**Exhibit 10.2**

 

**LONGS DRUG STORES CORPORATION1995 LONG-TERM INCENTIVE PLAN(As amended on February 25, 2003)**

 

1.

PURPOSE

 

The purpose of the 1995 Long-Term Incentive Plan is to provide a meansthrough which Longs Drug Stores Corporation, a Maryland Corporation, and itsSubsidiaries, may attract and retain the employment of able persons and toprovide a means whereby such persons can acquire and maintain stock ownershipthereby strengthening their commitment to the welfare of the Company. A furtherpurpose of the Plan is to provide key employees with incentive and rewardopportunities designed to enhance the profitable growth of the Company.

 

2.

DEFINITIONS

 

Thefollowing definitions shall be applicable throughout the Plan:

 

a.    “Award” means,individually or collectively, any Option, Stock Appreciation Right (SAR),Restricted Stock Award or Performance Share Award.

 

b.    “Award Period” means aperiod set by the Committee for Performance Share Awards.

 

c.    “Board” means the Board ofDirectors of the Company.

 

d.    “Change in CorporateControl” except as may otherwise be provided in the Award agreement or otherapplicable agreement, means the occurrence of any of the following:

 

(1)  The consummation of a merger orconsolidation of the Company with or into another entity or any other corporatereorganization, if more than 50% of the combined voting power of the continuingor surviving entity’s securities outstanding immediately after such merger,consolidation or other reorganization is owned by persons who are not part ofthe same controlled group of the Company immediately prior to such merger,consolidation or other reorganization, and who directly or indirectly in theaggregate owned less than 25% of the Company’s combined voting powerrepresented by the Company’s outstanding securities immediately prior to suchmerger, consolidation or other reorganization;

 

(2)  The sale, transfer or otherdisposition of all or substantially all of the Company’s assets;

 

(3)  A change in the composition of theBoard over a period of 24 consecutive months or less such that a majority ofthe members of the Board (rounded up to the next whole number) cease, by reasonof one or more proxy contests for the election of directors, to be comprised ofindividuals who either (i) have been directors continuously since thebeginning of such period or (ii) have been elected, or nominated forelection, as directors during such period by at least a majority of thedirectors described in clause (i) 

 

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whowere still in office at the time such election or nomination was approved bythe Board; or

 

(4)  The shareholders of the Companyapprove the dissolution or liquidation of the Company or the commencement by oragainst the Company of a case under the federal bankruptcy laws or any other proceedingunder any other laws relating to bankruptcy, insolvency, reorganization,arrangement, debt adjustment or debtor relief or there is an involuntarydissolution of the Company; or

 

(5)  Any transaction as a result of whichany person becomes the “beneficial owner” (as defined in Rule 13d-3 underthe Securities Exchange Act of 1934 (“Exchange Act”)), directly or indirectly,of securities of the Company representing at least 50% of the total votingpower represented by the Company’s then outstanding voting securities. Forpurposes of this Paragraph (v), the term “person” shall have the samemeaning as when used in sections 13(d) and 14(d) of the Exchange Act but shallexclude:

 

(A)  A trustee or other fiduciary holdingsecurities under an employee benefit plan of the Company or a Subsidiary of theCompany;

 

(B)  A corporation owned directly orindirectly by the shareholders of the Company in substantially the sameproportions as their ownership of the common stock of the Company;

 

(C)  The Company; and

 

(D)  Longs Drug StoresCalifornia, Inc.

 

Atransaction shall not constitute a Change in Corporate Control if its solepurpose is to change the state of the Company’s incorporation or to create aholding company that will be owned in substantially the same proportions by thepersons who held the Company’s securities immediately before such transaction.

 

e.    “Code” means the InternalRevenue Code of 1986, as amended from time to time. Reference in the Plan toany section of the Code shall be deemed to include any amendments orsuccessor provisions to such section and any regulations under suchsection.

 

f.    “Committee” means thecommittee of the Board appointed to administer the Plan as referred to inSection 4.

 

g.    “Company” means Longs DrugStores Corporation.

 

h.    “Date of Grant” means thedate on which the granting of an Award is authorized by the Committee or suchlater date as may be specified by the Committee in such authorization.

 

i.    “Eligible Employee” meansany person who satisfies the requirements of Section 6.

 

j.    “Fair Market Value” meansthe fair market value of a share of Stock, to be determined as follows:

 

(1)  For Options and SARs, it shall be theclosing price on the New York Stock Exchange (“NYSE”) as reported in thePacific Edition of the Wall Street Journal on a specified date.

 

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(2)  For Performance Share Awards, itshall be the average of the closing prices of the Stock reported in the PacificEdition of the Wall Street Journal on the NYSE for the 30 consecutive tradingdays prior to the “Valuation Date.” The “Valuation Date” for the purpose ofgranting Performance Share Awards shall be the first day of the year in whichthe Award is made. The “Valuation Date” for the purpose of Performance SharePayments shall be the first business day following the end of the Award Period.

 

(3)  If the Stock is not regularly tradedon the NYSE, then “Fair Market Value” shall be determined by the Committee on auniform basis in good faith.

 

k.    “Holder” means a personwho has been granted an Option, an SAR, a Restricted Stock Award, or aPerformance Share Award or who has succeeded to such Award.

 

l.    “Normal Retirement” means,unless the Award agreement or other applicable agreement provides otherwise,Termination by resignation of employment with the Company and any Subsidiaryafter attaining age 65 or Termination by resignation of employment with theCompany and any Subsidiary after attaining age 55 with 10 or more years ofemployment with the Company or any Subsidiary. With respect to members of theBoard who are not also employees of the Company or a Subsidiary, “NormalRetirement” shall have the meaning under the Board policy, if any, applicableto the Board.

 

m.    “Option” means an Awardgranted under Section 7 of the Plan.

 

n.    “Performance Share” meansan Award granted under Section 9 of the Plan.

 

o.    “Plan” means this 1995Long-Term Incentive Plan.

 

p.    “Restricted Stock Award”means an Award granted under Section 10 of the Plan.

 

q.    “ROE” means return onaverage shareholders’ equity which is defined as the Company’s consolidated netearnings, before extraordinary items, divided by the average of theshareholders’ equity at the beginning and end of the year, as set forth in theCompany’s consolidated statement of earnings and balance sheet for such year.The Committee may, at its sole discretion, include or exclude any extraordinaryor unusual items in calculation of ROE. “Average ROE” means, with respect toany one Award Period, the sum of the ROE’s achieved in each of the years of theAward Period divided by the number of years in the Award Period.

 

r.    “SEC” means the Securitiesand Exchange Commission.

 

s.    “Service” means employmentwith the Company or a Subsidiary or service as a member of the Board.

 

t.    “Stock” means CommonShares of the Company and, after substitution, such other stock as shall besubstituted therefor as provided in Section 12.

 

u.    “Stock Appreciation Right”(SAR) means an Award granted under Section 8, whether or not granted inconjunction with an Option.

 

v.    “Subsidiary” means any“subsidiary corporation” as defined in Code Section 424(f). Subsidiaryalso includes any entity of which the Company and/or one or more Subsidiariesown not less than 50%.

 

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w.    “Termination” means, withrespect to any person, ceasing to be an employee of the Company or anySubsidiary and a member of the Board. An individual who ceases to be anemployee of the Company or a Subsidiary but remains (or becomes prior to suchcessation) a member of the Board or who ceases to serve on the Board butremains (or becomes prior to such cessation) an employee shall not be treatedas having had a Termination.

 

3.

EFFECTIVEDATE, DURATION AND SHAREHOLDER APPROVAL

 

ThePlan originally became effective on May 17, 1994, when the shareholders ofthe Company approved the Plan and authorized Awards under the Plan for a periodof 10 years following such date. The Plan was amended effective onMay 21, 2002, when the shareholders of the Company approved an extensionfor five years of the period during which Awards are authorized to be madeunder the Plan and was subsequently amended on August 20, 2002 (the “PriorPlan”). This Plan as amended and restated on February 25, 2003 (the“Restatement Date”) shall become effective only upon shareholder approval. ThePrior Plan shall remain in effect pursuant to its terms until such shareholderapproval. Following such shareholder approval and subject to the provisions ofSection 13, Awards may be made under the Plan until ten years after theRestatement Date. The Plan shall continue in effect until all matters relatingto the payment of Awards and administration of the Plan have been settled.

 

4.

ADMINISTRATION

 

a.    COMMITTEE COMPOSITION. ACommittee appointed by the Board shall administer the Plan. Unless the Boarddetermines otherwise, the Board’s Compensation Committee shall be theCommittee. Members of the Committee shall serve for such period of time as theBoard may determine and shall be subject to removal by the Board at any time.The Board may also at any time terminate the functions of the Committee andreassume all powers and authority previously delegated to the Committee.

 

TheCommittee shall consist either (i) of those individuals who shall satisfythe requirements of Rule 16b-3 (or its successor) under the Exchange Actwith respect to Options to persons who are officers or directors of the Companyunder Section 16 of the Exchange Act or (ii) of the Board itself. TheCommittee shall comply with the requirements of Code Section 162(m) withrespect to Awards intended to meet the qualified performance based compensationexception under Code Section 162(m).

 

TheBoard may also appoint one or more separate committees of the Board, eachcomposed of directors of the Company who need not qualify underRule 16b-3, who may administer the Plan with respect to Eligible Employeeswho are not considered officers or directors of the Company underSection 16 of the Exchange Act, may grant Awards under the Plan to suchEligible Employees and may determine all terms of such Awards. Notwithstandingthe foregoing, the Board shall constitute the Committee with respect to Awardsgranted to directors who are not employees of the Company or any Subsidiary(“Non-Employee Directors”).

 

b.    AUTHORITY OF THECOMMITTEE. Subject to the provisions of the Plan, the Committee shall have fullauthority and discretion to take any actions it deems necessary or advisablefor the administration of the Plan. Such actions shall include:

 

(1)  selecting Eligible Employees who areto receive Awards under the Plan;

 

(2)  determining the type, number, vestingrequirements and other features and conditions of such Awards;

 

(3)  interpreting the Plan;

 

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(4)  making all other decisions relatingto the operation of the Plan; and

 

(5)  establishing such plans or sub-plansunder the Plan for the purpose of facilitating Awards to Eligible Employees whoare not United States citizens or taxpayers.

 

TheCommittee may adopt such rules or guidelines, as it deems appropriate toimplement the Plan. The Committee’s determinations under the Plan shall befinal and binding on all persons.

 

5.

GRANTOF OPTIONS, STOCK APPRECIATION RIGHTS, RESTRICTED STOCK AWARDS, AND PERFORMANCESHARE AWARDS; SHARES SUBJECT TO THE PLAN

 

TheCommittee may, from time to time, grant Awards to one or more personsdetermined by it to be eligible for participation in the Plan in accordancewith the provisions of Section 6; provided however that:

 

a.    TOTAL SHARES. Subject toSection 12, the aggregate number of shares of Stock made subject to Awardsmay not exceed 3,400,000 (which includes 1,400,000 shares previously authorizedfor issuance under the terms of the original Plan, as adjusted for changes inthe Company’s capitalization). Subject to Section 12, no Eligible Employeeshall receive Options and/or SARs during any fiscal year covering in excess of500,000 shares of Stock (750,000 shares of Stock in connection with theindividual’s initial employment).

 

b.    USE OF SHARES. Such sharesshall be deemed to have been used in payment of Performance Shares and SARsonly if actually delivered or the Fair Market Value equivalent of such sharesis paid in cash. To the extent that an Award lapses or the rights of its Holderterminate, any shares of Stock subject to such Award shall again be availablefor the grant of an Award.

 

c.    ELIGIBLE SHARES. Stockdelivered by the Company in settlement under the Plan may be authorized andunissued Stock or Stock held in the treasury of the Company or may be purchasedon the open market or by private purchase.

 

6.

ELIGIBILITY

 

Officersand key employees of the Company or a Subsidiary who, in the opinion of theCommittee, are mainly responsible for the continued growth and development andfinancial success of the business of the Company or any Subsidiary shall beeligible to be granted Awards under the Plan. Non-Employee Directors shall alsobe eligible to be granted Awards under the Plan.

 

7.

STOCKOPTIONS

 

Oneor more Options can be granted to any Eligible Employee. Options may be grantedas Incentive Stock Options (“ISOs”) or nonqualified stock options. OnlyEligible Employees employed by the Company or a “subsidiary corporation” of theCompany as defined in Code Section 424(f) may be granted ISOs. Optionsshall be subject to the following terms and conditions:

 

a.    OPTION PRICE. The optionprice per share of Stock shall be set by the grant but in the case of ISOsshall in no instance be less than Fair Market Value on the Date of Grant.Notwithstanding the previous sentence, in the event Options are granted in acorporate transaction in replacement of options of another entity, the optionprice of such Options may be less than the Fair Market Value and the principlesof Code Section 424 shall apply to replacement ISOs.

 

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b.    FORM OF PAYMENT. At thetime of the exercise of the Option, the option price shall be payable in cashand/or shares of Stock valued at the Fair Market Value at the time the Optionis exercised, and at the discretion of and on terms acceptable to theCommittee, by any other legal means.

 

c.    OTHER TERMS AND CONDITIONS.Each Option shall become exercisable in cumulative installments in such mannerand within such period or periods, not to exceed 10 years from its Date ofGrant, as set forth in the Stock Option Agreement. No Option shall beexercisable after the expiration of ten years from the date it is granted.Except as set forth below, an Option shall terminate in the event of theHolder’s Termination.

 

Unlessotherwise provided in the Stock Option Agreement, in the event of aTermination, the Holder shall have the right to exercise the Option for thefollowing periods after such Termination, but only to the extent that theOption was exercisable at the date of the Termination and does not otherwiseexpire by its terms.

 

(1)  In the event of Normal Retirement,three years after the date of Termination.

 

(2)  In the event of (a) discharge bythe Company or any Subsidiary (except for Cause) within two years after thedate of a Change in Corporate Control, or (b) resignation of the Holderwithin the period commencing 180 days after the date of a Change inCorporate Control and ending two years from the date of a Change in CorporateControl, one year after the date of Termination.

 

(3)  In the event of the Holder’sTermination (except as provided in Section 7c(2) hereof) with the priorwritten consent of the Company or any Subsidiary or by the Company (orSubsidiary) without Cause, ninety (90) days after the date of suchTermination. Such prior written consent may be given only by the ChiefExecutive Officer of the Company or any Subsidiary or any such officerdelegated by the Chief Executive Officer (other than the resigning person) andmust specify that it is given for the purpose of the Holder’s exercise of theOption.

 

(4)  In the event of (a) discharge bythe Company or any Subsidiary with Cause (except as provided inSection 7c(2), hereof), or (b) resignation without the prior writtenconsent of the Company or any Subsidiary, on the date of such discharge orresignation.

 

Forpurposes of this Plan, unless otherwise provided for in the Award agreement orother applicable agreement, “Cause” shall mean a commission of any act offraud, embezzlement or dishonesty; any unauthorized use or disclosure ofconfidential information or trade secrets of the Company (or any Subsidiary);or any other intentional misconduct adversely affecting the business or affairsof the Company (or any Subsidiary) in a material manner. In the event ofHolder’s Termination due to death, or death within three months of a NormalRetirement, the Option may be exercised for a period of one year after the dateof Holder’s death or, if shorter, the remaining term of the Option.

 

d.    SPECIAL RULES GOVERNINGINCENTIVE STOCK OPTIONS (ISOS). Notwithstanding the foregoing, any ISO grantedunder the Plan shall be subject to such terms and conditions not inconsistentwith the Plan as the Committee shall impose, including the following:

 

(1)  No individual will be granted an ISOif that individual owns stock of the Company or any of its Subsidiaries possessingmore than ten percent of the total combined voting power of all classes ofstock of the Company or any of its Subsidiaries, unless the option price shallnot be less than 110% of the Fair Market Value of such stock on the date suchOption is granted and the Option by its terms is not exercisable more than fiveyears from the date it is granted;

 

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(2)  The aggregate Fair Market Value(determined at the time the ISO is granted) of the stock with respect to whichISOs are exercisable for the first time by any Holder during any calendar year(under all incentive stock option plans of the Company) shall not exceed$100,000; provided, however, that all or any portion of an Option which cannotbe exercised as an ISO because of such limitation shall be treated as anonqualified stock option; and

 

(3)  An ISO that is exercised more thanthree months after the Holder ceases to be an employee of the Company or a“subsidiary corporation” (as defined in Code Section 424(f)) (one year ifthe termination of employment was due to “disability” (as defined in CodeSection 22(e)(3)) shall be treated as a nonqualified stock option.Notwithstanding the foregoing, if the Holder of an ISO dies, the Option shallcontinue to be treated as an ISO.

 

e.    STOCK OPTION AGREEMENT.Each Option granted under the Plan shall be evidenced by a “Stock OptionAgreement” between the Company and the Holder of the Option containingprovisions not inconsistent with the Plan as determined by the Committee, andshall be subject to the following additional terms and conditions:

 

(1)  Any Option or portion thereof that isexercisable shall be exercisable for the full amount or for any part thereof,except as otherwise determined by the Stock Option Agreement.

 

(2)  Each Option shall cease to beexercisable, as to any share, when the Holder purchases the share or exercisesa related SAR or when the Option lapses.

 

(3)  Leaves of absence, approved by theCompany or a Subsidiary, shall not constitute the Termination of the Holder.

 

f.    EXPIRED OPTIONS. If anyOptions awarded under the Plan shall be forfeited, cancelled, or not exercisedin full, the Stock subject to such Options may again be awarded under the Plan.

 

g.    TENDER OFFER OR MERGER.Notwithstanding any other provision, in the event of a public tender offer forall or any portion of the Stock or in the event that a proposal to merge,consolidate, or otherwise combine with, or sell all or a substantial portion ofthe assets of the Company or a Subsidiary to, another company is submitted forshareholder approval, the Committee may in its sole discretion declare any orall previously granted Options to be immediately exercisable.

 

h.    NON-EMPLOYEE DIRECTORFEES. The Board, in its sole discretion, may permit a Non-Employee Director toelect to receive Options in lieu of director cash fees. Any such electionsshall be subject to such rules and procedures as shall be determined by theBoard in its sole discretion.

 

8.

STOCKAPPRECIATION RIGHTS

 

AnyOption granted under the Plan may include an SAR, either at the time of grantor by amendment. SARs may also be granted to an Eligible Employee independentof any prior or contemporaneous Option grant and shall be exercisable asprovided therein without regard to any Option. In addition to such terms andconditions not inconsistent with the Plan as the Committee shall impose, SARsshall be subject to the following terms:

 

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a.    RIGHT TO EXERCISE. An SARgranted with an Option shall be exercisable to the extent and only to theextent the Option is exercisable. An SAR not included in an Option shall have a“purchase price” ascribed thereto by the Committee in granting such SAR, whichshall not be less than the Fair Market Value of the Stock on the Date of Grant.

 

b.    PAYMENT. An exercisableSAR shall entitle the Holder to surrender unexercised the SAR or the Option inwhich it is included, as the case may be, or any portion thereof, and, toreceive in exchange therefore that number of shares of Stock having anaggregate Fair Market Value, as hereinafter defined, equal to the excess of theFair Market Value of one share over the purchase price per share specified insuch SAR or Option times the number of shares called for by the SAR or Option,or portion thereof, which is so surrendered.

 

TheCommittee shall be entitled to elect to settle the Company’s obligation arisingout of the exercise of an SAR by the payment of cash or partially by thepayment of cash and partially by the delivery of shares, the total value ofwhich shall be in either case equal to the aggregate Fair Market Value of theshares it would otherwise be obligated to deliver. The Committee shall alsohave the right to place such limitations and restrictions on the obligation tomake such cash payments or deliver shares under SARs as it, in its solediscretion, deems to be in the best interest of the Company. The Fair MarketValue for SAR exercise purposes of shares shall be determined on the basis ofprices on the trading day next preceding the date on which the SAR isexercised. To the extent that an SAR included in an Option is exercised, suchOption shall be deemed to have been exercised, and shall not be deemed to havelapsed.

 

c.    SPECIAL RULES GOVERNINGSARS. An SAR not included in an Option shall be evidenced by an agreementbetween the Company and the Holder in a form approved by the Committee. Any SARgranted under the Plan shall be subject to such terms and conditions notinconsistent with the Plan as the Committee shall impose, including thefollowing:

 

(1)  The SAR will lapse no later than theunderlying Option for SARs accompanying an Option or, for freestanding SARs, nolater than 10 years from its Date of Grant;

 

(2)  An SAR accompanying an Option may beexercised only when the Fair Market Value of the Stock exceeds the option priceof the Stock subject to the SAR.

 

d.    OTHER LIMITATIONS. An SARshall be subject to such other limitations as the Committee shall impose.

 

9.

PERFORMANCESHARES

 

Oneor more Awards of Performance Shares may be made to an Eligible Employee.Performance Shares shall be credited to a Performance Share account to bemaintained for each such Holder. Each Performance Share shall be deemed to bethe equivalent of one share of Stock of the Company. The Award of PerformanceShares under the Plan shall not entitle the Holder to any interest in or to anydividend, voting, or other rights of a shareholder. The value of thePerformance Shares in a Holder’s Performance Share account at the time of Awardor the time of payment shall be the Fair Market Value at any such time of anequivalent number of shares of the Stock (subject to the limitation provided inSection 9c).

 

Ifany Performance Shares awarded under the Plan shall be forfeited, cancelled, ornot paid out in full, such Performance Shares may again be awarded under thePlan. Shares of Stock delivered upon payment of Performance Shares may beeither treasury shares, shares purchased for the account of the Holder orauthorized and unissued shares, or any combination thereof.

 

a.    AWARD GRANTS. Grants ofPerformance Shares may be made by the Committee in any fiscal year during theterm of the Plan. Such shares will be paid out in full or in part on the 

 

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basisof the Company’s performance in terms of (i) ROE over the Award Periodfollowing the beginning of the Company’s fiscal year in which the Award is madeas hereinafter set forth or (ii) such other criteria as determined by theCommittee. In determining the size of Awards, the Committee shall take intoaccount a Holder’s responsibility level, performance, potential, cashcompensation level, and the Fair Market Value of the Company’s Stock at thetime of Awards, as well as such other considerations as it deems appropriate.For purposes of meeting the qualified performance based compensation exceptionof Code Section 162(m), such criteria shall be based on one or acombination of the “Performance Goals.” Performance Goals may be any of thefollowing: economic value added (“EVA”), operating income before provisions forLIFO accounting, taxes, contributions to the Company’s profit sharing plan, andexecutive bonuses; cash flow return on investment; sales revenue; operatingcash flow; pre-tax earnings; earnings; profit; earnings before taxes; earningsbefore interest, depreciation, taxes and amortization; working capital; ROE;net income; operating income; revenue; earnings per share and stock price,stock price/earnings; return on assets (or total assets), return on earningsassets; operating expenses; selling, general and administrative expenses;inventory (or inventory turnover); debt; profit margin (net income/sales);accounts receivable (accounts receivable turnover, collection periods);writeoffs; cash; cost of goods sold; liquidity (current assets/currentliabilities); and debt to equity.

 

Unlessthe Award agreement or applicable agreement provides otherwise, in the eventthere is a Termination of the Holder during an Award Period, payout would be asfollows:

 

(1)  *NormalRetirement*. Payout would be at the end of the Award Period andprorated for service during the Award Period.

 

(2)  *Resignationor discharge*. For resignation with the prior written consent of theCompany or a Subsidiary, the payout would be at the end of the Award Period andprorated for service during the Award Period. For resignation other than withsuch consent (and not constituting Normal Retirement) or for discharge with orwithout Cause, the Award would be completely forfeited.

 

(3)  *Deathor Disability*. Payout would be at the end of the Award Period andprorated for service during the Award Period.

 

Subjectto Section 12, no Eligible Employee shall receive Performance Sharesduring any fiscal year in excess of 300,000 Performance Shares (500,000Performance Shares in connection with the individual’s initial employment).Awards cancelled or portions of Awards not paid out in full for any singleHolder shall not be included for purposes of this limitation.

 

b.    RIGHT TO PAYMENT OFPERFORMANCE SHARES. Following the end of the Award Period, the Holder of aPerformance Share shall be entitled to receive payment of an amount based onterms of the applicable Award agreement and the achievement of the performancemeasures for such Award Period, as determined by the Committee.

 

c.    FORM AND TIMING OFPAYMENT. No payment of Performance Shares shall be made prior to the end of anAward Period. Payment therefore shall be made as soon as practicable after thereceipt of audited financial statements relating to the last year of suchperiod. The payment to which a Holder shall be entitled at the end of an AwardPeriod shall be a dollar amount equal to the Fair Market Value at the ValuationDate (as defined in Section 2j(2) hereof) of the number of shares of Stockequal to the number of Performance Shares earned and payable to him/her inaccordance with Section 9b. Payment shall normally be made one-half incash and one-half in Stock; however, the Committee may authorize payment insuch other combinations of cash 

 

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andStock or all in cash or all in Stock, as it deems appropriate. Issuance ofStock shall be subject to the authorization of the Board.

 

Thenumber of shares of Stock to be paid in lieu of cash will be based on thequotient of the portion of the payment not paid in cash and the Fair MarketValue of a share of Stock on the date of entitlement.

 

d.    TENDER OFFER OR MERGER.Notwithstanding any other provision of the Plan, in the event of any publictender offer for all or any portion of the Stock or in the event that aproposal to merge, consolidate or otherwise combine with, or sell all or asubstantial portion of the assets of the Company or a Subsidiary to, anothercompany is submitted for shareholder approval, the Committee may in its solediscretion declare any Award Period ended as of a specific date and acceleratefull payments of such awards accordingly.

 

10.

RESTRICTEDSTOCK AWARDS.

 

a.    RESTRICTION PERIOD TO BEESTABLISHED BY THE COMMITTEE. One or more Awards of Restricted Stock may bemade to an Eligible Employee. At the time a Restricted Stock Award is made, theCommittee shall establish a period of time (the “Restriction Period”) applicableto such Award which shall be not less than one (1) year. Each RestrictedStock Award may have a different Restriction Period, at the discretion of theCommittee. In the event of a public tender offer for all or any portion of theStock or in the event that any proposal to merge, consolidate or otherwisecombine with, or sell all or a substantial portion of the assets of the Companyor a Subsidiary to, another company is submitted for approval, the Committeemay in its sole discretion change or eliminate the Restriction Period. Exceptas permitted above or pursuant to Section 12, the Restriction Periodapplicable to a particular Restricted Stock Award shall not be changed.

 

b.    OTHER TERMS ANDCONDITIONS. Subject to Section 12, no Eligible Employee shall receiveRestricted Stock Awards during any fiscal year in excess of 300,000 shares ofStock (500,000 shares of Stock in connection with the individual’s initialemployment). Stock awarded pursuant to a Restricted Stock Award shall berepresented by a stock certificate registered in the name of the Holder of suchRestricted Stock Award. The Holder shall have the right to enjoy allshareholder rights during the Restriction Period with the exception that:

 

(1)  The Holder shall not be entitled todelivery of the stock certificate until the Restriction Period shall haveexpired and arrangements satisfactory to the Company for the satisfaction ofapplicable tax or other withholding shall have been made.

 

(2)  The Company may either issue sharessubject to such restrictive legends and/or stop-transfer instructions as itdeems appropriate or provide for retention of custody of the Stock during theRestriction Period.

 

(3)  A breach of the terms and conditionsestablished by the Committee pursuant to the Restricted Stock Award shall causean immediate forfeiture of the Restricted Stock Award, and any dividendswithheld thereon.

 

(4)  Cash and stock dividends may beeither currently paid or withheld by the Company for the Holder’s account untilthe Restriction Period expires. At the discretion of the Committee, interestmay be paid on the amount of cash dividends withheld, including cash dividendson stock dividends, at a rate and subject to such terms as determined by theCommittee.

 

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Atthe discretion of the Committee, Restricted Stock Awards may be granted, ortheir Restriction Periods may be based upon, criteria including the PerformanceGoals.

 

c.    FORFEITURE PROVISIONS. Inthe event there is a Termination of Holder during a Restriction Period, unlessthe Award agreement or other applicable agreement provides otherwise, an Awardwould be forfeited as follows:

 

(1)  *NormalRetirement*. The Award would be prorated for service during theperiod and would be received as soon as practicable following retirement.

 

(2)  *Resignationor discharge*. For resignation with the prior written consent of theCompany or a Subsidiary, the Award would be prorated for service during theAward Period and received as soon as practicable following resignation. Forresignation other than with such consent (and not constituting NormalRetirement) or for discharge with or without Cause, the Award would becompletely forfeited.

 

(3)  *Deathor Disability*. The Award would be prorated for service during theAward Period and received as soon as practicable following death or disability.

 

Dividendswithheld by the Company on Restricted Stock that is forfeited shall be retainedby the Company.

 

d.    PAYMENT FOR RESTRICTEDSTOCK. A Holder may or may not be required to make any payment for Stockreceived pursuant to a Restricted Stock Award.

 

e.    NON-EMPLOYEE DIRECTORFORMULA AWARDS. Non-Employee Directors shall be eligible to receive restrictedstock awards as described in this Section 7e from and after the date theBoard has determined to implement this provision.

 

(1)  Upon the conclusion of each regularannual meeting of the Company’s shareholders following his or her initialelection or appointment, each eligible Non-Employee Director who will continueserving as a member of the Board thereafter shall receive a restricted stockaward of up to 5,000 shares of Stock (subject to adjustment underSection 12) or such lesser number of shares as may be determined by theBoard. All Stock granted pursuant to this Section 10e shall vest withrespect to one-third (1⁄3) of the shares on each of the first three(3) anniversaries of the date of grant, provided the individual has notsustained a Termination prior to each such vesting date.

 

(2)  All Stock granted to Non-EmployeeDirectors under this Section 10e shall become vested in full in the eventof a Change in Corporate Control with respect to the Company or upon aNon-Employee Director’s Normal Retirement.

 

(3)  All Unvested Stock granted to aNon-Employee Director under this Section 10e shall be forfeited onTermination (except for Normal Retirement).

 

Inlieu of the restricted stock grants under this Section 10e, the Board inits discretion may elect to have the Formula Awards issued in the form ofnonqualified stock options (with an option grant value equivalent to that ofthe restricted shares as determined by the Company’s stock option pricingmodel) with terms and conditions similar to those specified in thisSection 10e.

 

f.    NON-EMPLOYEE DIRECTOR FEES.The Board, in its sole discretion, may permit a Non-Employee Director to electto receive shares of Stock in lieu of director cash fees. Any such

 

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electionsshall be subject to such rules and procedures as shall be determined by theBoard in its sole discretion.

 

11.

GENERAL

 

a.    GOVERNMENT AND OTHERREGULATIONS. The obligation of the Company to make payment of Awards in Stockor otherwise shall be subject to all applicable laws, rules, and regulations,and to such approvals by governmental agencies as may be required. The Companyshall be under no obligation to register under the Securities Act of 1933, asamended (“Act”), any of the shares of Stock issued under the Plan. If theshares issued under the Plan may in certain circumstances be exempt fromregistration under the Act, the Company may restrict the transfer of suchshares in such manner as it deems advisable to ensure the availability of anysuch exemption.

 

b.    TAX WITHHOLDING. TheCompany or a Subsidiary, as appropriate, shall have the right to deduct fromall Awards paid in cash any federal, state or local taxes as required by law tobe withheld with respect to such cash payments. In the case of Awards paid inStock, the employee or other person receiving such Stock may be required to payto the Company or a Subsidiary, as appropriate, the amount of any such taxeswhich the Company or Subsidiary is required to withhold with respect to suchStock. Stock withholding may be permitted in the discretion of the Committee tocover minimum withholding requirements.

 

c.    CLAIM TO AWARDS ANDEMPLOYMENT RIGHTS. No employee or other person shall have any claim or right tobe granted an Award under the Plan. Neither this Plan nor any action takenhereunder shall be construed as giving any employee any right to be retained inthe employ of the Company or a Subsidiary or limit the right of the Company orany Subsidiary to terminate an employee at anytime, with or without cause. Aholder of any right hereunder to receive cash or Stock in respect of any Awardshall have no rights other than those of a general unsecured creditor of theCompany. Awards represent unfunded and unsecured obligations of the Company,subject to the terms and conditions of the applicable Award.

 

d.    BENEFICIARIES. To theextent that the Committee allows beneficiary designations, any payment ofAwards due under this Plan to a deceased Holder shall be paid to thebeneficiary duly designated by the Holder in accordance with the Company’spractices. If no such beneficiary has been designated or survives the Holder,payment shall be made to the Holder’s legal representative. A beneficiarydesignation may be changed or revoked by a Holder at any time provided thechange or revocation is filed with the Committee.

 

e.    NONTRANSFERABILITY. Unlessotherwise permitted in the Award agreement and then only to the extentallowable by applicable law, a person’s rights and interests under the Plan,including any Award previously made to such person or any amounts payable underthe Plan, may not be assigned, pledged, or transferred except, in the event ofa Holder’s death, to a designated beneficiary as provided in the Plan, or inthe absence of such designation, by will or the laws of descent and distribution,or, for any Award other than an ISO (or an SAR granted in tandem with an ISO),pursuant to a qualified domestic relations order as defined by the Code orTitle I of the Employee Retirement Income Security Act, or the rulesthereunder.

 

f.    INDEMNIFICATION. Eachperson who is or shall have been a member of the Committee or of the Boardshall be indemnified and held harmless by the Company from and against anyloss, cost, liability, or expense that may be imposed upon or reasonablyincurred by him/her in connection with or resulting from any claim, action,suit, or proceeding to which he/she may be a party or in which he/she may beinvolved by reason of any action or failure to act under the Plan and againstand from any and all amounts paid by him/her in satisfaction of judgment in 

 

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anysuch action, suit, or proceeding against him/her. He/she shall give the Companyan opportunity, at its own expense, to handle and defend the same before he/sheundertakes to handle and defend it on his/her own behalf. The foregoing rightof indemnification shall not be exclusive of any other rights ofindemnification to which such persons may be entitled under the Company’sArticles of Incorporation or By-Laws, as a matter of law, or otherwise, or anypower that the Company may have to indemnify them or hold them harmless.

 

g.    RELIANCE ON REPORTS. Eachmember of the Committee and each member of the Board shall be fully justifiedin relying or acting in good faith upon any report made by the independentpublic accountant of the Company and its Subsidiaries and upon any otherinformation furnished in connection with the Plan by any person or personsother than himself. In no event shall any person who is or shall have been amember of the Committee or of the Board be liable for any determination made orother action taken or any omission to act in reliance upon any such report orinformation or for any action taken, including the furnishing of information,or failure to act, if in good faith.

 

h.    RELATIONSHIP TO OTHERBENEFITS. No payment under the Plan shall be taken into account in determiningany benefits under any pension, retirement, profit sharing, group insurance orother benefit plan of the Company or any Subsidiary.

 

i.    EXPENSES. The expenses ofadministering the Plan shall be borne by the Company and its Subsidiaries.

 

j.    PRONOUNS. Masculinepronouns and other words of masculine gender shall refer to both men and women.

 

k.    TITLES AND HEADINGS. Thetitles and headings of the sections in the Plan are for convenience ofreference only, and in the event of any conflict, the text of the Plan, ratherthan such titles or headings, shall control.

 

12.

CHANGESIN CAPITAL STRUCTURE

 

Options,SARs, Restricted Stock Awards, Performance Share Awards and any agreementsevidencing such Awards shall be subject to adjustment by the Committee as tothe number and type (or class) and price per share of Stock or otherconsiderations subject to such Awards in the event of changes in theoutstanding Stock by reason of stock dividends, stock splits,recapitalizations, reorganizations, mergers, consolidations, combinations,exchanges, or other relevant changes in capitalization occurring after the Dateof Grant of any such Awards. In the event of any such change in the outstandingStock, the aggregate number and type (or class) of shares available under thePlan (and pursuant to individual to Award limits) shall be appropriatelyadjusted by the Committee, whose determination shall be conclusive.

 

13.

AMENDMENTSAND TERMINATION

 

TheBoard may at any time and for any reason terminate the Plan or, with theexpress written consent of a Holder for any changes that are detrimental tosuch Holder, cancel or reduce or otherwise alter his outstanding Awardsthereunder if, in its judgment, the tax, accounting, or other effects of thePlan or potential payouts thereunder would not be in the best interest of theCompany. The Board may, at any time, or from time to time, amend or suspendand, if suspended, reinstate, the Plan in whole or in part, provided, however,that any amendment of the Plan shall be subject to the approval of theCompany’s shareholders to the extent required by applicable laws, regulationsor rules. The Committee may permit Awards to be 

 

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grantedin exchange for the cancellation of other Awards. The Committee may permit theamendment of Awards, subject to the express written consent of a Holder for anychanges that are detrimental to such Holder.

 

14.

GOVERNINGLAW

 

ThePlan shall be governed by, and construed in accordance with, the laws of theState of California (except its choice-of-law provisions). Capitalized termsshall have the meaning provided in Section 2 unless otherwise provided inthis Plan or applicable Award agreement.

 

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