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EXHIBIT 10.5

AXION POWER INTERNATIONAL, INC.
DEFINITIVE INCENTIVE STOCK PLAN

1.   Purpose of the Plan

This Incentive Stock Plan is intended to promote the interests of Axion Power
International, a Delaware corporation (the “Company”), by providing the
employees of the Company, who will be largely responsible for the management,
growth and protection of the business of the Company, with a proprietary
interest in the Company.

2.   Definitions

As used in the Plan, the following definitions apply to the terms indicated
below:

(a)   “Board of Directors” shall mean the Board of Directors of Tamboril Cigar
Company, a Delaware corporation.

(b)   “Cause,” when used in connection with the termination of a Participant’s
employment with the Company, shall mean the termination of the Participant’s
employment by the Company by reason of (i) the conviction of the Participant by
a court of competent jurisdiction as to which no further appeal can be taken of
a crime involving moral turpitude; (ii) the proven commission by the Participant
of an act of fraud upon the Company; (iii) the willful and proven
misappropriation of any funds or property of the Company by the Participant;
(iv) the willful, continued and unreasonable failure by the Participant to
perform duties assigned to him and agreed to by him; (v) the knowing engagement
by the Participant in any direct, material conflict of interest with the Company
without compliance with the Company’s conflict of interest policy, if any, then
in effect; (vi) the knowing engagement by the Participant, without the written
approval of the Board of Directors of the Company, in any activity which
competes with the business of the Company or which would result in a material
injury to the Company; or (vii) the knowing engagement in any activity which
would constitute a material violation of the provisions of the Company’s
Policies and Procedures Manual, if any, then in effect.

(c)   “Cash Bonus” shall mean an award of a bonus payable in cash pursuant to
Section 10 hereof.

(d)   “Change in Control” shall mean:

(1)   a “change in control” of the Company, as that term is contemplated in the
federal securities laws; or

(2)   the occurrence of any of the following events:
 
(A)    any Person becomes, after the effective date of this Plan, the
“beneficial owner” (as defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company’s then outstanding securities;
provided, that the acquisition of additional voting securities, after the
effective date of this Plan, by any Person who is, as of the effective date of
this Plan, the beneficial owner, directly or indirectly, of 20% or more of the
combined voting power of the Company’s then outstanding securities, shall not
constitute a “Change in Control” of the Company for purposes of this Section
2(d).
 
(B)    a majority of individuals who are nominated by the Board of Directors for
election to the Board of Directors on any date, fail to be elected to the Board
of Directors as a direct or indirect result of any proxy fight or contested
election for positions on the Board of Directors, or
 

       

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(C)    the Board of Directors determines in its sole and absolute discretion
that there has been a change in control of the Company.
 
(e)   “Code” shall mean the Internal Revenue Code of 1986, as amended from time
to time.

(f)   “Committee” shall mean the Compensation Committee of the Board of
Directors or such other committee as the Board of Directors shall appoint from
time to time to administer the Plan.

(g)   “Common Stock” shall mean the Company’s Common Stock, par value $.0001 per
share.

(h)   “Company” shall mean Axion Power International, Inc., a Delaware
corporation formerly known as Tamboril Cigar Compay, and each of its
Subsidiaries, and its successors.

(i)   “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended
from time to time.

(j)   the “Fair Market Value” of a share of Common Stock on any date shall be
(i) the closing sales price on the immediately preceding business day of a share
of Common Stock as reported on the principal securities exchange on which shares
of Common Stock are then listed or admitted to trading or (ii) if not so
reported, the average of the closing bid and asked prices for a share of Common
Stock on the immediately preceding business day as quoted on the National
Association of Securities Dealers Automated Quotation System (“Nasdaq”) or (iii)
if not quoted on Nasdaq, the average of the closing bid and asked prices for a
share of Common Stock as quoted by the National Quotation Bureau’s “Pink Sheets”
or the National Association of Securities Dealers’ OTC Bulletin Board System. If
the price of a share of Common Stock shall not be so reported, the Committee in
its absolute discretion shall determine the Fair Market Value of a share of
Common Stock.

(k)   “Incentive Award” shall mean an Option, a share of Restricted Stock, a
share of Phantom Stock, a Stock Bonus or Cash Bonus granted pursuant to the
terms of the Plan.

(l)   “Incentive Stock Option” shall mean an Option which is an “incentive stock
option” within the meaning of Section 422 of the Code and which is identified as
an Incentive Stock Option in the agreement by which it is evidenced.

(m)   “Issue Date” shall mean the date established by the Committee on which the
Company pursuant to the terms of Section 7(d) shall issue certificates
representing shares of Restricted Stock hereof.

(n)   “Non-Qualified Stock Option” shall mean an Option which is not an
Incentive Stock Option and which is identified as a Non-Qualified Stock Option
in the agreement by which it is evidenced.

(o)   “Option” shall mean an option to purchase shares of Common Stock of the
Company granted pursuant to Section 6 hereof. Each Option shall be identified as
either an Incentive Stock Option or a Non-Qualified Stock Option in the
agreement by which it is evidenced.

(p)   “Participant” shall mean a full-time employee of the Company who is
eligible to participate in the Plan and to whom an Incentive Award is granted
pursuant to the Plan, and, upon his death, his successors, heirs, executors and
administrators, as the case may be, to the extent permitted hereby.

(q)   “Person” shall mean a “person,” as such term is used in Sections 13(d) and
14(d) of the Exchange Act, and the rules and regulations in effect from time to
time thereunder.

(r)   a share of “Phantom Stock” shall represent the right to receive in cash
the Fair Market Value of a share of Common Stock of the Company, which right is
granted pursuant to Section 8 hereof and subject to the terms and conditions
contained therein.

(s)   “Plan” shall mean the Axion Power International, Inc. Incentive Stock
Plan, as it may be amended from time to time.

       

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(t)   “Qualified Domestic Relations Order” shall mean a qualified domestic
relations order as defined in the Code, in Title I of the Employee Retirement
Income Security Act, or in the rules and regulations as may be in effect from
time to time thereunder.

(u)   a share of “Restricted Stock” shall mean a share of Common Stock which is
granted pursuant to the terms of Section 7 hereof and which is subject to the
restrictions set forth in Section 7 (c) hereof for so long as such restrictions
continue to apply to such share.

(v)   “Securities Act” shall mean the Securities Act of 1933, as amended from
time to time.

(w)   “Stock Bonus” shall mean a grant of a bonus payable in shares of Common
Stock pursuant to Section 9 hereof.

(x)   “Subsidiary” or “Subsidiaries” shall mean any and all corporations in
which at the pertinent time the Company owns, directly or indirectly, stock
vested with 50% or more of the total combined voting power of all classes of
stock of such corporations within the meaning of Section 424(f) of the Code.

(y)   “Vesting Date” shall mean the date established by the Committee on which a
share of Restricted Stock or Phantom Stock may vest.

3.   Stock Subject to the Plan

Under the Plan, the Committee may grant to Participants (i) Options, (ii) shares
of Restricted Stock, (iii) shares of Phantom Stock, (iv) Stock Bonuses and (v)
Cash Bonuses.

The Committee may grant Options, shares of Restricted Stock, shares of Phantom
Stock and Stock Bonuses under the Plan with respect to a number of shares of
Common Stock that in the aggregate at any time does not (after giving effect to
the 1 for 16 reverse split approved by the Company’s shareholders on June 4,
2004) exceed 1,000,000 shares of Common Stock. The grant of a Cash Bonus shall
not reduce the number of shares of Common Stock with respect to which Options,
shares of Restricted Stock, shares of Phantom Stock or Stock Bonuses may be
granted pursuant to the Plan.

If any outstanding Option expires, terminates or is canceled for any reason, the
shares of Common Stock subject to the unexercised portion of such Option shall
again be available for grant under the Plan. If any shares of Restricted Stock
or Phantom Stock, or any shares of Common Stock granted in a Stock Bonus are
forfeited or canceled for any reason, such shares shall again be available for
grant under the Plan.

Shares of Common Stock issued under the Plan may be either newly issued or
treasury shares, at the discretion of the Committee.

4.   Administration of the Plan

The Plan shall be administered by a Committee of the Board of Directors
consisting of two or more persons, each of whom shall be a “disinterested
person” within the meaning of Rule 16b-3(c)(2) promulgated under Section 16 of
the Exchange Act. The Committee shall from time to time designate the employees
of the Company who shall be granted Incentive Awards and the amount and type of
such Incentive Awards.

The Committee shall have full authority to administer the Plan, including
authority to interpret and construe any provision of the Plan and the terms of
any Incentive Award issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties.

The Committee may, in its absolute discretion (i) accelerate the date on which
any Option granted under the Plan becomes exercisable, (ii) extend the date on
which any Option granted under the Plan ceases to be exercisable, (iii)
accelerate the Vesting Date or Issue Date, or waive any condition imposed
pursuant to Section 7(b)

       

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hereof, with respect to any share of Restricted Stock granted under the Plan and
(iv) accelerate the Vesting Date or waive any condition imposed pursuant to
Section 8 hereof, with respect to any share of Phantom Stock granted under the
Plan.

In addition, the Committee may, in its absolute discretion, grant Incentive
Awards to Participants on the condition that such Participants surrender to the
Committee for cancellation such other Incentive Awards (including, without
limitation, Incentive Awards with higher exercise prices) as the Committee
specifies. Notwithstanding Section 3 hereof, Incentive Awards granted on the
condition of surrender of outstanding Incentive Awards shall not count against
the limits set forth in such Section 3 until Such time as such Incentive Awards
are surrendered.

The Committee in its absolute discretion shall determine whether an authorized
leave of absence, or absence in military or government service, shall constitute
termination of employment.

No member of the Committee shall be liable for any action, omission, or
determination relating to the Plan, and the Company shall indemnify and hold
harmless each member of the Committee and each other director or employee of the
Company to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated from and against any cost or
expense (including attorneys’ fees) or liability (including any sum paid in
settlement of a claim with the approval of the Committee) arising out of any
action, omission or determination relating to the Plan, unless, in either case,
such action, omission or determination was taken or made by such member,
director or employee in bad faith and without reasonable belief that it was in
the best interests of the Company.

5.   Eligibility

(a)   Incentive Stock Options may only be granted to persons who are regular
full-time employees of the Company. In determining the employees to whom
Incentive Stock Options shall be granted and the number of shares to be covered
by each Incentive Stock Option, the Committee shall take into account the nature
of employees' duties, their present and potential contributions to the success
of the Company and such other factors as it shall deem relevant in connection
with accomplishing the purposes of the Plan. An employee who had been granted an
option or options under the Plan may be granted an additional option or options,
subject to such limitations as may be imposed by the Code on such options.

(b)   Non-Qualified Stock Options, shares of Restricted Stock, shares of Phantom
Stock, Stock Bonuses and Cash Bonus granted may be granted to any person,
including, but not limited to, directors of the Company who do not qualify as
“outside directors” under Section 162(m) of the Internal Revenue Code of 1986,
independent agents, consultants, attorneys and advisors, who the Committee
believes has contributed, or will contribute, to the success of the Company.

6.   Options

The Committee may grant Options pursuant to the Plan, which Options shall be
evidenced by agreements in such form as the Committee shall from time to time
approve. Options shall comply with and be subject to the following terms and
conditions:

(a)   Identification of Options

All Options granted under the Plan shall be clearly identified in the agreement
evidencing such Options as either Incentive Stock Options or as Non-Qualified
Stock Options.

(b)   Exercise Price

The exercise price of any Non-Qualified Stock Option granted under the Plan
shall be such price as the Committee shall determine on the date on which such
Non-Qualified Stock Option is granted; provided, that such price may not be less
than the minimum price required by law. Except as provided in Section 6(d)
hereof, the exercise price of any Incentive Stock Option granted under the Plan
shall be not less than 100% of the Fair Market Value of a share of Common Stock
on the date on which such Incentive Stock Option is granted.

       

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(c)   Term and Exercise of Options

(1)   Each Option shall be exercisable on such date or dates, during such period
and for such number of shares of Common Stock as shall be determined by the
Committee on the day on which such Option is granted and set forth in the
agreement evidencing the Option; provided, however, that no Option shall be
exercisable after the expiration of ten years from the date such Option was
granted; and, provided, further, that each Option shall be subject to earlier
termination, expiration or cancellation as provided in the Plan.

(2)   Each Option shall be exercisable in whole or in part with respect to whole
shares of Common Stock. The partial exercise of an Option shall not cause the
expiration, termination or cancellation of the remaining portion thereof. Upon
the partial exercise of an Option, the agreement evidencing such Option shall be
returned to the Participant exercising such Option together with the delivery of
the certificates described in Section 6(c)(5) hereof.

(3)   An Option shall be exercised by delivering notice to the Company’s
principal office, to the attention of its Secretary, no fewer than five business
days in advance of the effective date of the proposed exercise. Such notice
shall be accompanied by the agreement evidencing the Option, shall specify the
number of shares of Common Stock with respect to which the Option is being
exercised and the effective date of the proposed exercise, and shall be signed
by the Participant. The Participant may withdraw such notice at any time prior
to the close of business on the business day immediately preceding the effective
date of the proposed exercise, in which case such agreement shall be returned to
the Participant. Payment for shares of Common Stock purchased upon the exercise
of an Option shall be made on the effective date of such exercise either (i) in
cash, by certified check, bank cashier’s check or wire transfer or (ii) subject
to the approval of the Committee, in shares of Common Stock owned by the
Participant and valued at their Fair Market Value on the effective date of such
exercise, or (iii) partly in shares of Common Stock with the balance in cash, by
certified check, bank cashier’s check or wire transfer. Any payment in shares of
Common Stock shall be effected by the delivery of such shares to the Secretary
of the Company, duly endorsed in blank or accompanied by stock powers duly
executed in blank, together with any other documents and evidences as the
Secretary of the Company shall require from time to time.

(4)   Any Option granted under the Plan may be exercised by a broker-dealer
acting on behalf of a Participant if (i) the broker-dealer has received from the
Participant or the Company a duly endorsed agreement evidencing such Option and
instructions signed by the Participant requesting the Company to deliver the
shares of Common Stock subject to such Option to the broker-dealer on behalf of
the Participant and specifying the account into which such shares should be
deposited, (ii) adequate provision has been made with respect to the payment of
any withholding taxes due upon such exercise and (iii) the broker-dealer and the
Participant have otherwise complied with Section 220.3(e)(4) of Regulation T, 12
CFR Part 220.

(5)   Certificates for shares of Common Stock purchased upon the exercise of an
Option shall be issued in the name of the Participant and delivered to the
Participant as soon as practicable following the effective date on which the
Option is exercised; provided, however, that such delivery shall be effected for
all purposes when a stock transfer agent of the Company shall have deposited
such certificates in the United States mail, addressed to the Participant.

(6)   During the lifetime of a Participant each Option granted to him shall be
exercisable only by him. No Option shall be assignable or transferable otherwise
than by will or by the laws of descent and distribution.

(d)   Limitations on Grant of Incentive Stock Options

(1)   The aggregate Fair Market Value of shares of Common Stock with respect to
which “incentive stock options” (within the meaning of Section 422, without
regard to Section 422(d) of the Code) are exercisable for the first time by a
Participant during any calendar year under the Plan (and any other stock option
plan of the Company, or any subsidiary of the Company shall not exceed $100,000.
Such Fair Market Value shall be determined as of the date on which each such
Incentive Stock Option is granted. If such

       

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aggregate Fair Market Value of shares of Common Stock underlying such Incentive
Stock Options exceeds $100,000, then Incentive Stock Options granted hereunder
to such Participant shall, to the extent and in the order required by
Regulations promulgated under the Code (or any other authority having the force
of Regulations), automatically be deemed to be Non-Qualified Stock Options, but
all other terms and provisions of such Incentive Stock Options shall remain
unchanged. In the absence of such Regulations (and authority), or if such
Regulations (or authority) require or permit a designation of the options which
shall cease to constitute Incentive Stock Options, Incentive Stock Options
shall, to the extent of such excess and in the order in which they were granted,
automatically be deemed to be Non-Qualified Stock Options, but all other terms
and provisions of such Incentive Stock Options shall remain unchanged.

(2)   No Incentive Stock Option may be granted to an individual if, at the time
of the proposed grant, such individual owns, directly or indirectly (based on
the attribution rules in Section 424(d) of the Code) stock possessing more than
ten percent of the total combined voting power of all classes of stock of the
Company or any of its subsidiaries, unless (i) the exercise price of such
Incentive Stock Option is at least 110% of the Fair Market Value of a share of
Common Stock at the time such Incentive Stock Option is granted and (ii) such
Incentive Stock Option is not exercisable after the expiration of five years
from the date such Incentive Stock Option is granted.

(e)   Effect of Termination of Employment

(1)   If the employment of a Participant with the Company shall terminate for
any reason other than Cause, “permanent and total disability (within the meaning
of Section 22(e)(3) of the Code) or the death of the Participant (i) Options
granted to such Participant, to the extent that they were exercisable at the
time of such termination, shall remain exercisable until the expiration of one
month after such termination, on which date they shall expire, and (ii) Options
granted to such Participant, to the extent that they were not exercisable at the
time of such termination, shall expire at the close of business on the date of
such termination; provided, however, that no Option shall be exercisable after
the expiration of its term.

(2)   If the employment of a Participant with the Company shall terminate as a
result of the “permanent and total disability (within the meaning of Section
22(e)(3) of the Code) of the Participant, the voluntary retirement of the
Participant in accordance with the Company’s retirement policy as then in effect
or the death of the Participant (i) Options granted to such Participant, to the
extent that they were exercisable at the time of such termination, shall remain
exercisable until the expiration of one year after such termination, on which
date they shall expire, and (ii) Options granted to such Participant, to the
extent that they were not exercisable at the time of such termination, shall
expire at the close of business on the date of such termination; provided,
however, that no Option shall be exercisable after the expiration of its term.

(3)   In the event of the termination of a Participant’s employment for Cause,
all outstanding Options granted to such Participant shall expire at the
commencement of business on the date of such termination.

(f) Acceleration of Exercise Date Upon Change in Control

Upon the occurrence of a Change in Control, each Option granted under the Plan
and outstanding at such time shall become fully and immediately exercisable and
shall remain exercisable until its expiration, termination or cancellation
pursuant to the terms of the Plan.

7.   Restricted Stock

The Committee may grant shares of Restricted Stock pursuant to the Plan. Each
grant of shares of Restricted Stock shall be evidenced by an agreement in such
form as the Committee shall from time to time approve. Each grant of shares of
Restricted Stock shall comply with and be subject to the following terms and
conditions:

(a)   Issue Date and Vesting Date

At the time of the grant of shares of Restricted Stock, the Committee shall
establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates with
respect to such shares. The Committee may divide such shares into

       

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classes and assign a different Issue Date and/or Vesting Date for each class.
Except as provided in Sections 7(c) and 7(f) hereof, upon the occurrence of the
Issue Date with respect to a share of Restricted Stock, a share of Restricted
Stock shall be issued in accordance with the provisions of Section 7(d) hereof.
Provided that all conditions to the vesting of a share of Restricted Stock
imposed pursuant to Section 7(b) hereof are satisfied, and except as provided in
Sections 7(c) and 7(f) hereof, upon the occurrence of the Vesting Date with
respect to a share of Restricted Stock, such share shall vest and the
restrictions of Section 7(c) hereof shall cease to apply to such share.

(b)   Conditions to Vesting

At the time of the grant of shares of Restricted Stock, the Committee may impose
such restrictions or conditions, not inconsistent with the provisions hereof, to
the vesting of such shares as it in its absolute discretion deems appropriate.
By way of example and not by way of limitation, the Committee may require, as a
condition to the vesting of any class or classes of shares of Restricted Stock,
that the Participant or the Company achieve certain performance criteria, such
criteria to be specified by the Committee at the time of the grant of such
shares.

(c)   Restrictions on Transfer Prior to Vesting

Prior to the vesting of a share of Restricted Stock, no transfer of a
Participant’s rights with respect to such share, whether voluntary or
involuntary, by operation of law or otherwise, shall vest the transferee with
any interest or right in or with respect to such share, but immediately upon any
attempt to transfer such fights, such share, and all of the rights related
thereto, shall be forfeited by the Participant and the transfer shall be of no
force or effect.

(d)   Issuance of Certificates

(1)   Except as provided in Sections 7(c) or 7(f) hereof, reasonably promptly
after the Issue Date with respect to shares of Restricted Stock, the Company
shall cause to be issued a stock certificate, registered in the name of the
Participant to whom such shares were granted, evidencing such shares: provided,
that the Company shall not cause to be issued such a stock certificates unless
it has received a stock power duly endorsed in blank with respect to such
shares. Each such stock certificate shall bear the following legend:

The transferability of this certificate and the shares of stock represented
hereby are subject to the restrictions, terms and conditions (including
forfeiture and restrictions against transfer) contained in the Tamboril Cigar
Company—Incentive Stock Plan and an Agreement entered into between the
registered owner of such shares and Tamboril Cigar Company A copy of the Plan
and Agreement is on file in the office of the Secretary of Tamboril Cigar
Company 1612 N. Osceola Avenue, Clearwater, FL 33755.

Such legend shall not be removed from the certificate evidencing such shares
until such shares vest pursuant to the terms hereof.

(2)   Each certificate issued pursuant to Paragraph 7 (d)(1) hereof, together
with the stock powers relating to the shares of Restricted Stock evidenced by
such certificate, shall be held by the Company. The Company shall issue to the
Participant a receipt evidencing the certificates held by it which are
registered in the name of the Participant.

(e)   Consequences Upon Vesting

Upon the vesting of a share of Restricted Stock pursuant to the terms hereof,
the restrictions of Section 7(c) hereof shall cease to apply to such share.
Reasonably promptly after a share of Restricted Stock vests pursuant to the
terms hereof, the Company shall cause to be issued and delivered to the
Participant to whom such shares were granted, a certificate evidencing such
share, free of the legend set forth in Paragraph 7 (d)(1) hereof, together with
any other property of the Participant held by Company pursuant to Section 7(d)
hereof, provided, however, that such delivery shall be effected for all purposes
when the Company shall have deposited such certificate and other property in the
United States mail, addressed to the Participant.

(f)   Effect of Termination of Employment

       

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(1)   If the employment of a Participant with the Company shall terminate for
any reason other than Cause prior to the vesting of shares of Restricted Stock
granted to such Participant, a portion of such shares, to the extent not
forfeited or canceled on or prior to such termination pursuant to any provision
hereof, shall vest on the date of such termination. The portion referred to in
the preceding sentence shall be determined by the Committee at the time of the
grant of such shares of Restricted Stock and may be based on the achievement of
any conditions imposed by the Committee with respect to such shares pursuant to
Section 7(b). Such portion may equal zero.

(2)   In the event of the termination of a Participant’s employment for Cause,
all shares of Restricted Stock granted to such Participant that have not vested
as of the date of such termination shall immediately be forfeited.

(g)   Effect of Change in Control

Upon the occurrence of a Change in Control, all shares of Restricted Stock that
have not theretofore vested (including those with respect to which the Issue
Date has not yet occurred) shall immediately vest.

8.   Phantom Stock

The Committee may grant shares of Phantom Stock pursuant to the Plan. Each grant
of shares of Phantom Stock shall be evidenced by an agreement in such form as
the Committee shall from time to time approve. Each grant of shares of Phantom
Stock shall comply with and be subject to the following terms and conditions:

(a)   Vesting Date

At the time of the grant of shares of Phantom Stock, the Committee shall
establish a Vesting Date or Vesting Dates with respect to such shares. The
Committee may divide such shares into classes and assign a different Vesting
Date for each class. Provided that all conditions to the vesting of a share of
Phantom Stock imposed pursuant to Section 8(c) hereof are satisfied, and except
as provided in Section 8(d) hereof, upon the occurrence of the Vesting Date with
respect to a share of Phantom Stock, such share shall vest.

(b)   Benefit Upon Vesting

Upon the vesting of a share of Phantom Stock, a Participant shall be entitled to
receive in cash, within 90 days of the date on which such share vests, an amount
in cash in a lump sum equal to the sum of (i) the Fair Market Value of a share
of Common Stock of the Company on the date on which such share of Phantom Stock
vests and (ii) the aggregate amount of cash dividends paid with respect to a
share of Common Stock of the Company during the period commencing on the date on
which the share of Phantom Stock was granted and terminating on the date on
which such share vests.

(c)   Conditions to Vesting

At the time of the grant of shares of Phantom Stock, the Committee may impose
such restrictions or conditions, not inconsistent with the provisions hereof, to
the vesting of such shares as it, in its absolute discretion deems appropriate.
By way of example and not by way of limitation, the Committee may require, as a
condition to the vesting of any class or classes of shares of Phantom Stock,
that the Participant or the Company achieve certain performance criteria, such
criteria to be specified by the Committee at the time of the grant of such
shares.

(d)   Effect of Termination of Employment

(1)   If the employment of a Participant with the Company shall terminate for
any reason other than Cause prior to the vesting of shares of Phantom Stock
granted to such Participant a portion of such shares, to the extent not
forfeited or canceled on or prior to such termination pursuant to any provision
hereof, shall vest on the date of such termination. The portion referred to in
the preceding sentence shall be determined by the Committee at the time of the
grant of such shares of Phantom Stock and may be based on the achievement of

       

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any conditions imposed by the Committee with respect to such shares pursuant to
Section 8(c). Such portion may equal zero.

(2)   In the event of the termination of a Participant’s employment for Cause,
all shares of Phantom Stock granted to such Participant that have not vested as
of the date of such termination shall immediately be forfeited.

(e)   Effect of Change in Control

Upon the occurrence of a Change in Control, all shares of Phantom Stock that
have not theretofore vested shall immediately vest.

9.   Stock Bonuses

The Committee may, in its absolute discretion, grant Stock Bonuses in such
amounts as it shall determine from time to time. A Stock Bonus shall be paid at
such time and subject to such conditions as the Committee shall determine at the
time of the grant of such Stock Bonus. Certificates for shares of Common Stock
granted as a Stock Bonus shall be issued in the name of the Participant to whom
such grant was made and delivered to such Participant as soon as practicable
after the date on which such Stock Bonus is required to be paid.

10.     Cash Bonuses

The Committee may, in its absolute discretion, grant in connection with any
grant of Restricted Stock or Stock Bonus or at any time thereafter, a cash
bonus, payable promptly after the date on which the Participant is required to
recognize income for federal income tax purposes in connection with such
Restricted Stock or Stock Bonus, in such amounts as the Committee shall
determine from time to time; provided, however, that in no event shall the
amount of a Cash Bonus exceed the Fair Market Value of the related shares of
Restricted Stock or Stock Bonus on such date. A Cash Bonus shall be subject to
such conditions as the Committee shall determine at the time of the grant of
such Cash Bonus.

11.     Adjustment Upon Changes in Common Stock

(a)   Outstanding Restricted Stock and Phantom Stock

Unless the Committee in its absolute discretion otherwise determines, if a
Participant receives any securities or other property (including dividends paid
in cash) with respect to a share of Restricted Stock, the Issue Date with
respect to which occurs prior to such event, but which has not vested as of the
date of such event, as a result of any dividend, stock split recapitalization,
merger, consolidation, combination, exchange of shares or otherwise, such
securities or other property will not vest until such share of Restricted Stock
vests, and shall be held by the Company pursuant to Paragraph 7 (d) (2) hereof.

The Committee may, in its absolute discretion, adjust any grant of shares of
Restricted Stock, the Issue Date with respect to which has not occurred as of
the date of the occurrence of any of the following events, or any grant of
shares of Phantom Stock, to reflect any dividend, stock split, recapitalization,
merger, consolidation, combination, exchange of shares or similar corporate
change as the Committee may deem appropriate to prevent the enlargement or
dilution of rights of Participants under the grant.

(b)   Outstanding Options, Increase or Decrease in Issued Shares Without
Consideration

Subject to any required action by the shareholders of the Company, in the event
of any increase or decrease in the number of issued shares of Common Stock
resulting from a subdivision or consolidation of shares of Common Stock or the
payment of a stock dividend (but only on the shares of Common Stock), or any
other increase or decrease in the number of such shares effected without receipt
of consideration by the Company, the Committee shall proportionally adjust the
number of shares and the exercise price per share of Common Stock subject to
each outstanding Option.

       

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(c)   Outstanding Options, Certain Mergers

Subject to any required action by the shareholders of the Company, if the
Company shall be the surviving corporation in any merger or consolidation
(except a merger of consolidation as a result of which the holders of shares of
Common Stock receive securities of another corporation), each Option outstanding
on the date of such merger or consolidation shall entitle the Participant to
acquire upon exercise the securities which a holder of the number of shares of
Common Stock subject to such Option would have received in such merger or
consolidation.

(d)   Outstanding Options, Certain Other Transactions

In the event of a dissolution or liquidation of the Company, a sale of all or
substantially all of the Company’s assets, a merger or consolidation involving
the Company in which the Company is not the surviving corporation or a merger or
consolidation involving the Company in which the Company is the surviving
corporation but the holders of shares of Common Stock receive securities of
another corporation and/or other property, including cash, the Committee shall,
in its absolute discretion, have the power to:

(1)   cancel, effective immediately prior to the occurrence of such event, each
Option outstanding immediately prior to such event (whether or not then
exercisable), and, in full consideration of such cancellation, pay to the
Participant to whom such Option was granted an amount in cash, for each share of
Common Stock subject to such Option equal to the excess of (A) the value, as
determined by the Committee in its absolute discretion, of the property
(including cash) received by the holder of a. share of Common Stock as a result
of such event over (B) the exercise price of such Option; or

(2)   provide for the exchange of each Option outstanding immediately prior to
such event (whether or not then exercisable) for an option on some or all of the
property for which such Option is exchanged and, incident thereto, make an
equitable adjustment as determined by the Committee in its absolute discretion
in the exercise price of the option, or the number of shares or amount of
property subject to the option or, if appropriate, provide for a cash payment to
the Participant to whom such Option was granted in partial consideration for the
exchange of the Option.

(e)   Outstanding Options. Other Changes

In the event of any change in the capitalization of the Company or corporate
change other than those specifically referred to in Sections 11(b), (c) or (d)
hereof, the Committee may, in its absolute discretion, make such adjustments in
the number and class of shares subject to Options outstanding on the date on
which such change occurs and in the per share exercise price of each such Option
as the Committee may consider appropriate to prevent dilution or enlargement of
rights.

(f)   No Other Rights

Except as expressly provided in the Plan, no Participant shall have any rights
by reason of any subdivision or consolidation of shares of stock of any class,
the payment of any dividend, any increase or decrease in the number of shares of
stock of any class or any dissolution, liquidation, merger or consolidation of
the Company or any other corporation. Except as expressly provided in the Plan,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number of shares of Common
Stock subject to an Incentive Award or the exercise price of any Option.

12.     Rights as a Shareholder

No person shall have any rights as a shareholder with respect to any shares of
Common Stock covered by or relating to any Incentive Award granted pursuant to
this Plan until the date of the issuance of a stock certificate with respect to
such shares. Except as otherwise expressly provided in Section 11 hereof, no
adjustment to any Incentive Award shall be made for dividends or other rights
for which the record date occurs prior to the date such stock certificate is
issued.

       

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13.     No Special Employment Rights; No Right to Incentive Award

Nothing contained in the Plan or any Incentive Award shall confer upon any
Participant any right with respect to the continuation of his employment by the
Company or interfere in any way with the right of the Company, subject to the
terms of any separate employment agreement to the contrary, at any time to
terminate such employment or to increase or decrease the compensation of the
Participant from the rate in existence at the time of the grant of an Incentive
Award.

No person shall have any claim or right to receive an Incentive Award hereunder.
The Committee’s granting of an Incentive Award to a Participant at any time
shall neither require the Committee to grant an Incentive Award to such
Participant or any other Participant or other person at any time nor preclude
the Committee from making subsequent grants to such Participant or any other
Participant or other person.

14.     Securities Matters

(a)   The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of any shares of Common Stock to be issued
hereunder or to effect similar compliance under any state laws. Notwithstanding
anything herein to the contrary, the Company shall not be obligated to cause to
be issued or delivered any certificates evidencing shares of Common Stock
pursuant to the Plan unless and until the Company is advised by its counsel that
the issuance and delivery of such certificates is in compliance with all
applicable laws, regulations of governmental authority and the requirements of
any securities exchange on which shares of Common Stock are traded. The
Committee may require, as a condition of the issuance and delivery of
certificates evidencing shares of Common Stock pursuant to the terms hereof,
that the recipient of such shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the Committee,
in its sole discretion, deems necessary or desirable.

(b)   The exercise of any Option granted hereunder shall only be effective at
such time as counsel to the Company shall have determined that the issuance and
delivery of shares of Common Stock pursuant to such exercise is in compliance
with all applicable laws, regulations of governmental authorities and the
requirements of any securities exchange on which shares of Common Stock are
traded. The Company may, in its sole discretion, defer the effectiveness of any
exercise of an Option granted hereunder in order to allow the issuance of shares
of Common Stock pursuant thereto to be made pursuant to registration or an
exemption from registration or other methods for compliance available under
federal or state securities laws. The Company shall inform the Participant in
writing of its decision to defer the effectiveness of the exercise of an Option
granted hereunder. During the period that the effectiveness of the exercise of
an Option has been deferred, the Participant may, by written notice, withdraw
such exercise and obtain the refund of any amount paid with respect thereto.

15.     Withholding Taxes

Whenever shares of Common Stock are to be issued upon the exercise of an Option,
the occurrence of the Issue Date or Vesting Date with respect to a share of
Restricted Stock or the payment of a Stock Bonus, the Company shall have the
right to require the Participant to remit to the Company in cash an amount
sufficient to satisfy federal, state and local withholding tax requirements, if
any, attributable to such exercise, occurrence or payment prior to the delivery
of any certificate or certificates for such shares. In addition, upon the grant
of a Cash Bonus or the making of a payment with respect to a share of Phantom
Stock, the Company shall have the right to withhold from any cash payment
required to be made pursuant thereto an amount sufficient to satisfy the
federal, state and local withholding tax requirements, if any, attributable to
such exercise or grant.

16.     Amendment of the Plan

The Board of Directors may at any time suspend or discontinue the Plan or revise
or amend it in any respect whatsoever, provided, however, that without approval
of the shareholders no revision or amendment shall (i) except as provided in
Section 11 hereof, increase the number of shares of Common Stock that may be
issued under the Plan, (ii) materially increase the benefits accruing to
individuals holding Incentive Awards granted pursuant to the Plan or (iii)
materially modify the requirements as to eligibility for participation in the
Plan.

       

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17.     No Obligation to Exercise

The grant to a Participant of an Option shall impose no obligation upon such
Participant to exercise such Option.

18.     Transfers Upon Death

Upon the death of a Participant, outstanding Incentive Awards granted to such
Participant may be exercised only by the executors or administrators of the
Participant’s estate or by any person or persons who shall have acquired such
right to exercise by will or by the laws of descent and distribution. No
transfer by will or the laws of descent and distribution of any Incentive Award,
or the right to exercise any Incentive Award, shall be effective to bind the
Company unless the Committee shall have been furnished with (a) written notice
thereof and with a copy of the will and/or such evidence as the Committee may
deem necessary to establish the validity of the transfer and (b) an agreement by
the transferee to comply with all the terms and conditions of the Incentive
Award that are or would have been applicable to the Participant and to be bound
by the acknowledgments made by the Participant in connection with the grant of
the Incentive Award.

19.     Expenses and Receipts

The Company shall pay the expenses of the Plan. Any proceeds received by the
Company in connection with any Incentive Award will be used for general
corporate purposes.

20.     Failure to Comply

In addition to the remedies of the Company elsewhere provided for herein,
failure by a Participant to comply with any of the terms and conditions of the
Plan or the agreement executed by such Participant evidencing an Incentive
Award, unless such failure is remedied by such Participant within ten days after
having been notified of such failure by the Committee, shall be grounds for the
cancellation and forfeiture of such Incentive Award, in whole or in part as the
Committee, in its absolute discretion, may determine.

21.     Effective Date and Term of Plan

The Board of Directors adopted the Plan effective January 8, 2004 and the
Stockholders approved the Plan in accordance with applicable law, the
requirements of Section 422 of the Code and the requirements of Rule 16b-3 under
Section 16(b) of the Exchange Act on June 4, 2004. No Incentive Award may be
granted under the Plan after June 3, 2014. Incentive Awards may be granted under
the Plan at any time prior to the receipt of such shareholder approval;
provided, however, that each such grant shall be subject to such approval.
Without limitation on the foregoing, no Option may be exercised prior to the
receipt of such approval, no share certificate shall be issued pursuant to a
grant of Restricted Stock or Stock Bonus prior to the receipt of such approval
and no Cash Bonus or payment with respect to a share of Phantom Stock shall be
paid prior to the receipt of such approval. If the Company’s shareholders do not
approve the Plan, then the Plan and all Incentive Awards then outstanding
hereunder shall forthwith automatically terminate and be of no force and effect.

IN WITNESS WHEREOF, this Incentive Stock Plan of Axion Power International, Inc.
has been executed this 4th day of June 2004.
 
 
 

 /s/  Kirk Tierney    /s/  John L. Petersen

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Kirk Tierney, president
 
John L. Petersen, secretary