPORATION, A MAJORITY OF THE
TOTAL VOTING POWER OF SHARES OF STOCK ENTITLED (WITHOUT REGARD TO THE OCCURRENCE
OF ANY CONTINGENCY) TO VOTE IN THE ELECTION OF DIRECTORS, MANAGERS OR TRUSTEES
THEREOF IS AT THE TIME OF DETERMINATION OWNED OR CONTROLLED, DIRECTLY OR
INDIRECTLY, COLLECTIVELY OR INDIVIDUALLY, BY SUCH PERSON OR BY ONE OR MORE
SUBSIDIARIES OF SUCH PERSON; AND

 

(II)                                  IF A PARTNERSHIP, ASSOCIATION, LIMITED
LIABILITY COMPANY OR OTHER ENTITY, (X) THE GENERAL PARTNER OR SIMILAR MANAGING
ENTITY OR (Y) A MAJORITY OF THE PARTNERSHIP, MEMBERSHIP OR OTHER SIMILAR
OWNERSHIP INTEREST THEREOF IS AT THE TIME OF DETERMINATION OWNED OR CONTROLLED,
DIRECTLY OR INDIRECTLY, COLLECTIVELY OR INDIVIDUALLY, BY SUCH PERSON OR BY ONE
OR MORE SUBSIDIARIES OF SUCH PERSON.

 

Each of the Company, DRS, LLC and their respective Subsidiaries shall be deemed
to own a majority ownership interest in a partnership, association, limited
liability company or other entity if it controls the general partner or managing
member or managing director of such entity.

 

3.                          EFFECTIVE DATE, DURATION AND SHAREHOLDER APPROVAL

 

The Plan is effective as of the Effective Date.  The validity and exercisability
of any Options granted pursuant to the Plan on and after the 162(m) Effective
Date is contingent upon approval of the Plan by the shareholders of the Company
in a manner intended to comply with the shareholder approval requirements of
Section 162(m) of the Code.  No Option shall be treated as an Incentive Stock
Option unless the Plan has been approved by the shareholders of the Company in a
manner intended to comply with the shareholder approval requirements of
Section 422(b)(1) of the Code; provided that any Option intended to be an
Incentive Stock Option shall not fail to be effective solely on account of a
failure to obtain such approval, but rather such Option shall be treated as a
Nonqualified Stock Option unless and until such approval is obtained.

 

The expiration date of the Plan, on and after which no Options may be granted
hereunder, shall be the tenth anniversary of the Effective Date; provided,
however, that the administration of the Plan shall continue in effect until all
matters relating to the payment of Options previously granted have been settled.

 

4.                          ADMINISTRATION

 

The Committee shall administer the Plan.  The majority of the members of the
Committee shall constitute a quorum.  The acts of a majority of the members of
the Committee present at any meeting at which a quorum is present or acts
approved in writing by a majority of the Committee shall be deemed the acts of
the Committee.

 

(A)                                  SUBJECT TO THE PROVISIONS OF THE PLAN AND
APPLICABLE LAW, THE COMMITTEE SHALL HAVE THE POWER, IN ADDITION TO OTHER EXPRESS
POWERS AND AUTHORIZATIONS CONFERRED ON THE COMMITTEE BY THE PLAN, TO:  (I)
DESIGNATE PARTICIPANTS; (II) DETERMINE THE TYPE OR TYPES OF OPTIONS

 

5

--------------------------------------------------------------------------------

 

TO BE GRANTED TO A PARTICIPANT; (III) DETERMINE THE NUMBER OF SHARES OF COMMON
STOCK TO BE COVERED BY, OR WITH RESPECT TO WHICH PAYMENTS, RIGHTS, OR OTHER
MATTERS ARE TO BE CALCULATED IN CONNECTION WITH OPTIONS; (IV) DETERMINE THE
TERMS AND CONDITIONS OF ANY OPTIONS; (V) DETERMINE WHETHER, TO WHAT EXTENT, AND
UNDER WHAT CIRCUMSTANCES OPTIONS MAY BE SETTLED OR EXERCISED IN CASH, SHARES OF
COMMON STOCK, OTHER SECURITIES, OTHER OPTIONS, OR OTHER PROPERTY, OR CANCELED,
FORFEITED, OR SUSPENDED AND THE METHOD OR METHODS BY WHICH OPTIONS MAY BE
SETTLED, EXERCISED, CANCELED, FORFEITED, OR SUSPENDED; (VI) DETERMINE WHETHER,
TO WHAT EXTENT, AND UNDER WHAT CIRCUMSTANCES CASH, SHARES OF COMMON STOCK, OTHER
SECURITIES, OTHER OPTIONS, OTHER PROPERTY, AND OTHER AMOUNTS PAYABLE WITH
RESPECT TO AN OPTION SHALL BE DEFERRED EITHER AUTOMATICALLY OR AT THE ELECTION
OF THE HOLDER THEREOF OR OF THE COMMITTEE; (VII) INTERPRET, ADMINISTER RECONCILE
ANY INCONSISTENCY, CORRECT ANY DEFAULT AND/OR SUPPLY ANY OMISSION IN THE PLAN
AND ANY INSTRUMENT OR AGREEMENT RELATING TO, OR OPTION GRANTED UNDER THE PLAN;
(VIII) ESTABLISH, AMEND, SUSPEND, OR WAIVE SUCH RULES AND REGULATIONS AND
APPOINT SUCH AGENTS AS IT SHALL DEEM APPROPRIATE FOR THE PROPER ADMINISTRATION
OF THE PLAN; AND (IX) MAKE ANY OTHER DETERMINATION AND TAKE ANY OTHER ACTION
THAT THE COMMITTEE DEEMS NECESSARY OR DESIRABLE FOR THE ADMINISTRATION OF THE
PLAN.

 

(B)                                 UNLESS OTHERWISE EXPRESSLY PROVIDED IN THE
PLAN, ALL DESIGNATIONS, DETERMINATIONS, INTERPRETATIONS, AND OTHER DECISIONS
UNDER OR WITH RESPECT TO THE PLAN OR ANY OPTION OR ANY DOCUMENTS EVIDENCING ANY
AND ALL OPTIONS SHALL BE WITHIN THE SOLE DISCRETION OF THE COMMITTEE, MAY BE
MADE AT ANY TIME GRANTED PURSUANT TO THE PLAN AND SHALL BE FINAL, CONCLUSIVE,
AND BINDING UPON ALL PARTIES, INCLUDING, WITHOUT LIMITATION, THE COMPANY, AN
AFFILIATE, ANY PARTICIPANT, ANY HOLDER OR BENEFICIARY OF ANY OPTION, AND ANY
SHAREHOLDER.

 

(C)                                  NO MEMBER OF THE COMMITTEE SHALL BE LIABLE
FOR ANY ACTION OR DETERMINATION MADE IN GOOD FAITH WITH RESPECT TO THE PLAN OR
ANY STOCK OPTION AGREEMENT HEREUNDER.

 

5.                          GRANT OF OPTIONS; SHARES SUBJECT TO THE PLAN

 

The Committee may, from time to time, grant Options to one or more Eligible
Persons; provided, however, that:

 

(A)                                  SUBJECT TO SECTION 9, THE AGGREGATE NUMBER
OF SHARES OF STOCK IN RESPECT OF WHICH OPTIONS MAY BE GRANTED UNDER THE PLAN IS
244,930 SHARES;

 

(B)                                 SHARES OF STOCK SHALL BE DEEMED TO HAVE BEEN
USED IN PAYMENT OF OPTIONS WHETHER THEY ARE ACTUALLY DELIVERED OR THE FAIR
MARKET VALUE EQUIVALENT OF SUCH SHARES IS PAID IN CASH; PROVIDED, HOWEVER THAT
SHARES OF STOCK DELIVERED (EITHER DIRECTLY OR BY MEANS OF ATTESTATION) IN FULL
OR PARTIAL PAYMENT OF THE OPTION PRICE IN ACCORDANCE WITH SECTION 7(B) SHALL BE
DEDUCTED FROM THE NUMBER OF SHARES OF STOCK DELIVERED TO THE PARTICIPANT
PURSUANT TO SUCH OPTION FOR PURPOSES OF DETERMINING THE NUMBER OF SHARES OF
STOCK ACQUIRED PURSUANT TO THE PLAN.  IN ACCORDANCE WITH (AND WITHOUT LIMITATION
UPON) THE PRECEDING SENTENCE, IF AND TO THE EXTENT ANY OPTION SHALL BE
SURRENDERED, TERMINATE, EXPIRE, OR BE FORFEITED, THE NUMBER OF SHARES OF STOCK
NO LONGER SUBJECT THERETO SHALL THEREUPON BE RELEASED AND SHALL THEREAFTER BE
AVAILABLE FOR NEW GRANTS UNDER THE PLAN;

 

6

--------------------------------------------------------------------------------

 

(C)                                  STOCK DELIVERED BY THE COMPANY IN
SETTLEMENT OF OPTIONS GRANTED UNDER THE PLAN MAY BE AUTHORIZED AND UNISSUED
STOCK OR STOCK HELD IN THE TREASURY OF THE COMPANY OR MAY BE PURCHASED ON THE
OPEN MARKET OR BY PRIVATE PURCHASE; AND

 

(D)                                 SUBJECT TO SECTION 9, ON AND AFTER THE
162(M) EFFECTIVE DATE, NO PERSON MAY BE GRANTED OPTIONS UNDER THE PLAN DURING
ANY CALENDAR YEAR WITH RESPECT TO MORE THAN 150,000 SHARES OF STOCK; PROVIDED
THAT SUCH NUMBER SHALL BE ADJUSTED PURSUANT TO SECTION 9, AND SHARES OTHERWISE
COUNTED AGAINST SUCH NUMBER, ONLY IN A MANNER WHICH WILL NOT CAUSE THE OPTIONS
GRANTED UNDER THE PLAN TO FAIL TO QUALIFY AS “PERFORMANCE-BASED COMPENSATION”
FOR PURPOSES OF SECTION 162(M) OF THE CODE.

 

6.                          ELIGIBILITY

 

Participation shall be limited to Eligible Persons who have received written
notification from the Committee, or from a person designated by the Committee,
that they have been selected to participate in the Plan.

 

7.                          TERMS OF OPTIONS

 

The Committee is authorized to grant one or more Incentive Stock Options or
Nonqualified Stock Options to any Eligible Person; provided, however, that no
Incentive Stock Options shall be granted to any Eligible Person who is not an
employee of the Company or a “parent” or “subsidiary” of the Company, as such
terms are used in Section 422(a)(2) of the Code.  Each Option so granted shall
be subject to the following conditions, or to such other conditions as may be
reflected in the applicable Stock Option Agreement.  In all events, the
provisions in the applicable Stock Option Agreement shall control the terms of
the Option issued pursuant thereto.  If there shall be a conflict between the
provisions of the Plan and such Stock Option Agreement, the provisions of such
Stock Option Agreement shall control.

 

(A)                                  OPTION PRICE.  THE OPTION PRICE PER SHARE
OF STOCK FOR EACH OPTION SHALL BE SET BY THE COMMITTEE AT THE TIME OF GRANT BUT
SHALL NOT BE LESS THAN (I) IN THE CASE OF AN INCENTIVE STOCK OPTION, AND SUBJECT
TO SECTION 7(E), THE FAIR MARKET VALUE OF A SHARE OF STOCK AT THE GRANT DATE,
AND (II) IN THE CASE OF A NON-QUALIFIED STOCK OPTION, THE PAR VALUE OF A SHARE
OF STOCK; PROVIDED, HOWEVER, THAT ALL OPTIONS GRANTED ON AND AFTER THE 162(M)
EFFECTIVE DATE WHICH ARE INTENDED TO QUALIFY AS “PERFORMANCE-BASED COMPENSATION”
UNDER SECTION 162(M) OF THE CODE SHALL HAVE AN OPTION PRICE PER SHARE OF STOCK
NO LESS THAN THE FAIR MARKET VALUE OF A SHARE OF STOCK ON THE GRANT DATE.

 

(B)                                 MANNER OF EXERCISE AND FORM OF PAYMENT.  NO
SHARES OF STOCK SHALL BE DELIVERED PURSUANT TO ANY EXERCISE OF AN OPTION UNTIL
PAYMENT IN FULL OF THE AGGREGATE OPTION PRICE THEREFOR IS RECEIVED BY THE
COMPANY.  OPTIONS WHICH HAVE BECOME EXERCISABLE MAY BE EXERCISED BY DELIVERY OF
WRITTEN NOTICE OF EXERCISE TO THE COMMITTEE ACCOMPANIED BY PAYMENT OF THE OPTION
PRICE.  THE OPTION PRICE SHALL BE PAYABLE IN CASH AND/OR SHARES OF STOCK VALUED
AT THE FAIR MARKET VALUE AT THE TIME THE OPTION IS EXERCISED (INCLUDING BY MEANS
OF ATTESTATION OF OWNERSHIP OF A SUFFICIENT NUMBER OF SHARES OF STOCK IN LIEU OF
ACTUAL DELIVERY OF SUCH SHARES TO THE COMPANY); PROVIDED, HOWEVER, THAT SUCH
SHARES ARE NOT SUBJECT TO ANY PLEDGE OR OTHER SECURITY INTEREST AND HAVE EITHER
BEEN HELD BY THE PARTICIPANT FOR SIX MONTHS, PREVIOUSLY ACQUIRED

 

7

--------------------------------------------------------------------------------

 

BY THE PARTICIPANT ON THE OPEN MARKET OR MEET SUCH OTHER REQUIREMENTS AS THE
COMMITTEE MAY DETERMINE NECESSARY IN ORDER TO AVOID AN ACCOUNTING EARNINGS
CHARGE IN RESPECT OF THE OPTION) OR, IN THE DISCRETION OF THE COMMITTEE, EITHER
(I) IN OTHER PROPERTY HAVING A FAIR MARKET VALUE ON THE DATE OF EXERCISE EQUAL
TO THE OPTION PRICE, (II) IF THERE SHALL BE A PUBLIC MARKET FOR THE STOCK, BY
DELIVERING TO THE COMMITTEE A COPY OF IRREVOCABLE INSTRUCTIONS TO A STOCKBROKER
TO DELIVER PROMPTLY TO THE COMPANY AN AMOUNT OF LOAN PROCEEDS, OR PROCEEDS OF
THE SALE OF THE STOCK SUBJECT TO THE OPTION, SUFFICIENT TO PAY THE OPTION PRICE
OR (III) BY SUCH OTHER METHOD AS THE COMMITTEE MAY ALLOW.  NOTWITHSTANDING THE
FOREGOING, IN NO EVENT SHALL A PARTICIPANT BE PERMITTED TO EXERCISE AN OPTION IN
THE MANNER DESCRIBED IN CLAUSE (II) OF THE PRECEDING SENTENCES IF THE COMMITTEE
DETERMINES THAT EXERCISING AN OPTION IN SUCH MANNER WOULD VIOLATE THE
SARBANES-OXLEY ACT OF 2002.

 

(C)                                  STOCK OPTION AGREEMENT -TERMS AND
CONDITIONS.  EACH OPTION GRANTED UNDER THE PLAN SHALL BE EVIDENCED BY A STOCK
OPTION AGREEMENT, WHICH SHALL CONTAIN SUCH PROVISIONS AS MAY BE DETERMINED BY
THE COMMITTEE AND, EXCEPT AS MAY BE SPECIFICALLY STATED OTHERWISE IN SUCH STOCK
OPTION AGREEMENT, WHICH SHALL BE SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS:

 

(I)                                     EACH OPTION OR PORTION THEREOF THAT IS
EXERCISABLE SHALL BE EXERCISABLE FOR THE FULL AMOUNT OR FOR ANY PART THEREOF.

 

(II)                                  EACH SHARE OF STOCK PURCHASED THROUGH THE
EXERCISE OF AN OPTION SHALL BE PAID FOR IN FULL AT THE TIME OF THE EXERCISE. 
EACH OPTION SHALL CEASE TO BE EXERCISABLE, AS TO ANY SHARE OF STOCK, WHEN THE
PARTICIPANT PURCHASES THE SHARE OR WHEN THE OPTION EXPIRES.

 

(III)                               SUBJECT TO SECTION 8(H), OPTIONS SHALL NOT
BE TRANSFERABLE BY THE PARTICIPANT EXCEPT BY WILL OR THE LAWS OF DESCENT AND
DISTRIBUTION AND SHALL BE EXERCISABLE DURING THE PARTICIPANT’S LIFETIME ONLY BY
HIM.

 

(IV)                              EACH OPTION SHALL VEST AND BECOME EXERCISABLE
BY THE PARTICIPANT IN ACCORDANCE WITH THE VESTING SCHEDULE ESTABLISHED BY THE
COMMITTEE AND SET FORTH IN THE STOCK OPTION AGREEMENT EVIDENCING SUCH OPTION. 
OPTIONS SHALL VEST AND BECOME EXERCISABLE IN SUCH MANNER DETERMINED BY THE
COMMITTEE AND AS SET FORTH IN THE APPLICABLE OPTION AGREEMENT AND SHALL EXPIRE
AFTER SUCH PERIOD, NOT TO EXCEED TEN YEARS, AS MAY BE DETERMINED BY THE
COMMITTEE (THE “OPTION PERIOD”); PROVIDED, HOWEVER, THAT NOTWITHSTANDING ANY
VESTING DATES SET BY THE COMMITTEE, THE COMMITTEE MAY IN ITS SOLE DISCRETION
ACCELERATE THE EXERCISABILITY OF ANY OPTION, WHICH ACCELERATION SHALL NOT AFFECT
THE TERMS AND CONDITIONS OF ANY SUCH OPTION OTHER THAN WITH RESPECT TO
EXERCISABILITY.  IF AN OPTION IS EXERCISABLE IN INSTALLMENTS, SUCH INSTALLMENTS
OR PORTIONS THEREOF WHICH BECOME EXERCISABLE SHALL REMAIN EXERCISABLE UNTIL THE
OPTION EXPIRES.

 

(V)                                 EACH STOCK OPTION AGREEMENT MAY CONTAIN A
PROVISION THAT, UPON DEMAND BY THE COMMITTEE FOR SUCH A REPRESENTATION, THE
PARTICIPANT SHALL DELIVER TO THE COMMITTEE AT THE TIME OF ANY EXERCISE OF AN
OPTION A WRITTEN REPRESENTATION THAT THE SHARES TO BE ACQUIRED UPON SUCH
EXERCISE ARE TO BE ACQUIRED FOR INVESTMENT AND NOT FOR RESALE OR WITH A VIEW TO
THE DISTRIBUTION THEREOF, AND ANY OTHER REPRESENTATIONS DEEMED

 

8

--------------------------------------------------------------------------------

 

NECESSARY BY THE COMMITTEE TO ENSURE COMPLIANCE WITH ALL APPLICABLE FEDERAL AND
STATE SECURITIES LAWS.  UPON SUCH DEMAND, DELIVERY OF SUCH REPRESENTATION PRIOR
TO THE DELIVERY OF ANY SHARES ISSUED UPON EXERCISE OF AN OPTION SHALL BE A
CONDITION PRECEDENT TO THE RIGHT OF THE PARTICIPANT OR SUCH OTHER PERSON TO
PURCHASE ANY SHARES.  IN THE EVENT CERTIFICATES FOR STOCK ARE DELIVERED UNDER
THE PLAN WITH RESPECT TO WHICH SUCH INVESTMENT REPRESENTATION HAS BEEN OBTAINED,
THE COMMITTEE MAY CAUSE A LEGEND OR LEGENDS TO BE PLACED ON SUCH CERTIFICATES TO
MAKE APPROPRIATE REFERENCE TO SUCH REPRESENTATION AND TO RESTRICT TRANSFER IN
THE ABSENCE OF COMPLIANCE WITH APPLICABLE FEDERAL OR STATE SECURITIES LAWS.

 

(VI)                              EACH STOCK OPTION AGREEMENT REPRESENTING AN
INCENTIVE STOCK OPTION SHALL CONTAIN A PROVISION REQUIRING THE PARTICIPANT TO
NOTIFY THE COMPANY IN WRITING IMMEDIATELY AFTER THE PARTICIPANT MAKES A
DISQUALIFYING DISPOSITION OF ANY STOCK ACQUIRED PURSUANT TO THE EXERCISE OF SUCH
INCENTIVE STOCK OPTION.  A DISQUALIFYING DISPOSITION IS ANY DISPOSITION
(INCLUDING ANY SALE) OF SUCH STOCK BEFORE THE LATER OF (A) TWO YEARS AFTER THE
GRANT DATE OF THE INCENTIVE STOCK OPTION OR (B) ONE YEAR AFTER THE DATE THE
PARTICIPANT ACQUIRED THE STOCK BY EXERCISING THE INCENTIVE STOCK OPTION.

 

(VII)                           A STOCK OPTION AGREEMENT MAY, BUT NEED NOT,
INCLUDE A PROVISION WHEREBY A PARTICIPANT MAY ELECT, AT ANY TIME BEFORE THE
TERMINATION OF THE PARTICIPANT’S EMPLOYMENT WITH THE COMPANY, TO EXERCISE THE
OPTION AS TO ANY PART OR ALL OF THE SHARES OF STOCK SUBJECT TO THE OPTION PRIOR
TO THE FULL VESTING OF THE OPTION.  ANY UNVESTED SHARES OF STOCK SO PURCHASED
MAY BE SUBJECT TO A SHARE REPURCHASE OPTION IN FAVOR OF THE COMPANY OR TO ANY
OTHER RESTRICTION THE COMMITTEE DETERMINES TO BE APPROPRIATE.  THE COMPANY SHALL
NOT EXERCISE ITS REPURCHASE OPTION UNTIL AT LEAST SIX (6) MONTHS (OR SUCH LONGER
OR SHORTER PERIOD OF TIME REQUIRED TO AVOID A CHARGE TO EARNINGS FOR FINANCIAL
ACCOUNTING PURPOSES) HAVE ELAPSED FOLLOWING THE EXERCISE OF THE OPTION UNLESS
THE COMMITTEE OTHERWISE SPECIFICALLY PROVIDES IN THE STOCK OPTION AGREEMENT.

 

(D)                                 INCENTIVE STOCK OPTION GRANTS TO 10%
STOCKHOLDERS.  NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS SECTION 7, IF AN
INCENTIVE STOCK OPTION IS GRANTED TO A PARTICIPANT WHO OWNS STOCK REPRESENTING
MORE THAN TEN PERCENT OF THE VOTING POWER OF ALL CLASSES OF STOCK OF THE
COMPANY, THE OPTION PERIOD SHALL NOT EXCEED FIVE YEARS FROM THE GRANT DATE OF
SUCH OPTION AND THE OPTION PRICE SHALL BE AT LEAST 110 PERCENT OF THE FAIR
MARKET VALUE (ON THE GRANT DATE) OF THE STOCK SUBJECT TO THE OPTION.

 

(E)                                  $100,000 PER YEAR LIMITATION FOR INCENTIVE
STOCK OPTIONS.  TO THE EXTENT THE AGGREGATE FAIR MARKET VALUE (DETERMINED AS OF
GRANT DATE) OF STOCK FOR WHICH INCENTIVE STOCK OPTIONS ARE EXERCISABLE FOR THE
FIRST TIME BY ANY PARTICIPANT DURING ANY CALENDAR YEAR (UNDER ALL PLANS OF THE
COMPANY) EXCEEDS $100,000, SUCH EXCESS INCENTIVE STOCK OPTIONS SHALL BE TREATED
AS NONQUALIFIED STOCK OPTIONS.

 

(F)                                    VOLUNTARY SURRENDER.  THE COMMITTEE MAY
PERMIT THE VOLUNTARY SURRENDER OF ALL OR ANY PORTION OF ANY NONQUALIFIED STOCK
OPTION, IF ANY, GRANTED UNDER THE PLAN TO BE CONDITIONED UPON THE GRANTING TO
THE PARTICIPANT OF A NEW OPTION FOR THE SAME OR A DIFFERENT NUMBER OF SHARES AS
THE OPTION SURRENDERED OR REQUIRE SUCH VOLUNTARY SURRENDER AS A CONDITION
PRECEDENT TO A GRANT OF A NEW OPTION TO SUCH PARTICIPANT.  SUCH NEW OPTION SHALL
BE EXERCISABLE

 

9

--------------------------------------------------------------------------------

 

AT AN OPTION PRICE, DURING AN OPTION PERIOD, AND IN ACCORDANCE WITH ANY OTHER
TERMS OR CONDITIONS SPECIFIED BY THE COMMITTEE AT THE TIME THE NEW OPTION IS
GRANTED, ALL DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF THE PLAN WITHOUT
REGARD TO THE OPTION PRICE, OPTION PERIOD, OR ANY OTHER TERMS AND CONDITIONS OF
THE NONQUALIFIED STOCK OPTION SURRENDERED.

 

8.                          GENERAL

 

(A)                                  ADDITIONAL PROVISIONS OF AN OPTION. 
OPTIONS GRANTED TO A PARTICIPANT UNDER THE PLAN ALSO MAY BE SUBJECT TO SUCH
OTHER PROVISIONS (WHETHER OR NOT APPLICABLE TO OPTIONS GRANTED TO ANY OTHER
PARTICIPANT) AS THE COMMITTEE DETERMINES APPROPRIATE INCLUDING, WITHOUT
LIMITATION, PROVISIONS TO ASSIST THE PARTICIPANT IN FINANCING THE PURCHASE OF
STOCK UPON THE EXERCISE OF OPTIONS, PROVISIONS FOR THE FORFEITURE OF OR
RESTRICTIONS ON RESALE OR OTHER DISPOSITION OF SHARES OF STOCK ACQUIRED UNDER
ANY OPTION, PROVISIONS GIVING THE COMPANY THE RIGHT TO REPURCHASE SHARES OF
STOCK ACQUIRED UNDER ANY OPTION IN THE EVENT THE PARTICIPANT ELECTS TO DISPOSE
OF SUCH SHARES ON TERMINATION OF EMPLOYMENT, PROVISIONS ALLOWING THE PARTICIPANT
TO ELECT TO DEFER THE RECEIPT OF PAYMENT IN RESPECT OF OPTIONS FOR A SPECIFIED
PERIOD OR UNTIL A SPECIFIED EVENT AND PROVISIONS TO COMPLY WITH FEDERAL AND
STATE SECURITIES LAWS AND FEDERAL AND STATE TAX WITHHOLDING REQUIREMENTS.  ANY
SUCH PROVISIONS SHALL BE REFLECTED IN THE APPLICABLE STOCK OPTION AGREEMENT.

 

(B)                                 PRIVILEGES OF STOCK OWNERSHIP.  EXCEPT AS
OTHERWISE SPECIFICALLY PROVIDED IN THE PLAN, NO PERSON SHALL BE ENTITLED TO THE
PRIVILEGES OF OWNERSHIP IN RESPECT OF SHARES OF STOCK WHICH ARE SUBJECT TO
OPTIONS HEREUNDER UNTIL SUCH SHARES HAVE BEEN ISSUED TO THAT PERSON.

 

(C)                                  GOVERNMENT AND OTHER REGULATIONS.  THE
OBLIGATION OF THE COMPANY TO MAKE PAYMENT OF OPTIONS IN STOCK OR OTHERWISE SHALL
BE SUBJECT TO ALL APPLICABLE LAWS, RULES, AND REGULATIONS, AND TO SUCH APPROVALS
BY GOVERNMENTAL AGENCIES AS MAY BE REQUIRED.  NOTWITHSTANDING ANY TERMS OR
CONDITIONS OF ANY OPTION TO THE CONTRARY, THE COMPANY SHALL BE UNDER NO
OBLIGATION TO OFFER TO SELL OR TO SELL AND SHALL BE PROHIBITED FROM OFFERING TO
SELL OR SELLING ANY SHARES OF STOCK PURSUANT TO AN OPTION UNLESS SUCH SHARES
HAVE BEEN PROPERLY REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT WITH THE
SECURITIES AND EXCHANGE COMMISSION OR UNLESS THE COMPANY HAS RECEIVED AN OPINION
OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH SHARES MAY BE OFFERED OR SOLD
WITHOUT SUCH REGISTRATION PURSUANT TO AN AVAILABLE EXEMPTION THEREFROM AND THE
TERMS AND CONDITIONS OF SUCH EXEMPTION HAVE BEEN FULLY COMPLIED WITH.  THE
COMPANY SHALL BE UNDER NO OBLIGATION TO REGISTER FOR SALE UNDER THE SECURITIES
ACT ANY OF THE SHARES OF STOCK TO BE OFFERED OR SOLD UNDER THE PLAN.  IF THE
SHARES OF STOCK OFFERED FOR SALE OR SOLD UNDER THE PLAN ARE OFFERED OR SOLD
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, THE COMPANY
MAY RESTRICT THE TRANSFER OF SUCH SHARES AND MAY LEGEND THE STOCK CERTIFICATES
REPRESENTING SUCH SHARES IN SUCH MANNER AS IT DEEMS ADVISABLE TO ENSURE THE
AVAILABILITY OF ANY SUCH EXEMPTION.

 

(D)                                 TAX WITHHOLDING.

 

(I)                                     A PARTICIPANT MAY BE REQUIRED TO PAY TO
THE COMPANY OR ANY AFFILIATE AND THE COMPANY OR ANY AFFILIATE SHALL HAVE THE
RIGHT AND IS HEREBY AUTHORIZED TO WITHHOLD FROM ANY SHARES OR OTHER PROPERTY
DELIVERABLE UNDER ANY OPTION OR FROM ANY COMPENSATION OR OTHER AMOUNTS OWING TO
A PARTICIPANT THE AMOUNT (IN CASH, STOCK OR OTHER

 

10

--------------------------------------------------------------------------------

 

PROPERTY) OF ANY REQUIRED TAX WITHHOLDING AND PAYROLL TAXES IN RESPECT OF AN
OPTION, ITS EXERCISE, OR ANY PAYMENT OR TRANSFER UNDER AN OPTION OR UNDER THE
PLAN AND TO TAKE SUCH OTHER ACTION AS MAY BE NECESSARY IN THE OPINION OF THE
COMPANY TO SATISFY ALL OBLIGATIONS FOR THE PAYMENT OF SUCH TAXES.

 

(II)                                  WITHOUT LIMITING THE GENERALITY OF CLAUSE
(I) ABOVE, IF SO PROVIDED IN AN STOCK OPTION AGREEMENT, A PARTICIPANT MAY
SATISFY, IN WHOLE OR IN PART, THE FOREGOING WITHHOLDING LIABILITY (BUT NO MORE
THAN THE MINIMUM REQUIRED WITHHOLDING LIABILITY) BY DELIVERY OF SHARES OF STOCK
OWNED BY THE PARTICIPANT WITH A FAIR MARKET VALUE EQUAL TO SUCH WITHHOLDING
LIABILITY (PROVIDED THAT SUCH SHARES ARE NOT SUBJECT TO ANY PLEDGE OR OTHER
SECURITY INTEREST AND HAVE EITHER BEEN HELD BY THE PARTICIPANT FOR SIX MONTHS,
PREVIOUSLY ACQUIRED BY THE PARTICIPANT ON THE OPEN MARKET OR MEET SUCH OTHER
REQUIREMENTS AS THE COMMITTEE MAY DETERMINE NECESSARY IN ORDER TO AVOID AN
ACCOUNTING EARNINGS CHARGE), OR ON OR AFTER THE IPO BY HAVING THE COMPANY
WITHHOLD FROM THE NUMBER OF SHARES OF STOCK OTHERWISE ISSUABLE PURSUANT TO THE
EXERCISE OR SETTLEMENT OF THE OPTION A NUMBER OF SHARES WITH A FAIR MARKET VALUE
EQUAL TO SUCH WITHHOLDING LIABILITY.

 

(E)                                  CLAIM TO OPTIONS AND EMPLOYMENT RIGHTS.  NO
EMPLOYEE OF THE COMPANY OR AN AFFILIATE, OR OTHER PERSON, SHALL HAVE ANY CLAIM
OR RIGHT TO BE GRANTED AN OPTION UNDER THE PLAN OR, HAVING BEEN SELECTED FOR THE
GRANT OF AN OPTION, TO BE SELECTED FOR A GRANT OF ANY OTHER OPTION.  NEITHER THE
PLAN NOR ANY ACTION TAKEN HEREUNDER SHALL BE CONSTRUED AS GIVING ANY PARTICIPANT
ANY RIGHT TO BE RETAINED IN THE EMPLOY OR SERVICE OF THE COMPANY OR AN
AFFILIATE.

 

(F)                                    NO LIABILITY OF COMMITTEE MEMBERS.  NO
MEMBER OF THE COMMITTEE SHALL BE PERSONALLY LIABLE BY REASON OF ANY CONTRACT OR
OTHER INSTRUMENT EXECUTED BY SUCH MEMBER OR ON HIS BEHALF IN HIS CAPACITY AS A
MEMBER OF THE COMMITTEE NOR FOR ANY MISTAKE OF JUDGMENT MADE IN GOOD FAITH, AND
THE COMPANY SHALL INDEMNIFY AND HOLD HARMLESS EACH MEMBER OF THE COMMITTEE AND
EACH OTHER EMPLOYEE, OFFICER OR DIRECTOR OF THE COMPANY TO WHOM ANY DUTY OR
POWER RELATING TO THE ADMINISTRATION OR INTERPRETATION OF THE PLAN MAY BE
ALLOCATED OR DELEGATED, AGAINST ANY COST OR EXPENSE (INCLUDING COUNSEL FEES) OR
LIABILITY (INCLUDING ANY SUM PAID IN SETTLEMENT OF A CLAIM) ARISING OUT OF ANY
ACT OR OMISSION TO ACT IN CONNECTION WITH THE PLAN UNLESS ARISING OUT OF SUCH
PERSON’S OWN FRAUD OR WILLFUL BAD FAITH; PROVIDED, HOWEVER, THAT APPROVAL OF THE
BOARD SHALL BE REQUIRED FOR THE PAYMENT OF ANY AMOUNT IN SETTLEMENT OF A CLAIM
AGAINST ANY SUCH PERSON.  THE FOREGOING RIGHT OF INDEMNIFICATION SHALL NOT BE
EXCLUSIVE OF ANY OTHER RIGHTS OF INDEMNIFICATION TO WHICH SUCH PERSONS MAY BE
ENTITLED UNDER THE COMPANY’S CERTIFICATE OF INCORPORATION OR BY-LAWS, AS A
MATTER OF LAW, OR OTHERWISE, OR ANY POWER THAT THE COMPANY MAY HAVE TO INDEMNIFY
THEM OR HOLD THEM HARMLESS.

 

(G)                                 GOVERNING LAW.  THE PLAN SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK.

 

(H)                                 NONTRANSFERABILITY.

 

(I)                                     EACH OPTION SHALL BE EXERCISABLE ONLY BY
THE PARTICIPANT DURING THE PARTICIPANT’S LIFETIME, OR, IF PERMISSIBLE UNDER
APPLICABLE LAW, BY THE PARTICIPANT’S LEGAL GUARDIAN OR REPRESENTATIVE.  NO
OPTION MAY BE ASSIGNED, ALIENATED, PLEDGED, ATTACHED, SOLD OR OTHERWISE
TRANSFERRED OR ENCUMBERED BY A PARTICIPANT OTHERWISE THAN BY WILL OR BY

 

11

--------------------------------------------------------------------------------

 

THE LAWS OF DESCENT AND DISTRIBUTION AND ANY SUCH PURPORTED ASSIGNMENT,
ALIENATION, PLEDGE, ATTACHMENT, SALE, TRANSFER OR ENCUMBRANCE SHALL BE VOID AND
UNENFORCEABLE AGAINST THE COMPANY OR AN AFFILIATE; PROVIDED THAT THE DESIGNATION
OF A BENEFICIARY SHALL NOT CONSTITUTE AN ASSIGNMENT, ALIENATION, PLEDGE,
ATTACHMENT, SALE, TRANSFER OR ENCUMBRANCE.

 

(II)                                  NOTWITHSTANDING THE FOREGOING, THE
COMMITTEE MAY IN THE STOCK OPTION AGREEMENT OR AT ANY TIME AFTER THE GRANT DATE
IN AN AMENDMENT TO A STOCK OPTION AGREEMENT PROVIDE THAT OPTIONS WHICH ARE NOT
INTENDED TO QUALIFY AS INCENTIVE STOCK OPTIONS MAY BE TRANSFERRED BY A
PARTICIPANT WITHOUT CONSIDERATION, SUBJECT TO SUCH RULES AS THE COMMITTEE MAY
ADOPT CONSISTENT WITH ANY APPLICABLE STOCK OPTION AGREEMENT TO PRESERVE THE
PURPOSES OF THE PLAN, TO:

 

(A)                              ANY PERSON WHO IS A “FAMILY MEMBER” OF THE
PARTICIPANT, AS SUCH TERM IS USED IN THE INSTRUCTIONS TO FORM S-8 (COLLECTIVELY,
THE “IMMEDIATE FAMILY MEMBERS”);

 

(B)                                A TRUST SOLELY FOR THE BENEFIT OF THE
PARTICIPANT AND HIS OR HER IMMEDIATE FAMILY MEMBERS;

 

(C)                                A PARTNERSHIP OR LIMITED LIABILITY COMPANY
WHOSE ONLY PARTNERS OR SHAREHOLDERS ARE THE PARTICIPANT AND HIS OR HER IMMEDIATE
FAMILY MEMBERS; OR

 

(D)                               ANY OTHER TRANSFEREE AS MAY BE APPROVED EITHER
(A) BY THE BOARD OR THE COMMITTEE IN ITS SOLE DISCRETION, OR (B) AS PROVIDED IN
THE APPLICABLE STOCK OPTION AGREEMENT;

 

(each transferee described in clauses (A), (B), (C) and (D) above is hereinafter
referred to as a “Permitted Transferee”); provided that the Participant gives
the Committee advance written notice describing the terms and conditions of the
proposed transfer and the Committee notifies the Participant in writing that
such a transfer would comply with the requirements of the Plan and any
applicable Stock Option Agreement.

 

(III)                               THE TERMS OF ANY OPTION TRANSFERRED IN
ACCORDANCE WITH THE IMMEDIATELY PRECEDING SENTENCE SHALL APPLY TO THE PERMITTED
TRANSFEREE AND ANY REFERENCE IN THE PLAN OR IN A STOCK OPTION AGREEMENT TO A
PARTICIPANT SHALL BE DEEMED TO REFER TO THE PERMITTED TRANSFEREE, EXCEPT THAT
(A) PERMITTED TRANSFEREES SHALL NOT BE ENTITLED TO TRANSFER ANY OPTIONS, OTHER
THAN BY WILL OR THE LAWS OF DESCENT AND DISTRIBUTION; (B) PERMITTED TRANSFEREES
SHALL NOT BE ENTITLED TO EXERCISE ANY TRANSFERRED OPTIONS UNLESS THERE SHALL BE
IN EFFECT A REGISTRATION STATEMENT ON AN APPROPRIATE FORM COVERING THE SHARES
(I) TO BE ACQUIRED PURSUANT TO THE EXERCISE OF SUCH OPTION OR (II) THE COMMITTEE
DETERMINES THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE, (C) THE COMMITTEE
OR THE COMPANY SHALL NOT BE REQUIRED TO PROVIDE ANY NOTICE TO A PERMITTED
TRANSFEREE, WHETHER OR NOT SUCH NOTICE IS OR WOULD OTHERWISE HAVE BEEN REQUIRED
TO BE GIVEN TO THE PARTICIPANT UNDER THE PLAN OR OTHERWISE BUT SHALL CONTINUE TO
PROVIDE THE PARTICIPANT WITH ALL NOTICES HEREUNDER, AND (D) THE CONSEQUENCES OF
TERMINATION OF THE PARTICIPANT’S EMPLOYMENT BY, OR SERVICES TO, THE COMPANY OR
AN AFFILIATE UNDER THE TERMS OF THE PLAN AND THE APPLICABLE

 

12

--------------------------------------------------------------------------------

 

STOCK OPTION AGREEMENT SHALL CONTINUE TO BE APPLIED WITH RESPECT TO THE
PARTICIPANT, FOLLOWING WHICH THE OPTIONS SHALL BE EXERCISABLE BY THE PERMITTED
TRANSFEREE ONLY TO THE EXTENT, AND FOR THE PERIODS, SPECIFIED IN THE PLAN AND
THE APPLICABLE STOCK OPTION AGREEMENT.

 

(I)                                     RELIANCE ON REPORTS.  EACH MEMBER OF THE
COMMITTEE AND EACH MEMBER OF THE BOARD SHALL BE FULLY JUSTIFIED IN RELYING,
ACTING OR FAILING TO ACT, AND SHALL NOT BE LIABLE FOR HAVING SO RELIED, ACTED OR
FAILED TO ACT IN GOOD FAITH, UPON ANY REPORT MADE BY THE INDEPENDENT PUBLIC
ACCOUNTANT OF THE COMPANY AND AFFILIATES AND UPON ANY OTHER INFORMATION
FURNISHED IN CONNECTION WITH THE PLAN BY ANY PERSON OR PERSONS OTHER THAN
HIMSELF.

 

(J)                                     RELATIONSHIP TO OTHER BENEFITS.  NO
PAYMENT UNDER THE PLAN SHALL BE TAKEN INTO ACCOUNT IN DETERMINING ANY BENEFITS
UNDER ANY PENSION, RETIREMENT, PROFIT SHARING, GROUP INSURANCE OR OTHER BENEFIT
PLAN OF THE COMPANY OR ANY AFFILIATE EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED
IN SUCH OTHER PLAN.

 

(K)                                  EXPENSES.  THE EXPENSES OF ADMINISTERING
THE PLAN SHALL BE BORNE BY THE COMPANY AND AFFILIATES.

 

(L)                                     PRONOUNS.  MASCULINE PRONOUNS AND OTHER
WORDS OF MASCULINE GENDER SHALL REFER TO BOTH MEN AND WOMEN.

 

(M)                               TITLES AND HEADINGS.  THE TITLES AND HEADINGS
OF THE SECTIONS IN THE PLAN ARE FOR CONVENIENCE OF REFERENCE ONLY, AND IN THE
EVENT OF ANY CONFLICT, THE TEXT OF THE PLAN, RATHER THAN SUCH TITLES OR HEADINGS
SHALL CONTROL.

 

(N)                                 TERMINATION OF EMPLOYMENT.  FOR ALL PURPOSES
HEREIN, A PERSON WHO TRANSFERS FROM EMPLOYMENT OR SERVICE WITH THE COMPANY TO
EMPLOYMENT OR SERVICE WITH AN AFFILIATE OR VICE VERSA SHALL NOT BE DEEMED TO
HAVE TERMINATED EMPLOYMENT OR SERVICE WITH THE COMPANY OR AN AFFILIATE.

 

(O)                                 SEVERABILITY.  IF ANY PROVISION OF THE PLAN
OR ANY STOCK OPTION AGREEMENT IS OR BECOMES OR IS DEEMED TO BE INVALID, ILLEGAL,
OR UNENFORCEABLE IN ANY JURISDICTION OR AS TO ANY PERSON OR OPTION, OR WOULD
DISQUALIFY THE PLAN OR ANY OPTION UNDER ANY LAW DEEMED APPLICABLE BY THE
COMMITTEE, SUCH PROVISION SHALL BE CONSTRUED OR DEEMED AMENDED TO CONFORM TO THE
APPLICABLE LAWS, OR IF IT CANNOT BE CONSTRUED OR DEEMED AMENDED WITHOUT, IN THE
DETERMINATION OF THE COMMITTEE, MATERIALLY ALTERING THE INTENT OF THE PLAN OR
THE OPTION, SUCH PROVISION SHALL BE STRICKEN AS TO SUCH JURISDICTION, PERSON OR
OPTION AND THE REMAINDER OF THE PLAN AND ANY SUCH OPTION SHALL REMAIN IN FULL
FORCE AND EFFECT.

 

9.                          CHANGES IN CAPITAL STRUCTURE

 

Options granted under the Plan and any agreements evidencing such awards, the
maximum number of shares of Stock subject to all Options stated in Section 5(a)
and the maximum number of shares of Stock with respect to which any one person
may be granted Options during any period stated in Section 5(d) shall be subject
to adjustment or substitution, as determined by the Committee in its sole
discretion, as to the number, price or kind of a share of Stock or other
consideration subject to such Options or as otherwise determined by the

 

13

--------------------------------------------------------------------------------

 

Committee to be equitable in the event of changes in the outstanding Stock or in
the capital structure of the Company by reason of stock or extraordinary cash
dividends, stock splits, reverse stock splits, recapitalization,
reorganizations, mergers, consolidations, combinations, exchanges, or other
relevant changes in capitalization occurring after the Grant Date of any such
Option.  Any adjustment in Incentive Stock Options under this Section 9 shall be
made only to the extent not constituting a “modification” within the meaning of
Section 424(h)(3) of the Code, and any adjustments under this Section 9 shall be
made in a manner which does not adversely affect the exemption provided pursuant
to Rule 16b-3 under the Exchange Act.  Further, with respect to Options granted
on and after the 162(m) Effective Date which are intended to qualify as
“performance-based compensation” under Section 162(m) of the Code, such
adjustments or substitutions shall be made only to the extent that the Committee
determines that such adjustments or substitutions may be made without causing
Options granted under the Plan to fail to qualify as such “performance-based
compensation.”  The Company shall give each Participant notice of an adjustment
hereunder and, upon notice, such adjustment shall be conclusive and binding for
all purposes.

 

Notwithstanding the above, in the event of any of the following:

 

A.                                   THE COMPANY IS MERGED OR CONSOLIDATED WITH
ANOTHER CORPORATION OR ENTITY AND, IN CONNECTION THEREWITH, CONSIDERATION IS
RECEIVED BY SHAREHOLDERS OF THE COMPANY IN A FORM OTHER THAN STOCK OR OTHER
EQUITY INTERESTS OF THE SURVIVING ENTITY;

 

B.                                     ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF
THE COMPANY ARE ACQUIRED BY ANOTHER PERSON;

 

C.                                     All of the issued and outstanding shares
of Stock are acquired by another person;

 

D.                                    A sale (by merger or otherwise) of all the
interests of the OH Investor Group in DRS, LLC or of all or substantially all of
the assets of DRS, LLC;

 

E.                                      THE REORGANIZATION OR LIQUIDATION OF THE
COMPANY; OR

 

F.                                      THE COMPANY SHALL ENTER INTO A WRITTEN
AGREEMENT TO UNDERGO AN EVENT DESCRIBED IN CLAUSES A, B, C, D OR E ABOVE;

 

then the Committee may, in its discretion and upon at least 10 days advance
notice to the affected persons, cancel any outstanding Options and, if
applicable, cause the holders thereof to be paid, in cash or stock or property,
or any combination thereof, the value of such Options based upon the price per
share of Stock received or to be received by other shareholders of the Company
in the event.  The terms of this Section 9 may be varied by the Committee in any
particular Stock Option Agreement.

 

14

--------------------------------------------------------------------------------

 

10.                   EFFECT OF CHANGE IN CONTROL

 

A Participant’s Option Agreement may include specific provisions relating to the
effect of a Change in Control including, without limitation, provisions that
accelerate the exercisability of an award in connection with a Change in
Control.

 

11.                   NONEXCLUSIVITY OF THE PLAN

 

Neither the adoption of this Plan by the Board nor the submission of this Plan
to the stockholders of the Company for approval shall be construed as creating
any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under this Plan, and such arrangements
may be either applicable generally or only in specific cases.

 

12.                   AMENDMENTS AND TERMINATION

 

(A)                                  AMENDMENT AND TERMINATION OF THE PLAN.  THE
BOARD MAY AMEND, ALTER, SUSPEND, DISCONTINUE, OR TERMINATE THE PLAN OR ANY
PORTION THEREOF AT ANY TIME; PROVIDED THAT NO SUCH AMENDMENT, ALTERATION,
SUSPENSION, DISCONTINUATION OR TERMINATION SHALL BE MADE WITHOUT SHAREHOLDER
APPROVAL IF SUCH APPROVAL IS NECESSARY TO COMPLY WITH ANY TAX OR REGULATORY
REQUIREMENT APPLICABLE TO THE PLAN (INCLUDING AS NECESSARY TO PREVENT OPTIONS
GRANTED UNDER THE PLAN ON AND AFTER THE 162(M) EFFECTIVE DATE FROM FAILING TO
QUALIFY AS “PERFORMANCE-BASED COMPENSATION” FOR PURPOSES OF SECTION 162(M) OF
THE CODE); AND PROVIDED FURTHER THAT ANY SUCH AMENDMENT, ALTERATION, SUSPENSION,
DISCONTINUANCE OR TERMINATION THAT WOULD IMPAIR THE RIGHTS OF ANY PARTICIPANT OR
ANY HOLDER OR BENEFICIARY OF ANY OPTION THERETOFORE GRANTED SHALL NOT TO THAT
EXTENT BE EFFECTIVE WITHOUT THE CONSENT OF THE AFFECTED PARTICIPANT, HOLDER OR
BENEFICIARY.

 

(B)                                 AMENDMENT OF STOCK OPTION AGREEMENTS.  THE
COMMITTEE MAY, TO THE EXTENT CONSISTENT WITH THE TERMS OF ANY APPLICABLE STOCK
OPTION AGREEMENT, WAIVE ANY CONDITIONS OR RIGHTS UNDER, AMEND ANY TERMS OF, OR
ALTER, SUSPEND, DISCONTINUE, CANCEL OR TERMINATE, ANY OPTION THERETOFORE
GRANTED, PROSPECTIVELY OR RETROACTIVELY; PROVIDED THAT ANY SUCH WAIVER,
AMENDMENT, ALTERATION, SUSPENSION, DISCONTINUANCE, CANCELLATION OR TERMINATION
THAT WOULD IMPAIR THE RIGHTS OF ANY PARTICIPANT IN RESPECT OF ANY OPTION
THERETOFORE GRANTED SHALL NOT TO THAT EXTENT BE EFFECTIVE WITHOUT THE CONSENT OF
THE AFFECTED PARTICIPANT.

 

As adopted by the Board of Directors of

Duane Reade Holdings, Inc. on July 30, 2004.

 

15

--------------------------------------------------------------------------------