Document:

Exhibit

Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.  Redacted portions are indicated with the notation “[**]”.

Exhibit 10.1

EXECUTION VERSION

Summary of Proposed Terms Regarding the Pension Plan Protection and Forbearance Agreement Between PBGC and Sears
The terms set forth in this Summary of Proposed Terms are being provided as part of a comprehensive compromise, each element of which is consideration for the other elements.  This Summary of Proposed Terms is proffered in the nature of a comprehensive settlement proposal in furtherance of settlement discussions, and is entitled to the protections of Federal Rule of Evidence 408 and any other applicable statutes or doctrines protecting the use or disclosure of confidential information and information exchanged in the context of settlement discussions.  The transactions described herein are subject in all respects to, among other things, negotiation of definitive documentation, all of which documentation shall be in form and substance satisfactory to each of the Company and PBGC (each as defined below), and obtaining of all necessary corporate and other approvals by the Company and PBGC.  Prior to satisfaction of all such conditions, nothing in this Summary of Proposed Terms shall be binding on any party; provided however, that notwithstanding anything herein to the contrary, the provisions set forth in the section entitled “Binding Term Sheet Provisions” shall be binding upon the Company and PBGC according to the terms thereof upon mutual execution and delivery of the signature pages hereto.

	
		
	I. 
RELEVANT ENTITIES

	The Company and Its Subsidiaries
	Company:
Sears Holdings Corporation, a Delaware corporation (the “Company”).
Pension Plan:
Sears Holdings Pension Plan, as amended and restated effective January 1, 2014 (the “Pension Plan”) 
Real Estate Subsidiaries:
SRC Depositor Corporation, a Delaware corporation (the “Depositor”).
The following indirect wholly-owned subsidiaries of the Company are collectively referred to as the “RE Subsidiaries”:
•    SRC O.P. Corporation, a Delaware corporation, which holds title to the Maryland properties and is the owner participant (beneficiary) of SRC Facilities Statutory Trust

	
		
	 
	     No. 2003-A;
•    SRC Real Estate (TX), LP, a Delaware limited partnership, which holds title to the Texas properties; and
•    SRC Facilities Statutory Trust No. 2003-A, a Delaware statutory trust, which holds title to the remaining properties and directly and indirectly owns all interests in SRC Real Estate (TX), LP.
Attached as Exhibit 1 hereto is an ownership chart relating to the Depositor and the RE Subsidiaries.
Intellectual Property Subsidiary:
KCD IP, LLC, a Delaware limited liability company (the “IP Subsidiary”), which holds certain trademarks, intellectual property licenses (including, without limitation, those related to Kenmore, Craftsman and Diehard) and various ancillary agreements (collectively, the “IP Assets”).
Other Company Subsidiaries:
Attached as Exhibit 2 hereto is a list of all of the direct or indirect subsidiaries of the Company (the “Other Company Subsidiaries” and the entirety of which, whether or not included on such list, and with the RE Subsidiaries, IP Subsidiary, Depositor and Company, collectively, “Sears”).1  A “subsidiary” of the Company shall mean any entity that is in the Company’s “controlled group” as defined in Section 4001(a)(14) of the Employee Retirement Security Act of 1974 (as amended from time to time, together with any final regulations promulgated thereunder, “ERISA”).

	PBGC
	The Pension Benefit Guaranty Corporation as established by ERISA (“PBGC”). 

	II. 
CURRENT CAPITAL STRUCTURE

	REMIC Securitization
	The Company shall represent, warrant and covenant, inter alia, that:
1.   The Depositor has made loans (the “Mortgage Loans”) to the RE Subsidiaries secured by, inter alia, mortgages on, and assignments of leases pertaining to, the properties held by the RE Subsidiaries.
2.   The Depositor’s interests in the Mortgage Loans have been assigned to Wells Fargo Bank Minnesota, N.A., now known

                                                          
1 All such entities are acknowledged by the Company to be in the Company's "controlled group" as defined in ERISA Section 4001(a)(14).

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	as Wells Fargo Bank, N.A., as trustee for SRC Commercial Mortgage Trust 2003-1 (the “REMIC Issuer”), which has in turn issued SRC Commercial Mortgage Trust 2003-1 Mortgage Pass-Through Certificates in the aggregate face amount of $1,312,416,000 (as amended, supplemented or otherwise modified, but only to the extent such amendments, supplements or other modifications (i) occur on or prior to the date of the Closing (and are disclosed to PBGC as set forth herein) or (ii) are permitted by the REMIC Amendment Covenant, the “REMIC Certificates”) backed by the pool of Mortgage Loans pursuant to a Pooling and Servicing Agreement, dated as of November 24, 2003 (as amended, supplemented or otherwise modified, but only to the extent such amendments, supplements or other modifications (i) occur on or prior to the date of the Closing (and are disclosed to PBGC as set forth herein) or (ii) are permitted by the REMIC Amendment Covenant, the “Pooling and Servicing Agreement”).  The REMIC Certificates, the agreements underlying the Mortgage Loans, the Master Lease (defined below), the Pooling and Servicing Agreement, and the agreements and other documents related thereto (each, as amended, supplemented or otherwise modified, but only to the extent such amendments, supplements or other modifications (i) occur on or prior to the date of the Closing (and are disclosed to PBGC as set forth herein) or (ii) are permitted by the REMIC Amendment Covenant) shall be referred to herein as the “REMIC Transactional Documents”.
3.   The regular interest REMIC Certificates are held by certain Other Company Subsidiaries (identified in Exhibit 3 attached hereto). The residual interest REMIC Certificate (which is a non‐economic residual interest) is held by the Depositor.
4.   Sears will continue to pay all rents as and when due (subject to any applicable grace periods) with respect to the real estate assets and mortgage loans related to the REMIC Certificates.
5.   The properties held by the RE Subsidiaries are subject to a master lease with Sears, Roebuck and Co. (as amended, supplemented or otherwise modified, but only to the extent such amendments, supplements or other modifications (i) occur on or prior to the date of the Closing (and are disclosed to PBGC as set forth herein) or (ii) are permitted by the REMIC Amendment Covenant, the “Master Lease”).
6.   As of the Closing: (i) all of the RE Subsidiaries and the Depositor are in material compliance with their respective organizational documents; and (ii) to the Company’s knowledge, none of the parties to the REMIC Transactional Documents are in default thereunder nor does an event of default exist thereunder.

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	The Company shall promptly inform PBGC prior to Closing of any defaults or default waivers under the REMIC Transactional Documents or any material non-compliance with the organizational documents of any of the RE Subsidiaries or the Depositor.  PBGC acknowledges that to its knowledge none of the parties to the REMIC Transactional Documents is in default thereunder and no event of default exists thereunder.  PBGC agrees that if the Closing occurs it shall not assert that anything disclosed to it by the Company in connection with, or during the course of, the negotiation and entry into this term sheet or the definitive documentation prior to the date of Closing constitutes a breach of the representations set forth in this paragraph 6.
7.   Prior to the Closing, the Company shall provide to PBGC a list of all of the sales, substitutions or transfers out of the REMIC structure of any Designated Assets (as defined below) from and after October 1, 2014 until the Closing.

	IP Securitization
	The Company shall further represent, warrant and covenant, inter alia, that:
1.   The IP Subsidiary has issued KCD IP, LLC Asset-Backed Notes in the aggregate face amount of $1,800,000,000 (the “IP Notes” and the indenture governing such IP Notes, as amended, supplemented or otherwise modified, but only to the extent such amendments, supplements or other modifications (i) occur on or prior to the date of the Closing (and are disclosed to PBGC as set forth herein) or (ii) are permitted by the Indenture Amendment Covenant), the “IP Notes Indenture”) secured by liens (the “IP Note Liens”) on the IP Assets. 
2.   All IP Notes are held by Sears Reinsurance Company Ltd. (“Sears Re”), a Bermuda Class 3 insurer and a subsidiary of the Company.
3.   Sears shall continue to pay all royalties as and when due (subject to any applicable grace periods) with respect to the IP Assets and the IP Notes.
4.   As of the Closing: (i) the IP Subsidiary is in material compliance with its organizational documents, and (ii) to the Company’s knowledge, none of the parties to the IP Notes or the IP Notes Indenture are in default thereunder nor does an event of default exist thereunder.  The Company shall promptly inform PBGC prior to Closing of any defaults or default waivers under the IP Notes or IP Notes Indenture or any material non-compliance with the organizational documents of the IP Subsidiary.  PBGC acknowledges that, to its knowledge none of the parties to the IP Notes or the IP Notes Indenture is in default thereunder and no event of default exists thereunder.  PBGC

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	agrees that if the Closing occurs it shall not assert that anything disclosed to it by the Company in connection with, or during the course of, the negotiation and entry into this term sheet or the definitive documentation prior to the date of Closing constitutes a breach of the representations set forth in this paragraph 4.
5.   Prior to the Closing, the Company shall provide to PBGC a list of all of the sales, substitutions or transfers out of the IP Subsidiary of any Designated Assets from and after October 1, 2014 until the Closing.

	III. 
TRANSACTIONS

	Maintenance of REMIC Structure / REMIC Certificate Transfer
	Ownership of the regular interest REMIC Certificates shall be transferred to the Depositor, with physical possession to be held by the Custodian (defined below) on behalf of PBGC.  The existing REMIC securitization structure shall otherwise be left in place.

	RE Subsidiary Bankruptcy-Remoteness
	The Company shall represent, warrant and covenant that:
(i) the organizational documents of the RE Subsidiaries provide that:
•     Bankruptcy filing is permissible only with the unanimous consent of the directors of SRC O.P. Corporation, including the consent of the independent director (as defined in such organizational documents) thereof; and
•     At least one director of SRC O.P. Corporation shall be an individual who is fully independent of the Company; and
•     Depositor and RE Subsidiaries have been and shall continue to be operated as special purpose entities consistent with the special purpose vehicle provisions of such organizational documents (including, without limitation, provisions intended to ensure and preserve the bankruptcy-remoteness of such entities) and the prior opinions provided by REMIC counsel.  REMIC counsel shall provide a bring-down opinion, in substantially the form attached hereto as Exhibit 4, that the execution, delivery and performance of the definitive documentation and the consummation of the transactions contemplated thereunder do not cause REMIC counsel to alter or withdraw the bankruptcy opinion issued in connection with the REMIC transaction (the “RE Bring-Down Opinion” and, together with the IP Bring-Down Opinion (defined below), the “Bring-Down Opinions”).  Sears shall cooperate with REMIC counsel in providing such

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	      authorizations, confirmations, certifications and other informational diligence requests as REMIC counsel shall reasonably require in order to prepare and issue the Bring-Down Opinion.
(ii) the organizational documents of the Depositor provide the same protection as set forth above pertaining to SRC O.P. Corporation with an independent director for the Depositor.
Upon the date of the Closing, concurrently with the receipt of the regular interest REMIC Certificates by the Depositor, the Company will cause the following to occur:
•     Sections 6, 9(j) and 9(t) of the Certificate of Incorporation of SRC O.P. Corporation and Section 9(j) and 9(t) of the Certificate of Incorporation of the Depositor will be amended to permit the continuing existence of PBGC UBL Claims (as defined below); Section 7 of the Certificate of Incorporation for SRC O.P. Corporation will be amended to add to the references to “the Initial Lender” a reference to PBGC and add to the references to “the Loan” a reference to PBGC’s forbearance described below and the period thereof; any comparable provisions of Section 7 of the Certificate of Incorporation for the Depositor will be correspondingly amended.
•     The organizational documents of each of SRC O.P. Corporation and the Depositor, will be amended to provide that:  (i) the Independent Director of SRC O.P. Corporation (the “SRC O.P. Independent Director”) shall be as set forth on Exhibit 5; (ii) the Independent Director of Depositor (the “Depositor Independent Director” and, together with the SRC O.P. Independent Director, the “Independent Directors”) shall be as set forth on Exhibit 5; (iii) any subsequent amendment to the organizational documents of SRC O.P. or the Depositor, in each case that is materially adverse to the interests of PBGC (it being understood that any amendment to the sections of those organizational documents to be mutually agreed by PBGC and the Company as part of the definitive documentation, or any addition of new sections or amendments (including deletions) which may, in the reasonable judgment of the SRC O.P. Independent Director or the Depositor Independent Director (as applicable), impair the bankruptcy-remoteness of SRC O.P. Corporation or Depositor in any material respect, shall be deemed to be materially adverse to the interests of PBGC),2 will require

                                                         
2 As part of definitive documentation, PBGC and the Company to agree on particular sections of specified organizational documents that cannot be amended without consent of PBGC notwithstanding the overall standard of

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	      the prior, written approval of the SRC O.P. Independent Director or the Depositor Independent Director (as applicable); and (iv) any existing Independent Director may be removed, and any successor Independent Director may be appointed, solely to the extent that the existing Independent Director is promptly replaced by a successor Independent Director set forth on Exhibit 5 hereto or otherwise expressly approved in writing by PBGC; provided that any Independent Director shall be entitled to vote solely on: (A) the commencement of a Voluntary Bankruptcy Event or a Transfer, Pledge or Distribution (each as defined below) of all or substantially all of the assets of the entity as to which such person is an Independent Director; (B) any amendment to the organizational documents of the entity as to which such person is an Independent Director; or (C) any action which, in the Independent Director’s reasonable judgment (x) may impair the special purpose nature or the bankruptcy-remoteness of any of the Depositor or the RE Subsidiaries (as applicable) in any material respect or (y) would otherwise be in violation of any provisions set forth in this term sheet or the definitive documentation.
•     The organizational documents of the Depositor and the other RE Subsidiaries will be amended to take into account the transactions contemplated herein and afford PBGC similar protections to those set forth above.
•     All Independent Directors contemplated herein shall (i) receive coverage from the applicable Directors’ and Officers’ liability policies of insurance and (ii) shall be paid and receive all other benefits at the same level and amount as the other directors of such entity, and at the sole expense of entity for whom such Independent Director serves.  The details of the current director insurance and compensation packages are as set forth at Exhibit 5.

	RE Subsidiary Negative Covenants
	Neither the RE Subsidiaries nor the Depositor may: (i) incur any indebtedness and/or guarantees thereof; (ii) sell, transfer or otherwise dispose of (“Transfer”) any of the Designated Assets (as defined below), (iii) fund any dividend, equity repurchase, intercompany loan or capital contribution (“Distribute”) with the Designated Assets, (iv) pledge, hypothecate, or grant a lien, security interest or other financial encumbrance (or permit to exist any such liens, security interests or financial encumbrances) in

                                                          
adversity; it being further understood that any amendment to the organizational documents that may impair the special purpose nature or bankruptcy-remoteness of the RE Subsidiaries or the Depositor shall be considered materially adverse to PBGC.

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	(“Pledge”) any of the Designated Assets (as defined below); (v) amend in any manner materially adverse to the interests of PBGC (A) the organizational documents of the Depositor or RE Subsidiaries or (B) the REMIC Transactional Documents (it being understood that a reasonable extension of the expiry of the Master Lease (including any renewal of the Master Lease in accordance with its terms) shall not be materially adverse to the interests of PBGC) (this clause (v), the “REMIC Amendment Covenant”); (vi) institute, or consent to the institution of (including, without limitation, by failing to timely defend against), bankruptcy or insolvency proceedings in respect to the Depositor or the RE Subsidiaries, or file a petition seeking or consenting to reorganization or relief under any applicable federal or state law relating to bankruptcy or insolvency, or seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Depositor or RE Subsidiaries or any substantial part of its or their assets, or make any assignment for the benefit of creditors, or admit in writing its inability to pay its debts generally as they become due, or take any corporate action in furtherance of any such action; (vii) (A) merge, dissolve, liquidate or consolidate with or into any other entity or engage in any other business combination with any other entity or (B) form any subsidiaries; or (viii) take any action in violation of the organizational documents of the Depositor or any RE Subsidiary, as applicable.
As used throughout, the phrase “ordinary course of business” shall mean the usual transactions, customs and practices of the Company or its relevant subsidiary, as applicable, of a kind, amount, and nature as common before the date of the Closing. 
Notwithstanding the above restrictions (except as noted below), the RE Subsidiaries and the Depositor may:
•    So long as a Springing Lien Event (as defined below) has not occurred, upon 30 days advance written notice to PBGC, remove up to 10 properties in aggregate from the RE Subsidiaries; provided, however, that the aggregate value (determined solely by reference to appraisals effective as of the date of the Closing provided by Sears at its sole expense) of all properties so removed pursuant to this basket may not exceed $75 million; provided further that, during the remainder of the calendar year in which the Closing occurs and the immediately following calendar year, the RE Subsidiaries may not remove more than 5 properties per calendar year (or portion thereof) and the aggregate value (determined solely by reference to appraisals effective as of the date of the Closing) of all properties removed during either of such calendar years

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	     (or portion thereof) may not exceed $25 million; provided further that, during each subsequent calendar year, the RE Subsidiaries may not remove more than 5 properties per calendar year and the aggregate value (determined solely by reference to appraisals effective as of the date of the Closing) of all properties removed during any such calendar year may not exceed $35 million (together, the “RE Subsidiaries Permitted Transfers”); provided that, notwithstanding anything herein to the contrary, no sales by the RE Subsidiaries or Depositor of real properties that are Designated Assets (as distinguished from, and not including, movement of parts, subleases, substitutions of real properties, outlots, Pledges or other transactions) may occur unless such sales are either (i) RE Subsidiaries Permitted Transfers, or (ii) expressly permitted in the third bullet point of this section at subsections 2.(v) or 2.(z);
•    Permit (i) the RE Subsidiaries to remain parties to (and the properties held by the RE Subsidiaries to remain subject to) the Master Lease and (ii) the RE Subsidiaries and the Depositor to remain parties to (and the properties held by such entities to remain subject to) the other REMIC Transactional Documents; for the avoidance of doubt, in the event that any action or matter is expressly prohibited (or limited) in the definitive documentation, but may otherwise be permitted (or otherwise less restricted) under the REMIC Transactional Documents, the definitive documentation will control;
•    So long as a Springing Lien Event has not occurred, in the case of the RE Subsidiaries: (1) take any action required by the Master Lease, (2) undertake or permit (t) movement of parts between properties, making of improvements to properties, and installation of trade fixtures in accordance with Section 9 of the Master Lease, (u) subleases of properties subject to the Master Lease in accordance with Section 13(a) of the Master Lease, (v) terminations of the Master Lease with respect to specific properties in accordance with Section 14(a) of the Master Lease; provided that the aggregate value of properties sold pursuant to this clause (v), together with the aggregate value of properties sold pursuant to clause (z) below, shall not exceed $25 million in any calendar year (provided that any unused portion thereof with respect to any calendar year may be carried forward to any subsequent calendar year), (w) substitutions of properties subject to the Master Lease in accordance with Sections 11(a) and/or 14(d) of the Master Lease, (x) transactions involving outlots

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	     pursuant to Section 14(e) of the Master Lease, (y) transactions involving easements pursuant to Section 14(f) of the Master Lease, and (z) sales of properties pursuant to Section 16 of the Master Lease; provided that the aggregate value of properties sold pursuant to this clause (z), together with the aggregate value of properties sold pursuant to clause (v) above, shall not exceed $25 million in any calendar year (provided that any unused portion thereof with respect to any calendar year may be carried forward to any subsequent calendar year); provided further that any substitution of any real property owned by any RE Subsidiary pursuant to this clause (2) (or otherwise, if any) shall be permitted only to the extent such real property is substituted for other real properties of equal or greater value (determined solely by reference to appraisals effective on or about the date of each such substitution) which become collateral for Mortgage Loans which back the REMIC Certificates, at the Company’s sole cost, and (3) except as expressly limited in the definitive documentation, permit Sears, Roebuck and Co. to exercise any of its other rights under the Master Lease;
•    (i) Pay third-party servicer and trustee fees in relation to the REMIC Certificates, and (ii) pay principal and interest on the REMIC Certificates in accordance with the Pooling and Servicing Agreement;
•    So long as a Springing Lien Event has not occurred, Transfer or Distribute cash or cash equivalents (but not real property constituting Designated Assets) to the Company or any of its subsidiaries but only in a manner generally consistent with the regular cash flow circulation processes employed by Sears in the ordinary course of business; and
•    (1) Incur (A) ordinary course or involuntary liens and encumbrances (including, without limitation (i) liens securing real estate taxes, which shall be timely extinguished in the ordinary course of business, (ii) zoning restrictions, and (iii) easements), (B) liens arising under the REMIC Transactional Documents and (C) liens and encumbrances permitted by the REMIC Transactional Documents and (2) permit to exist any liens and encumbrances existing at the date of the Closing (“REMIC Existing Liens”).  In the event that the Company, the Depositor or any of the RE Subsidiaries (or any of the Company’s other subsidiaries) is required to (or otherwise) deliver(s) a schedule of liens and encumbrances pertaining to any property owned by the

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	    Depositor or any of the RE Subsidiaries to any third party, it shall deliver such schedule (including updates) to PBGC promptly following delivery to the applicable third party.

	RE Subsidiary Additional Covenants
	Sears shall not cause or allow, and there shall not be, (i) any direct or indirect Transfer or Distribution or (ii) any Pledge, in each case of the equity or other ownership interests of any RE Subsidiary or the Depositor to any person other than the Company or any of its subsidiaries; provided that Sears shall not cause or allow, and there shall not be, any Transfer, Distribution or Pledge of the equity or other ownership interests of any RE Subsidiary or the Depositor unless (x) such interests are (or will be) owned by the Company or a subsidiary of the Company organized under the laws of (and domiciled in) the United States of America, any state thereof or the District of Columbia and (y) upon giving effect to such Transfer, Distribution or Pledge, the RE Subsidiaries and the Depositor will remain members of the Company’s “controlled group” as defined in ERISA Section 4001(a)(14).  The RE Subsidiaries and the Depositor shall at all times remain liable for their respective obligations to PBGC irrespective of whether any direct or indirect Transfer, Pledge or Distribution of the equity or other ownership interests in any RE Subsidiary or the Depositor occurs.

	IP Subsidiary Organizational Changes and Bankruptcy Remoteness
	The Company shall represent, warrant and covenant that the organizational documents of the IP Subsidiary provide that:
•    Bankruptcy filing is permissible only with the unanimous consent of the managers of IP Subsidiary; and
•    At least one manager of IP Subsidiary shall be an individual who is fully independent of the Company; and
•    The IP Subsidiary has been and shall continue to be operated as a special purpose entity consistent with the special purpose vehicle provisions of such organizational documents (including, without limitation, provisions intended to ensure and preserve the bankruptcy-remoteness of such entity) and the prior opinions provided by IP Subsidiary counsel.  IP Subsidiary counsel shall provide a bring-down opinion, in substantially the form attached hereto as Exhibit 4, that the execution, delivery and performance of the definitive documentation and the consummation of the transactions contemplated thereunder do not cause IP Subsidiary counsel to alter or withdraw the bankruptcy opinion issued in connection with the IP Notes transaction (the “IP Bring-Down Opinion”).  Sears shall cooperate with IP Subsidiary counsel in providing such authorizations, confirmations,

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	      certifications and other informational diligence requests as IP Subsidiary counsel shall reasonably require in order to prepare and issue the IP Bring-Down Opinion.
Upon the date of the Closing: (i) Sears Brands, LLC, the sole member of the IP Subsidiary (the “Member”), shall appoint that entity as identified on Exhibit 5 as a manager of the IP Subsidiary in accordance with the terms of the IP Subsidiary’s existing organizational documents (the “IP Independent Manager”); (ii) the Board of Managers shall cause an Issuer Order (as defined in the IP Notes Indenture) to be given to the Trustee (as defined in the IP Notes Indenture), instructing the Trustee to refrain from consenting to or entering into any subsequent amendments to the IP Notes Indenture without the IP Independent Manager’s prior, express written consent (unless refraining from such amendments would materially impair the value of the IP Notes) and further stating that such Issuer Order may not be revoked by any subsequent Issuer Order unless such subsequent Issuer Order is signed by the Independent Manager (it being understood that the IP Notes Indenture does not, in every instance, obligate the Trustee to adhere to the terms of any Issuer Order); and (iii) each of the Company and the Member shall individually covenant and a gree that it will not seek to remove the existing IP Independent Manager or appoint any successor IP Independent Manager unless the existing Independent IP Independent Manager is promptly replaced by a successor IP Independent Manager set forth on Exhibit 5 hereto or otherwise expressly approved in writing by PBGC; provided that any IP Independent Manager shall agree with the Company to vote solely on: (A) the commencement of a Voluntary Bankruptcy Event or a Transfer, Pledge or Distribution of all or substantially all of the assets of the IP Subsidiary; (B) any amendment to the organizational documents of the IP Subsidiary; or (C) any action which, in the Independent Manager’s reasonable judgment: (x) may impair the bankruptcy-remoteness of the IP Subsidiary in any material respect; or (y) would otherwise be in violation of any provisions set forth in this term sheet or the definitive documentation.
All Independent Managers contemplated herein shall: (i) receive coverage from the applicable Directors’ and Officers’ liability policies of insurance; and (ii) shall be paid and receive all other benefits at the same level and amount as the other managers of such entity, and at the sole expense of the IP Subsidiary.  The details of the current manager insurance and compensation packages are as set forth at Exhibit 5.

	IP Subsidiary Negative Covenants
	The Company shall not permit the IP Subsidiary to, and (as an independent covenant  and solely to the extent that such agreement by the IP Subsidiary does not impair the rights of the

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	holder of the IP Notes thereunder or materially impair the marketability of the IP Notes) the IP Subsidiary shall not:
•    Transfer or Distribute any Designated Assets; provided that the IP Subsidiary shall be permitted to: (i) make payments in respect of the IP Notes or as required by the IP Notes Indenture; (ii) Transfer or Distribute the IP Assets to the extent that such Transfer or Distribution (1) is permitted by the IP Notes Indenture and is otherwise undertaken for fair market value and in the ordinary course of business, or (2) is a Transfer or Distribution following the occurrence of a default under the IP Notes Indenture, with the net proceeds thereof being first applied to the IP Notes and after payment in full of such IP Notes and the other obligations under the IP Notes Indenture, such remaining proceeds (being Designated Assets) subject to the Springing Lien and thereafter to be applied to the PBGC UBL Claims (defined below) (or, in the event that the PBGC UBL Claims are then contingent, unliquidated and/or unmatured, transferred within 5 business days to and held by PBGC or its designated agent for the benefit of PBGC in express trust or escrow (as applicable) until such time as the PBGC UBL Claims are fully liquidated and after application, such amount (if any) in excess of that required to pay the PBGC UBL Claims in full (provided such PBGC UBL Claims have not become unenforceable by reason of a lapse of time) shall be remitted to the Company or its appropriate subsidiary as directed by the Company); and (iii) so long as a Springing Lien Event has not occurred, Transfer or Distribute cash or cash equivalents (even if constituting Designated Assets of the IP Subsidiary) to the Company or any of its subsidiaries in a manner generally consistent with the regular cash flow circulation processes employed by Sears in the ordinary course of business, including without limitation by (1) maintaining loans (as lender) from the initial proceeds from the issuance of the IP Notes, (2) making loans (as lender) to any affiliate out of payments from the licenses constituting IP Assets, (3) canceling, amending, modifying or refinancing any such loans or (4) making distribution of amounts received by the IP Subsidiary under the waterfall provisions of the IP Notes Indenture;
•    amend in any manner materially adverse to the interests of PBGC (i) the organizational documents of the IP Subsidiary (it being understood that any amendment to the sections of those organizational documents to be agreed by

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	     PBGC and the Company as part of the definitive documentation shall be deemed to be materially adverse to the interests of PBGC)3 or (ii) the IP Notes Indenture (the “Indenture Amendment Covenant”);
•    Pledge any Designated Assets other than (i) liens securing the IP Notes, (ii) liens granted to licensees and qualified sub-licensees under the applicable licenses and sublicenses in the ordinary course of business, (iii) licenses or sublicenses of IP Assets on arms’-length terms and otherwise in the ordinary course of business (provided that long-term licenses or sub-licenses providing only upfront (as opposed to regular and periodic) royalty payments shall not be permitted unless the IP Subsidiary (x) promptly reports such transaction(s) to PBGC, and (y) retains (and does not Distribute, Transfer or, unless otherwise permitted by this paragraph, Pledge (except as required by the IP Notes Indenture)) the proceeds of such upfront royalty payments), (iv) any rights granted pursuant to Section 1.12 of the IP Notes Indenture (to the extent as described in footnote 4), (v) ordinary course or involuntary liens and encumbrances, (vi) liens and other encumbrances existing at the date of Closing (“IP Existing Liens”); (vii) Permitted Liens (as defined in the IP Notes Indenture) and (viii) continuations or substitutions of the foregoing with substantially equivalent liens or encumbrances.  In the event the Company or the IP Subsidiary (or any other subsidiary of the Company) is required to (or otherwise) deliver(s) a schedule of liens and encumbrances pertaining to any property owned by the IP Subsidiary to any third party, it shall deliver such schedule (including updates) to PBGC promptly following delivery to the applicable third-party;
•    institute or consent to the institution of (including, without limitation, by failing to timely defend against) bankruptcy or insolvency proceedings in respect to the IP Subsidiary, or file a petition seeking or consenting to reorganization or relief under any applicable federal or state law relating to bankruptcy or insolvency, or seek orconsent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the IP Subsidiary or any substantial part of its assets, or make any

                                                         
3 As part of definitive documentation, PBGC and the Company to agree on particular sections of specified organizational documents that cannot be amended without consent of PBGC notwithstanding the overall standard of adversity; it being further understood that any amendment to the organizational documents that may impair the special purpose vehicle status and bankruptcy-remoteness of the relevant IP Subsidiary shall be considered materially adverse to PBGC.

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	     assignment for the benefit of creditors, or admit in writing its inability to pay its debts generally as they become due, or take any corporate action in furtherance of such action;
•    except for (i) the IP Notes, (ii) other liabilities arising under the IP Notes Indenture and the Transaction Documents (as defined in the IP Notes Indenture), each as in effect on the date of the Closing and (iii) liabilities of the IP Subsidiary incurred in the ordinary course of business (and then, only to the extent permitted under the IP Notes Indenture), incur, assume or guaranty any indebtedness;
•    make any expenditure (by long-term or operating lease or otherwise) for any capital assets (either realty or personalty);
•    (A) merge, dissolve, liquidate or consolidate with or into any other entity or engage in any other business combination with any other entity or (B) form any subsidiaries; or
•    take any action in violation of the organizational documents of the IP Subsidiary.
Sears shall not cause or allow, and there shall not be, (i) any direct or indirect Transfer or Distribution or (ii) any Pledge, in each case of any equity interests in the IP Subsidiary to any person other than the Company or any of its subsidiaries (other than any liens required under the Company’s existing revolving credit facility)4; provided that Sears shall not cause or allow, and there shall not be, any Transfer, Distribution or Pledge of the equity or other ownership interests of the IP Subsidiary (other than pursuant to any liens required under the Company’s existing revolving credit facility) unless (x) such interests are (or will be) owned by the Company or a subsidiary of the Company organized under the laws of (and domiciled in) the United States of America, any state thereof or the District of Columbia and (y) upon giving effect to such Transfer, Distribution or Pledge, the IP Subsidiary will remain a member of the Company’s “controlled group” as defined in ERISA Section 4001(a)(14).  The Company, through its corporate ownership structure, shall instruct and direct the Board of Sears RE that Sears Re shall not enter into or agree to any amendment to (or waiver under)  the IP Notes Indenture which would reasonably be anticipated to materially adversely impact the interests of PBGC.

                                                         
4 Definitive documentation shall reflect that the noted parenthetical above and as used throughout this term-sheet refers solely to the rights of the lender(s) under the revolving credit facility to be afforded a limited license of the brand names and marks in the event the lender(s) conduct a liquidation of their inventory-based collateral.

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	Enforcement
	In addition to any and all other remedies that the parties to the definitive documentation may have, the parties shall each be entitled to specific performance as a remedy for breach of the covenants set forth in this term sheet and the definitive documentation, and PBGC, the Company and all subsidiaries of the Company shall be deemed to have consented to specific performance in respect of any such violation.
Any transactions or other actions in violation of the covenants set forth in this term sheet and the definitive documentation shall be, ab initio, null, void and of no force or effect.
If the Company or any of its subsidiaries takes or attempts to take any action which: (i)(x) is or would be in breach of the definitive documentation, and (y) the Company does not within 10 business days following delivery of notice of such breach by PBGC to the Company either cure such breach or provide written notice to PBGC that it will not take such action, (ii) reduces or, if consummated, would reasonably be expected to reduce the aggregate value of the Designated Assets held by the Depositor, the RE Subsidiaries and the IP Subsidiary that may be realized by PBGC (whether as a result of a prohibited Transfer, Distribution or Pledge of any Designated Asset, reduction in the value of any Designated Asset or impairment of the bankruptcy remoteness or special purpose nature of any of the Depositor, the RE Subsidiaries or the IP Subsidiary, or otherwise) by at least $50 million, and (iii) is enjoined by a permanent injunction (after notice to and an opportunity to be heard by the Company) set forth in a final and non-appealable order of a court of competent jurisdiction (or determined by a final and non-appealable order of such court to constitute a breach of the definitive documentation), then the Company shall within 5 business days of entry of such final and non-appealable order (a “Final Injunction Order”) make a contribution to the Pension Plan (an “Excess Contribution”) in an amount equal to $100 million which shall be in addition to the minimum required contribution determined under 26 U.S.C. § 430 for the plan year for which the Excess Contribution is made.  For the avoidance of doubt, nothing set forth in this paragraph, including, without limitation, the payment of the Excess Contribution, will (1) relieve the Company or any of its subsidiaries from, or otherwise mitigate, its obligation to fully comply with the Final Injunction Order (including, without limitation, any obligation to pay damages to PBGC or the Pension Plan), (2) constitute a waiver by PBGC, or cure of, any breach under the definitive documentation, or (3) in any way impair, waive or abrogate any of PBGC’s remedies under the definitive documentation (including, without limitation, the right to declare a Forbearance Termination Event) or under applicable law, other

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	than the occurrence of a Springing Lien Event arising from the requirement to make such Excess Contribution.  The Company shall not at any time elect under 26 U.S.C § 430(f)(6)(B) to create or to increase any prefunding balance (as defined in 26 U.S.C § 430(f)(6)) of the Pension Plan by using (a) all or any part of any Excess Contribution, or (b) all or any portion of any excess described in 26 U.S.C. § 430(f)(6)(B) that is directly or indirectly attributable to any Excess Contribution.

	PBGC Commitment
	Unless after the date of the Closing (i) a Forbearance Termination Event occurs that is continuing at the time of PBGC’s issuance of a notice of determination under ERISA Section 4042(a) that it is instituting proceedings to terminate the Pension Plan, or (ii) the Company or any of its subsidiaries enters into an agreement providing for a Material Transaction, PBGC shall forbear from initiating any involuntary termination of the Pension Plan (except an involuntary termination that is based solely on PBGC’s determination (in accordance with then-applicable legal standards) that the Pension Plan “does not have assets available to pay benefits which are currently due under the terms of the plan” within the meaning of ERISA Section 4042(a) and that PBGC is therefore required to initiate pursuant to ERISA Section 4042(a)).
 
A “Forbearance Termination Event” shall mean:
(i)    the occurrence of any Springing Lien Event; 
(ii)    an event of default under any third-party debt issued by the Company or any Material Subsidiary (as defined below) with an aggregate outstanding principal in excess of $350 million, which event of default (x) results in the acceleration of the maturity date of such debt and such debt remains outstanding for a period of 5 days following such acceleration; or (y) arises from non-payment upon the expiry of such debt’s term;
(iii)    both (A) the Company’s Market Capitalization (as defined below) is less than $1.0 billion on a fully diluted basis, determined at market close, and (B) either (1) the UBL (as defined below) of the Pension Plan exceeds $625 million; or (2) both (x) the Pension Plan is less than 80% funded on a termination basis and (y) the UBL of the Pension Plan is greater than $250 million; or
(iv)    any breach by the Company or any of its subsidiaries of any applicable representation, warranty, covenant, undertaking or agreement set forth herein or in the definitive documentation applicable to such entity, in each case subject to materiality thresholds and grace periods (if any) to be agreed.

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	PBGC will provide the Company with the UBL Documentation (as defined below) at the time PBGC makes any determination that a Forbearance Termination Event has occurred under clause (iii), above.
A “Material Transaction” shall mean any:
(i)    (A) so long as the Company’s Market Capitalization is at least $1.5 billion, asset dispositions (other than dispositions of equity interests of subsidiaries, which are addressed in section (ii) below) on terms that are not either (i) fair and reasonable or (ii) the result of an arm’s length transaction; and (B) if the Company’s Market Capitalization is less than $1.5 billion, asset dispositions (other than dispositions of equity interests of subsidiaries which are addressed in section (ii) below) that are not both (i) on terms that are either (x) fair and reasonable or (y) the result of an arm’s length transaction, and (ii) having a total value not in excess of $600 million, as calculated from and after the most recent date on which the Company’s Market Capitalization fell below such threshold and excluding transactions required under agreements entered into prior to such date.
(ii)    disposition of equity or other ownership interests of any subsidiary (including without limitation by means of a rights offering) with total value in excess of $500 million;
(iii)    spinoffs, dividends or share repurchases with a total value in excess of $250 million; or 
(iv)    new financing to or sale-leaseback by (for the avoidance of doubt, including, without limitation, any sale-leaseback of real estate or REIT transaction) the Company or any of its subsidiaries such that, immediately following such transaction, the amount of outstanding indebtedness of the Company and its subsidiaries (including, without limitation, attributable indebtedness arising from sale-leasebacks and commitments under revolving credit facilities) exceeds the amount of outstanding indebtedness (including, without limitation, attributable indebtedness arising from sale-leasebacks, commitments under revolving credit facilities and letter of credit commitment amounts) on July 1, 2015 by at least $1.0 billion;
    

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	provided that: (x) a disposition of inventory and/or other assets held for sale in the ordinary course of business of the Company and its subsidiaries shall not constitute a Material Transaction and shall not count against any cap set forth above, (y) the transactions described in the Registration Statement on Form S-11 filed with the Securities and Exchange Commission by Seritage Growth Properties and declared effective on June 9, 2015 and any transactions related thereto (the “REIT Transaction”) shall, in each case, not constitute a Material Transaction and shall not count against any cap set forth above; provided however that no proceeds thereof may be used to effect a transaction as set forth in section (iii) above, irrespective of any caps set forth therein, and (z) any transaction solely to the extent among the Company and/or any of its subsidiaries shall not constitute a Material Transaction and shall not count against any cap set forth above.  Any transaction cap amounts under sections (ii) or (iii) of the definition of a Material Transaction shall be calculated as the sum of all transactions in such section required under agreements entered into during any calendar year, with any unused amounts in any calendar year carried forward into the following calendar year at the Company’s sole discretion; provided that any unused amount with respect to a particular calendar year may not be carried forward to any calendar year other than the immediately following calendar year.  Any transaction cap amounts under section (i) of the definition of a Material Transaction shall be calculated as the sum of all transactions in such section entered into during any consecutive 12-month period.  For the avoidance of doubt, qualification of a transaction as a “Material Transaction” for the limited purposes of this term sheet and the definitive documentation shall not constitute an admission by the Company or any of its subsidiaries that such transaction is material for any other purpose.

As used herein, the “Company’s Market Capitalization” shall mean and be determined in the following order of priority as of the relevant date of determination:
(1) First, so long as ESL Investments, Inc., Fairholme Capital Management, LLC and their respective Affiliates and managed funds, together with the Company’s officers and directors as of the date of determination, (and, if different, those officers and directors within the prior 6 months as well) (collectively, the “Specified Shareholders”) beneficially own or control, in the aggregate, no more than 88% of the total amount of outstanding fully-diluted shares of the Company’s common stock, the product of (A) the number of fully-diluted shares of the Company’s common stock then outstanding and (B) the closing price of a share of the Company’s common stock as of the end of the most recently ended trading day as reported by the Nasdaq Stock Market or such successor or other securities exchange on which 

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	the Company’s common stock may then be listed.  The Company shall provide PBGC the Specified Shareholder common equity ownership totals (to the best of the Company’s knowledge) within 3 business days of receipt of a written request therefor;
(2) Second, if PBGC or the Company requests a determination of the Company’s Market Capitalization by written notice delivered to the other party and the Specified Shareholders own or control more than 88% of the total amount of outstanding fully-diluted shares of the Company’s common stock,  the product of (i) number of fully-diluted shares outstanding, multiplied by (ii) the Average Quoted Price (defined below) at any given time; and
(3) Third, if (i) PBGC requests a determination of the Company’s Market Capitalization by written notice delivered to the Company, (ii) the Specified Shareholders own or control more than 88% of the total amount of outstanding fully-diluted shares of the Company’s common stock, and (iii) an Average Quoted Price cannot be promptly calculated (due to a lack of available quotes or otherwise), then the Company’s Market Capitalization shall be deemed (for the purposes of this term sheet and the definitive documentation only) to be less than $1.0 billion on a fully diluted basis unless the Company then has issuer ratings (A) by both (x) S&P of CCC- or higher and (y) Moody’s of Caa3 or higher, in which case the Company’s Market Capitalization shall be deemed (for the purposes of this term sheet and the definitive documentation only) to be greater than $1.0 billion but, except as specified in clause (B) below, less than $1.5 billion or (B) by both (x) S&P of CCC or higher and (y) Moody’s of Caa2 or higher, in which case the Company’s Market Capitalization shall be deemed (for the purposes of this term sheet and the definitive documentation only) to be greater than $1.5 billion, in each case until such time as a subsequent determination of Company’s Market Capitalization is requested by either PBGC or the Company and determined in accordance with the procedures set forth herein; for the avoidance of doubt, in the event that either S&P or Moody’s no longer rates or otherwise withdraws its rating from the Company, then, in the circumstances contemplated by this paragraph (3), the Company’s Market Capitalization shall be deemed (for purposes of this term sheet and the definitive documentation only) to be less than $1.0 billion on a fully diluted basis.
The “Average Quoted Price” shall be determined from time-to-time, promptly following a request by PBGC or the Company, as follows: (x) the Company will solicit and obtain a quoted price per share for a sale of 50,000 shares from each of five

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	 independent broker-dealers reasonably acceptable to each of PBGC and the Company; (y) the highest and lowest price quotes will be eliminated; and (z) the Average Quoted Price will be the arithmetic average of the remaining three quotes.
“Affiliate” means, with respect to a specified person or entity, another person or entity that directly or indirectly Controls or is Controlled by or is under common Control with the person or entity specified.  “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person or entity, whether through the ability to exercise voting power, by contract or otherwise.

	Springing Lien
	1.     Upon and continuing after the occurrence of any Springing Lien Event, the Depositor, the RE Subsidiaries and the IP Subsidiary will each automatically be deemed to have granted (as of the date the applicable Springing Lien Event occurs), without further action of any party, a lien on and security interest in (the “Springing Lien”): (i) the REMIC Certificates held by the Depositor; (ii) the real property held by the RE Subsidiaries; (iii) the IP Assets held by the IP Subsidiary; and (iv) all proceeds of any of the foregoing (including, without limitation, proceeds of proceeds) set forth in clauses (i) through (iii) (all assets set forth in clauses (i) through (iv), regardless of whether a Springing Lien Event has occurred, the “Designated Assets”) to PBGC securing any and all claims (whether fixed, contingent or otherwise) of PBGC for the “unfunded benefit liabilities” together with interest (the “UBL”)5 of the Pension Plan under ERISA Section 4062(b)(1)(A) (provided that, notwithstanding anything in this term sheet or the definitive documentation, the parties reserve all

                                                         
5 PBGC shall provide the Company with its supporting documentation relating to its determination of, estimate of, or other calculations relating to the UBL of the Pension Plan (including, but not limited to, its Pension Information Profile relating thereto in Excel format) (the "UBL Documentation"), at the times provided in this term sheet or in the the definitive documentation; provided, however, that neither PBGC's provision of the UBL Documentation to the Company nor the Company's review thereof or response thereto will prevent or delay PGBC from pursuing any and all remedies hereunder or under the definitive documentation in accordance with the terms hereof or thereof. The Company shall timely provide to PBGC: (i) all quarterly asset statements for the Pension Plan within 5 business days after the Company's receipt thereof; and (ii) the Pension Plan's Actuarial Valuation Report annually within 5 business days after the earlier of (a) the last day of the ninth calendar month of the plan year and (b) the date on which such report is received by the Company.

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	          rights regarding the determination of UBL, including, but not limited to, the applicability, validity, interpretation, and application of PBGC regulations relating thereto) (such claims, the “PBGC UBL Claims”), against the Company and each of its subsidiaries; provided, however, that if the grant of the Springing Lien respecting the IP Assets (and all proceeds thereof) would constitute a default under the IP Notes Indenture as of the date of the Closing, then the Springing Lien as respecting the IP Assets (and all proceeds thereof) shall be of no force and effect until either (1) the IP Notes and all other obligations under the IP Notes Indenture have been paid in full (or the IP Notes and the IP Notes Indenture have otherwise been defeased or fully discharged) or (2) the grant of the Springing Lien respecting the IP Assets (and all proceeds thereof) ceases to constitute a default under the IP Notes Indenture (the “IP Springing Lien Conditions”).  In addition, and without any limitation to any other rights or remedies of whatever kind or nature PBGC may have, and notwithstanding anything herein to the contrary, PBGC may foreclose on the Designated Assets (or any portion thereof) under the Springing Lien only: (a) if the plan administrator of the Pension Plan initiates a distress termination of the Pension Plan under ERISA Section 4041(c); or (b) upon satisfaction of the following conditions: (x) the Pension Plan is terminated and (y) PBGC does not receive from the Company within five business days after a written demand by PBGC (the “PBGC Demand Letter”) (which PBGC Demand Letter shall include the UBL Documentation) the full amount of the PBGC UBL Claims.  PBGC’s reasonable estimate of the PBGC UBL Claims shall suffice for purposes of its demand as set forth above; provided however, that if the PBGC UBL Claims are then contingent, unliquidated and/or unmatured, then any proceeds from such foreclosure action shall (1) be held by PBGC or its designated agent for the benefit of PBGC in express trust or escrow (as applicable); and (2) if invested, then invested as PBGC shall reasonably determine, until such time as the PBGC UBL Claims are fully liquidated and after application, such amount (if any) in excess of that required to pay the PBGC UBL Claims in full (provided such PBGC UBL Claims have not become unenforceable by reason of a lapse of time) shall be remitted to Sears; provided further that if the amount of the PBGC UBL Claims is ultimately determined to be less than PBGC’s reasonable estimate as set forth above, any amounts paid in respect of the PBGC UBL Claims that are in excess of the

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	          ultimately determined amount thereof shall be promptly returned to the Company, including, to the extent permitted by applicable law, unapplied interest and earnings (in either case, if any) as earned on the trust or escrow account. The Springing Lien shall remain in existence until the PBGC UBL Claims (x) are paid in full, or (y) become unenforceable by reason of lapse of time.
2.         In addition, following the occurrence of a Springing Lien Event and determined only at such time, the Springing Lien shall (i) with respect to the lien on the Designated Assets consisting of the REMIC Certificates (and all proceeds thereof), be (a) a valid, binding and enforceable lien on and security interest in such REMIC Certificates (and all proceeds thereof) senior to all other liens except for non-consensual liens which may prime by operation of statute (if any) and (b) perfected (x) through physical possession of such REMIC Certificates to be held in escrow (in accordance with escrow arrangements reasonably acceptable to PBGC) until the occurrence of a Springing Lien Event by PBGC’s designated agent, which shall be a money-center financial institution reasonably acceptable to PBGC and the Company (the “Custodian”), such REMIC Certificates to be delivered by the Depositor to the Custodian at the date of Closing, and (y) by such other pre-executed documents of perfection and powers of attorney in form and substance reasonably acceptable to PBGC, delivered to the Custodian to be held in escrow (in accordance with escrow arrangements reasonably acceptable to PBGC) until the occurrence of a Springing Lien Event at the date of Closing for filing and recordation upon the occurrence of a Springing Lien Event; (ii) with respect to the lien on the Designated Assets consisting of the IP Assets (and all proceeds thereof), be (a) subject to and conditioned upon the satisfaction of at least one of the IP Springing Lien Conditions, a valid, binding and enforceable lien on and security interest in such IP assets (and all proceeds thereof) senior to all other liens except for the liens securing the IP Notes and non-consensual liens which may prime by operation of statute (if any) (and such rights as described supra at footnote 4) and (b) perfectible by pre-executed documents of perfection and powers of attorney in form and substance reasonably acceptable to PBGC, delivered to the Custodian to be held in escrow (in accordance with escrow arrangements reasonably acceptable to PBGC) until the occurrence of a Springing Lien Event at the date of the Closing for filing and recordation upon the occurrence of a Springing Lien Event;

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	          and (iii) with respect to the lien on the Designated Assets consisting of the real property (and all proceeds thereof), be (a) a valid, binding and enforceable lien on and security interest in such real property (and all proceeds thereof) senior to all other liens except for the mortgages and non-consensual liens which may prime by operation of statute (if any) and (b) perfectible by (I) other than mortgages (addressed in sub-paragraph (II) below), pre-executed documents of perfection and powers of attorney in form and substance reasonably acceptable to PBGC, delivered to the Custodian to be held in escrow (in accordance with escrow arrangements reasonably acceptable to PBGC) until the occurrence of a Springing Lien Event at the date of Closing for filing and recordation upon the occurrence of a Springing Lien Event and (II) mortgages, which shall be substantially in the form of the form of mortgage attached hereto as Exhibit 6 (together with any state-specific conformations required as of the time of the applicable Springing Lien Event), to be recorded promptly following the occurrence of a Springing Lien Event; provided that the Company shall: (i) cause to be provided at Closing pre-executed signature pages of the applicable subsidiary of the Company with respect to such mortgages; and (ii) appoint PBGC as its attorney-in-fact (pursuant to a power of attorney in a form reasonably acceptable to PBGC, which shall be updated at the reasonable request of PBGC to reflect any changes required by law) to execute, make state-specific conformations, and record such mortgages on the real properties held by the RE Subsidiaries; provided, however, that PBGC may act in reliance upon such power of attorney only following the occurrence of a Springing Lien Event.  Upon the occurrence of a Springing Lien Event, PBGC may remove any of the foregoing pre-executed documents from escrow, file such pre-executed documents with applicable government entities, file applicable UCC-1 financing statements, negotiate, execute and record mortgages, and take such other actions, in each case to the extent reasonably necessary to perfect the applicable Springing Lien and, to the extent in accordance with applicable law and not otherwise prohibited by the definitive documentation, foreclose on the Designated Assets. 
3.         Each of the Depositor, the RE Subsidiaries, the IP Subsidiary and their respective direct parents, as well as the Company, shall enter into a subordination agreement with PBGC agreeing on the date of the Closing that solely after the occurrence of a Springing Lien Event, (i) any and all

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	          claims such entity may then or thereafter  hold against the Company or any of its subsidiaries will be subordinated in right of payment to the PBGC UBL Claims against the Company or such subsidiary, as applicable, (ii) except as pertaining to amounts owed in connection with REMIC Transaction Documents and/or the IP Notes, any and all monetary obligations of Depositor, the RE subsidiaries and the IP Subsidiary then owed to the Company or any of its subsidiaries will be subordinated in right of payment to the PBGC claims against the Company or such subsidiary as applicable and (iii) that any funds received contrary to such subordination shall be held expressly in trust and turned over to PBGC for application to the PBGC UBL Claims.
For the avoidance of doubt, the Springing Lien shall consensually secure the PBGC UBL Claims in total (without regard to any rights of the Company or any of its subsidiaries to seek marshalling or similar remedies, which shall be deemed waived).  Each of (i) the Company and (ii) the RE Subsidiaries, Depositor and the IP Subsidiary, hereby acknowledge and shall in the definitive documentation further acknowledge its joint and several contingent liability for the PBGC UBL Claims.
The Springing Lien shall not be subject to the collective net worth limit applicable to a statutory lien under ERISA Section 4068 (the “ERISA Lien”).  Rather, the Springing Lien shall secure the PBGC UBL Claims on a joint and several basis against each of the RE Subsidiaries, the Depositor, and the IP Subsidiary. Each of the RE Subsidiaries, the Depositor, and the IP Subsidiary shall waive any and all defenses based on marshalling, suretyship or impairment of collateral.
Nothing herein in any way limits PBGC's rights, if any, to an ERISA Lien.  However, any amount PBGC collects pursuant to an ERISA Lien from any of the RE Subsidiaries, the Depositor or the IP Subsidiary shall serve to reduce the amount owed by the RE Subsidiaries and the Depositor or the IP Subsidiary, as applicable, for the PBGC UBL Claims that would otherwise be secured by the Springing Lien, provided that no amounts collected hereunder from the Company or any of its subsidiaries will reduce any PBGC claim against any other of the Company and its subsidiaries until PBGC has received a single satisfaction of such claim.  Except as otherwise expressly agreed to herein or in the definitive documentation, nothing herein will limit PBGC’s or the Pension Plan’s rights and remedies, whether by statute, contract, at law, in equity or otherwise.
As set forth in footnote 4 hereof, the Springing Lien shall not extend to such rights with respect to the IP Assets as are reasonably necessary to permit the collateral agents under the

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	Company’s existing credit facility to enforce their rights and remedies under the documents governing such facility with respect to the collateral securing such facility.
At Closing, the Company shall deposit with the Custodian the sum of $250,000 to cover all out-of-pocket costs and expenses of PBGC to be incurred in connection with the execution, perfection and recordation of any mortgages and other security interests related to the Springing Lien.  Any unused portion of such escrowed funds shall be returned by the Custodian to the Company promptly following the termination of the parties’ agreement under the definitive documentation.  For the avoidance of doubt, these escrowed funds shall not be released by the Custodian to PBGC until a Springing Lien Event occurs.

	Springing Lien Events
	Each of the following shall constitute a “Springing Lien Event” hereunder:
1.    A “Voluntary Bankruptcy Event” or an “Involuntary Bankruptcy Event” (each as defined below).
2.    Failure by the Company (or any of its subsidiaries) to timely make any quarterly or other required Pension Plan contributions (including, without limitation, any Excess Contribution).
3.    Entry into an agreement providing for (i) direct or indirect Distribution or Transfer or (ii) Pledge, in each case of any ownership interest in the Depositor, any RE Subsidiary or the IP Subsidiary by the Company or any of its subsidiaries to any entity other than the Company or any of its subsidiaries (other than pursuant to any liens required under the Company’s existing revolving credit facility, as described in footnote 4) without the Depositor, such RE Subsidiary or the IP Subsidiary, as applicable, remaining liable for its obligations to PBGC.
4.    (i) The initiation by the plan administrator of the Pension Plan of a distress termination of the Pension Plan under ERISA Section 4041(c), (ii) entry by a court of competent jurisdiction of a decree under ERISA §4042(c)(1) adjudicating that the Pension Plan is terminated or (iii) agreement between PBGC and the plan administrator of the Pension Plan that the Pension Plan is terminated.
For the purposes hereof: (i) a “Voluntary Bankruptcy Event” shall mean voluntary commencement (or consent to, including, without limitation, by failure to timely defend against, either involuntary commencement or entry of an order for relief in an involuntary 

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	case) of a bankruptcy case or similar proceeding (including, without limitation, appointment of a receiver or other custodian or general assignment for the benefit of creditors) with respect to the Company or any of its Material Subsidiaries; (ii) an “Involuntary Bankruptcy Event” shall mean commencement of an involuntary bankruptcy case or similar proceeding (including without limitation appointment of a receiver or other custodian or required winding up or liquidation) with respect to the Company or any of its Material Subsidiaries that is not dismissed or vacated within 60 days after commencement; (iii) a “Material Subsidiary” shall mean any direct or indirect subsidiary of the Company (A) for which the Company’s share (determined on a pro rata basis by reference to the portion of the equity of such subsidiary held directly or indirectly by the Company) of the assets of such subsidiary and its direct and indirect subsidiaries, taken as a consolidated whole, constitutes more than 5% of the assets of the Company and its direct and indirect subsidiaries, taken as a consolidated whole, (B) which is the Depositor, a RE Subsidiary, the IP Subsidiary or Sears Re or (C) which is a direct or indirect parent of the Depositor, a RE Subsidiary, the IP Subsidiary or Sears Re; and (iv) “Closing” or “Close” means the mutual execution and delivery of the definitive documentation and the effectiveness thereof.

With respect to any and all agreements, indentures, appraisals, leases, articles, governance documents, or other documents of any kind or nature that are referred to herein or in the definitive documentation, the Company: (i)(a) shall with respect to any appraisals to be conducted as of the Closing and thereafter in connection with the Designated Assets and the transactions contemplated herein and in the definitive documentation, bear all costs and expenses associated therewith and select such appraiser(s) from the list of approved appraisers set forth on Exhibit 7 (as the parties may reasonably agree to amend), (b) shall provide to PBGC the most current version of such documents then in effect at least 3 weeks before the date of the Closing, (c) shall (x) identify any changes, waivers or amendments thereto which have been made within the last 12 months, or (y) represent and warrant that no such changes or amendments have been made during the last 12 months, and (d) represents, warrants and covenants that no other changes or amendments have been or will be made until after the Closing, and then only to the extent permitted hereunder or in the definitive documentation; and (ii) shall with respect to references herein to REMIC Existing Liens and IP Existing Liens, the Company shall, as pertaining to the Depositor, the RE Subsidiaries and the IP Subsidiary provide a definitive schedule of all such REMIC Existing Liens and IP

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	Existing Liens that are permitted under the definitive documentation solely as a result of being REMIC Existing Liens or IP Existing Liens, as applicable, and not pursuant to any other carve-out.

	Termination of Agreement
	The parties’ agreements under the definitive documentation shall terminate, the definitive documentation shall be of no further effect and the Springing Lien shall be released upon the earliest of:
•    The Pension Plan’s achieving an 85% funded level on a termination basis as of the last day of two consecutive plan years of the Pension Plan; provided that Company may, at any time, provide to PBGC a calculation of the Pension Plan’s funding percentage on a termination basis with supporting documentation and request PBGC review thereof and, in such event, PBGC will promptly inform the Company in writing that it agrees or disagrees with such calculation and, if it disagrees with such calculation, will simultaneously provide the Company with the UBL Documentation relating to such disagreement and a written explanation of the bases upon which it disagrees;
•    5 years after the earlier of (i) the date of the Closing and (ii) the date that is 60 days after the date of this term sheet; provided that, if PBGC has commenced an enforcement action with respect to its rights hereunder (or the definitive documentation), such agreements shall not terminate solely as a result of the lapse of time until such enforcement action is finally resolved; or
•    The Company completes a standard termination of the Pension Plan.  Any such standard termination will be deemed completed for purposes of the definitive documentation upon the expiration of the Audit Period.  “Audit Period” means the period beginning on the date on which PBGC receives a Form 501 Post-Distribution Certification for the Pension Plan indicating that the Pension Plan has terminated in a standard termination under ERISA § 4041(b) and ending on the later of (a) the 180th day after such receipt, and (b) if PBGC has, by such 180th day, issued audit findings or a notice of noncompliance with respect to such standard termination, the date on which such audit findings have been complied with or rescinded or on which such notice of noncompliance has been rescinded.

	Disclosure
	The content of any public disclosure or press release relating to the terms set forth herein shall be substantially in the form attached hereto as Exhibit 8. The timing of any such disclosure or

28

	
		
	 
	release shall be mutually agreed prior to the date of the Closing and in advance of such disclosure or release. 

	Representation
	It is contemplated that each of the parties will consult their own counsel regarding the foregoing arrangements and the effects thereof.  In furtherance thereof, no legal opinions of either party’s counsel will be required to be provided to the other party other than (1) the Bring-Down Opinions and (2) opinions of local counsel solely as to corporate existence, good standing, power and authority and authorization with respect to the Company and each of its subsidiaries party to the definitive documentation implementing the transactions contemplated herein and in the definitive documentation.

	Binding Term Sheet Provisions
	It is recognized that despite the Parties’ efforts to effectuate concurrently the Closing and the REIT Transaction closing, the REIT Transaction has already closed.  Therefore, by affixing authorized signatures hereto, the Company and PBGC agree (the “Binding Term Sheet Provisions”) that:
1.   Each party shall act in good faith to attempt to prepare,  finalize and Close definitive documentation on the terms and conditions as contemplated in this term sheet (including, without limitation, finalizing and resolving all bracketed provisions, provisions subject to further review, and Exhibits as noted herein) as soon as reasonably practicable, but in any event, within 60 days of mutual execution hereof (the “Documentation Period”).
2.   During the Documentation Period: (a) both parties shall not issue any press release or make any other public disclosure relating to the terms set forth herein  except (1) as to which the timing and content shall have been mutually agreed by both parties prior to the time of such disclosure or release or (2) as required by applicable law or compulsory legal process or in connection with any pending legal proceeding (in which case each party agrees, to the extent permitted by applicable law, to inform the other party promptly thereof and such other party may reply or otherwise respond as it deems necessary or advisable); (b) the Company shall, as if the definitive documentation were in effect, (i) comply with the covenants set forth in the sections entitled “RE Subsidiary Negative Covenants,” “RE Subsidiary Additional Covenants,” “IP Subsidiary Negative Covenants” and “IP Subsidiary Additional Covenants”, and (ii) refrain from using the proceeds of the REIT Transaction to fund any spinoffs, dividends or share repurchases; and (c) unless after the date of the term sheet either (i) a Forbearance Termination Event occurs that is continuing or (ii) the Company or any of its subsidiaries enters into an agreement providing for a Material Transaction, PBGC shall refrain from issuing a notice of determination under ERISA

29

	
		
	

	Section 4042(a) that it is instituting proceedings to terminate the Pension Plan.
3.   Unless extended in writing by both parties, upon the expiry of the Documentation Period, these Binding Term Sheet Provisions shall be of no further force or effect.

	AGREED AS TO THE BINDING TERM SHEET PROVISIONS ONLY

	SEARS HOLDINGS CORPORATION 
Dated:  September 4, 2015

By: /s/ Kristin M. Coleman            
Print: Kristin M. Coleman
Title: Senior Vice President, General Counsel and Corporate  Secretary
 
    – and –

PENSION BENEFIT GUARANTY CORPORATION
Dated:  September 4, 2015

By: /s/ Sanford Rich   
Print: Sanford Rich
Title: Chief of Negotiations and Restructuring, PBGC

30

EXHIBIT 1
(SEARS OWNERSHIP CHART)

[To be provided by Company as soon as practicable as part of
definitive documentation process]

31

EXHIBIT 2
(Other Company Subsidiaries)

[To be provided by Company as soon as practicable as part of
definitive documentation process]

32

EXHIBIT 3
(Current Holders of REMIC Certificates)

[To be provided by Company as soon as practicable as part of
definitive documentation process]

33

EXHIBIT 4
(Bring-Down Opinions)

[To be provided by Company counsel and finalized with PBGC
as soon as practicable as part of definitive documentation process]

34

EXHIBIT 5
(Independent Director and Independent Manager Lists and
Schedule of Compensation and Benefits for Current Relevant 
Company Directors and Managers )

[(i) Initial and Replacement Independent Director and Manager Lists to be finalized as soon
as practicable as part of definitive documentation process; (ii) Schedule of
Independent Director and Manager Compensation and Benefits to be
provided by Company as soon as practicable as part of definitive documentation process]

35

EXHIBIT 6
(Form of Springing Lien Mortgage)

[To be finalized by Company and PBGC as soon as practicable as part of
definitive documentation process]

36

EXHIBIT 7
(List of Approved Appraisers)

[**]

[**] Confidential Information has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to this omitted information.

37

EXHIBIT 8
(Form of Press Release)

[To be finalized by Company and PBGC as soon as practicable as part of
definitive documentation process]

38ex_101.htm

Exhibit 10.1

 

 

PARAGON COMMERCIAL CORPORATION

2006 OMNIBUS STOCK OWNERSHIP AND

LONG TERM INCENTIVE PLAN

 

 

THIS 2006 OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN (the “Plan”) of Paragon Commercial Corporation (the “Company”), a North Carolina corporation with its principal office in Wake County, North Carolina sets forth the terms and conditions under which Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock, Stock Appreciation Rights, and/or Units may be granted from time to time to Eligible Employees and, where applicable, to Directors, subject to the following provisions:

ARTICLE I

DEFINITIONS

The following terms shall have the meanings set forth below. Additional terms defined in this Plan shall have the meanings ascribed to them when first used herein.

Annual Vesting Amount.  With respect to any calendar year, the aggregate fair market value of stock subject to ISOs that are first exercisable during such calendar year for any Optionee, which may not exceed $100,000. The aggregate fair market value of stock with respect to which ISOs are first exercisable during any calendar year shall be determined by taking into account all ISOs granted to such person under all incentive stock options plans of the Company or of any Subsidiary.

Base Value.  The Fair Market Value of a share of Common Stock on the date of issuance of a SAR.

Board.  The Board of Directors of Paragon Commercial Corporation.

Change in Control Transaction.  The dissolution or liquidation of the Company; a reorganization, merger or consolidation of the Company as a result of which the outstanding securities of the class then subject to Rights hereunder are changed into or exchanged for cash or property or securities not of the Company’s issue; or a sale of all or substantially all of the assets of the Company to, or the acquisition of stock representing more than twenty-five percent (25%) of the voting power of the capital stock of the Company then outstanding by, another corporation, trust, limited liability company, bank, entity or person, other than pursuant to a merger in which the Company is the surviving entity.

Code.  The Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated thereunder.

Committee.  The Compensation Committee of the Board.

Common Stock.  The Common Stock, par value $1.00 per share, of the Company.

Company.  Paragon Commercial Corporation.

 

  

  

  

 

Death.  The date of death of an individual who has received Rights as established by the relevant death certificate.

Director.  A member of the Board or a member of the Board of Directors of any Subsidiary.

Disability.  The date on which an individual who has received Rights becomes permanently and totally disabled within the meaning of Section 22(e)(3) of the Code, which shall be determined by the Committee on the basis of such medical or other evidence as it may reasonably require or deem appropriate.

Distribution Date.  March 15th in the year of distribution of a Retained Unit in cash or Stock under Article V (or the first business day thereafter), except that in the case of special distributions, the Distribution Date shall be the first business day of the month in which the Committee determines the amount and form of the distribution.

Dividend Equivalent Credit.  An amount equal to the dividend payable on one share of Common Stock determined and credited on the dividend payment date to each Unit Recipient’s account for each Unit which has been awarded to the Unit Recipient and not converted to a Retained Unit or canceled.

Dividend Equivalent Unit.  A Unit awarded pursuant to a Dividend Equivalent Credit.

Effective Date.  The date as of which this Plan is effective, which shall be the date it is adopted by the Board.

Eligible Employees.  Those individuals who meet the following eligibility requirements:

i.           Such individual must be a full time employee of the Company or a Subsidiary.

For this purpose, an individual shall be considered to be an “employee” only if there exists between the Company or a Subsidiary and the individual the legal and bona fide relationship of employer and employee.  In determining whether such relationship exists, the regulations of the United States Treasury Department relating to the determination of such relationship for the purpose of collection of income tax at the source on wages shall be applied.

	
  

	
ii.

	
Such individual is identified by the Committee as an employee who is in a position to contribute to the long-term success of the Company.

	
  

	
iii.

	
If the Registration shall not have occurred, such individual must have such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the investment involved in the receipt and/or exercise of a Right.

 

  

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iv.

	
Such individual, being otherwise an Eligible Employee under the foregoing items, shall have been selected by the Committee as a person to whom a Right or Rights shall be granted under the Plan.

Exercise Price.  The price at which an Option may be exercised.

Fair Market Value.  With respect to the Company’s Common Stock, the market price per share of such Common Stock determined by the Committee, consistent with the requirements of Section 422 of the Code and to the extent consistent therewith, as follows, as of the date specified in the context within which such term is used:

 

	 	

i. 

	

if the Common Stock was traded on a stock exchange on the date as of which such determination is made, then the Fair Market Value will be equal to the closing price reported by the applicable composite-transactions report for such date;

 

	
  

	
ii.

	
if on the date as of which such determination is made, quotations for the Common Stock are regularly listed on the NASDAQ system or another comparable system, the fair market value of a share of Common Stock shall be deemed to be equal to the closing price for the Common Stock quoted on such system for the trading date as of the date as of which such determination is made; and if a closing price is not available for such date, then the fair market value shall be equal to the closing price on the most recent trading day for which such a price is available;

	
  

	
iii.

	
if no such quotations are available, the fair market value of a share of Common Stock shall be deemed to be the average of the closing bid and asked prices furnished by a professional securities dealer making a market in such shares, as selected by the Committee, for the trading date first preceding the date as of which such determination is made; and

	
  

	
iv.

	
if the Committee determines that the price as determined above does not represent the fair market value of a share of Common Stock, the Committee may then consider such other factors as it deems appropriate and then fix the fair market value for the purposes of this Plan. In such case, the Committee shall maintain a written record of its method of determining Fair Market Value.

Holder.  An individual granted Rights to Restricted Stock.

ISO.  An “incentive stock option” as defined in Section 422 of the Code.

Just Cause Termination means:

	
  

	
i.

	
with respect to the Company or any Subsidiary which employs the recipient of any Rights under the Plan (the “Recipient”) or for which such recipient primarily performs services, the commission by the recipient of an act of fraud, embezzlement, theft or proven dishonesty, or any other illegal act or practice (whether or not resulting in criminal prosecution or conviction), or any act or practice which the Committee shall, in good faith, deem to have resulted in the recipient’s becoming unbondable under the Company’s or the Subsidiary’s fidelity bond;

 

  

3

  

 

	
  

	
ii.

	
the willful engaging by the recipient in misconduct which is deemed by the Committee, in good faith, to be materially injurious to the Company or any subsidiary, monetarily or otherwise, including, but not limited to, improperly disclosing trade secrets or other confidential or sensitive business information and data about the Company or any subsidiaries and competing with the Company or its subsidiaries, or soliciting employees, consultants or customers of the Company in violation of law or any employment or other agreement to which the recipient is a party; or

	
  

	
iii.

	
the willful and continued failure or habitual neglect by the recipient to perform his or her duties with the Company or the subsidiary substantially in accordance with the operating and personnel policies and procedures of the Company or the subsidiary generally applicable to all their employees. For purposes of this Plan, no act or failure to act by the recipient shall be deemed to be “willful” unless done or omitted to be done by the recipient not in good faith and without reasonable belief that the recipient’s action or omission was in the best interest of the Company and/or the subsidiary. Notwithstanding the foregoing, if the recipient has entered into an employment agreement that is binding as of the date of employment termination, and if such employment agreement defines “Cause,” then the definition of “Cause” in such agreement shall apply to the recipient in this Plan. “Cause” under either (i), (ii) or (iii) shall be determined by the Committee.

NASDAQ.  National Association of Securities Dealers Automated Quotation System.

Non-Qualified Option.  Any Option granted under Article III hereof whether designated by the Committee as a Non-Qualified Option or otherwise, other than an Option designated by the Committee as an ISO, or any Option so designated but which, for any reason, fails to qualify as an ISO pursuant to Section 422 of the Code and the rules and regulations thereunder.

Option Agreement.  The agreement between the Company and an Optionee with respect to Options granted to such Optionee, including such terms and provisions as are necessary or appropriate under Article III.

Optionee.  An individual granted an Option under Article III.

Option Period.  The period ending on the expiration date of each Option, which shall not exceed 10 years from the date of grant of the Option.

 

  

4

  

Options.  ISOs and Non-Qualified Options are collectively referred to herein as “Options;” provided, however, whenever reference is specifically made only to ISOs or Non-Qualified Options, such reference shall be deemed to be made to the exclusion of the other.

Performance Period.  A period of two or more years during which certain criteria must be met in order for Units to be converted into Retained Units.

Plan Pool.  A total of 1,000 shares of authorized, but unissued, shares of Common Stock, as adjusted pursuant to Section 2.3(b), which shall be available as Stock under this Plan.

Registration.  The registration by the Company of this Plan, the offering of Rights under this Plan, the offering of Stock under this Plan, and/or the Stock acquirable under this Plan under the 1933 Act and applicable state “Blue Sky” and securities laws.

Retained Units.  Units which Unit Recipients receive based upon the satisfaction of performance goals during a Performance Period.

Restricted Stock.  The Stock that a Holder shall be awarded with restrictions when, as, in the amounts and with the restrictions described in Article IV.

Restricted Stock Grant Agreement.  The agreement between the Company and a Holder with respect to Rights to Restricted Stock, including such terms and provisions as are necessary or appropriate under Article IV.

Retirement. “Retirement” shall mean:

i.           the termination of an Eligible Employee’s employment under conditions which would constitute “normal retirement” or “early retirement” under any tax qualified retirement plan maintained by the Company or a Subsidiary, or

ii.          termination of employment after attaining age 65 (except in the case of a Just Cause Termination), or

iii.         termination of service as a Director, at the election of the Director, at any time after not less than five (5) years of service as a member of the board of directors.

Rights.  The rights to exercise, purchase or receive the Options, Restricted Stock, Units and SARs described herein.

Rights Agreement.  An Option Agreement, a Restricted Stock Grant Agreement, a Unit Agreement or a SAR Agreement.

SAR.  The Right of a SAR Recipient to receive cash when, as and in the amounts described in Article VI.

 

  

5

  

SAR Agreement.  The agreement between the Company and a SAR Recipient with respect to the SAR awarded to the SAR Recipient, including such terms and conditions as are necessary or appropriate under Article VI.

SAR Exercise Date.  The date notice is received by the Company that a SAR is being exercised.

SAR Period.  The period ending on the expiration date or dates of each SAR, which date shall be not later than ten (10) years after the date such SAR is granted.

SAR Recipient.  An individual to whom SARs are granted.

SAR Vesting Period.  The period or periods of time within which each SAR or portion thereof will first become exercisable.

SEC.  The United States Securities and Exchange Commission.

Stock.  The shares of Common Stock in the Plan Pool available for issuance pursuant to the valid exercise of a Right or on which the cash value of a Right is to be based.

Subsidiary.  Any direct or indirect subsidiary entity of the Company.

Tax Withholding Liability.  All federal and state income taxes, social security tax, and any other taxes applicable to the compensation income arising from the transaction required by applicable law to be withheld by the Company.

Transfer.  The sale, assignment, transfer, conveyance, pledge, hypothecation, encumbrance, loan, gift, attachment, levy upon, assignment for the benefit of creditors, by operation of law (by will or descent and distribution), transfer by a qualified domestic relations order, a property settlement or maintenance agreement, transfer by result of the bankruptcy laws or otherwise of a share of Stock or of a Right.

Units.  The Right of a Unit Recipient to receive a combination of cash and Stock when, as and in the amounts described in Article V.

Unit Agreement.  The agreement between the Company and Unit Recipient with respect to the award of Units to the Unit Recipient, including such terms and conditions as are necessary or appropriate under Article V.

Unit Recipient.  An individual granted a Unit.

Vesting Period.  The period or periods of time within which each Option or portion thereof will first become exercisable.

1933 Act.  The Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder.

 

  

6

  

1934 Act.  The Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.

ARTICLE II

GENERAL

Section 2.1. Purpose.

The purposes of this Plan are to encourage and motivate Directors and selected key employees to contribute to the successful performance of the Company and any Subsidiary of the Company and to promote the growth of the market value of the Company’s Common Stock; to achieve a unity of purpose between such Directors, employees and shareholders by providing ownership opportunities, and, when viewed in conjunction with potential benefit plans for members of the Board and the Board of Directors of any Subsidiary, to achieve a unity of purpose between such employees and Directors in the achievement of the Company’s primary long term performance objectives; and to retain such employees by rewarding them with potentially tax-advantageous future compensation. These objectives will be promoted through the granting of Rights to designated Eligible Employees and Directors pursuant to the terms of this Plan.

 

Section 2.2. Administration.

(a)           The Plan shall be administered by the Committee. The Committee may designate any officers or employees of the Company or any Subsidiary to assist in the administration of the Plan, to execute documents on behalf of the Committee and to perform such other ministerial duties as may be delegated to them by the Committee.

(b)           Subject to the provisions of the Plan, the determinations and the interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive upon persons affected thereby. By way of illustration and not of limitation, the Committee shall have the discretion:

(i)           to construe and interpret the Plan and all Rights granted hereunder and to determine the terms and provisions (and amendments thereof) of the Rights granted under the Plan (which need not be identical);

(ii)           to define the terms used in the Plan and in the Rights granted hereunder;

(iii)           to prescribe, amend and rescind the rules, regulations and policies relating to the Plan;

(iv)           to determine the Eligible Employees and Directors to whom and the time or times at which such Rights shall be granted, the number of shares of Stock, as and when applicable, to be subject to each Right, the exercise price or, other relevant purchase price or value pertaining to a Right, and the determination of leaves of absence which may be granted to Eligible Employees without constituting a termination of their employment for the purposes of the Plan; and

 

  

7

  

(v)           to make all other determinations and interpretations necessary or advisable for the administration of the Plan.

(c)           It shall be in the discretion of the Committee to grant Options to purchase shares of Stock to Eligible Employees which qualify as ISOs under the Code. Any Options granted which fail to satisfy the requirements for ISOs shall become Non-Qualified Options.

(d)           The Company has no present intention to effect the Registration. Until such time as the Registration shall occur, the Committee shall be responsible for supplying the recipient of a Right and/or shares of Stock in connection therewith with such information about the Company as is contemplated by the federal and state securities laws in connection with exemptions from the registration requirements of such laws, as well as providing the recipient of a Right with the opportunity to ask questions and receive answers concerning the Company and the terms and conditions of the Rights granted under this Plan. In addition, if the Registration has not occurred, the Committee shall be responsible for determining the maximum number of Eligible Employees and the suitability of particular persons to be Eligible Employees in order to comply with applicable federal and state securities statutes and regulations governing such exemptions. In the event that the Company effects the Registration, the Company shall make available to Eligible Employees and Directors receiving Rights and/or shares of Stock in connection therewith all disclosure documents required under applicable federal and state laws.

(e)           In determining the Eligible Employees and Directors to whom Rights may be granted and the number of shares of Stock to be covered by each Right, the Committee shall take into account the nature of the services rendered by such Eligible Employees and Directors, their present and potential contributions to the success of the Company and/or a Subsidiary and such other factors as the Committee shall deem relevant. An Eligible Employee or Director who has been granted a Right under this Plan may be granted an additional Right or Rights under this Plan if the Committee shall so determine. If pursuant to the terms of this Plan, or otherwise in connection with this Plan, it is necessary that the percentage of stock ownership of an Eligible Employee be determined, the ownership attribution provisions set forth in Section 424(d) of the Code shall be controlling.

(f)           The granting of Rights pursuant to this Plan is in the exclusive discretion of the Committee, and until the Committee acts, no individual shall have any rights under this Plan. The terms of this Plan shall be interpreted in accordance with this intent.

 

Section 2.3. Stock Available For Rights.

(a)           Shares of the Stock shall be subject to, or underlying, grants of Options, Restricted Stock, SARs and Units under this Plan. The total number of shares of Stock for which, or with respect to which, Rights may be granted (including the number of shares of Stock in respect of which SARs and Units may be granted) under this Plan shall be those designated in the Plan Pool. In the event that a Right granted under this Plan to any Eligible Employee or Director expires or is terminated unexercised as to any shares of Stock covered thereby, such shares thereafter shall be deemed available in the Plan Pool for the granting of Rights under this Plan; provided, however, if the expiration or termination date of a Right is beyond the term of existence of this Plan as described in Section 7.3, then any shares of Stock covered by unexercised or terminated Rights shall not reactivate the existence of this Plan and therefore shall not be available for additional grants of Rights under this Plan.

 

  

8

  

(b)           In the event the outstanding shares of Common Stock are increased, decreased, changed into or exchanged for a different number or kind of securities as a result of a stock split, reverse stock split, stock dividend, recapitalization, merger, share exchange acquisition, combination or reclassification, appropriate proportionate adjustments will be made in: (i) the aggregate number and/or kind of shares of Stock in the Plan Pool that may be issued pursuant to the exercise of, or that are underlying, Rights granted hereunder; (ii) the exercise or other purchase price or value pertaining to, and the number and/or kind of shares of Stock called for with respect to, or underlying, each outstanding Right granted hereunder; and (iii) other rights and matters determined on a per share basis under this Plan or any Rights Agreement. Any such adjustments will be made only by the Committee and when so approved will be effective, conclusive and binding for all purposes with respect to this Plan and all Rights then outstanding. No such adjustments will be required by reason of (i) the issuance or sale by the Company for cash of additional shares of its Common Stock or securities convertible into or exchangeable for shares of its Common Stock, or (ii) the issuance of shares of Common Stock in exchange for shares of the capital stock of any corporation, financial institution or other entity acquired by the Company or any Subsidiary in connection therewith.

(c)           The grant of a Right pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets.

(d)           No fractional shares of Stock shall be issued under this Plan for any adjustment under Section 2.3(b).

Section 2.4. Severable Provisions.

The Company intends that the provisions of each of Articles III, IV, V and VI, in each case together with Articles I, II and VII, shall each be deemed to be effective on an independent basis, and that if one or more of such Articles, or the operative provisions thereof, shall be deemed invalid, void or voidable, the remainder of such Articles shall continue in full force and effect.

 

  

9

  

 

ARTICLE III

OPTIONS

Section 3.1. Grant of Options.

(a)           The Company may grant Options to Eligible Employees and Directors as provided in this Article III. Options will be deemed granted pursuant to this Article III only upon (i) authorization by the Committee, and (ii) the execution and delivery of an Option Agreement by the Optionee and a duly authorized officer of the Company. The aggregate number of shares of Stock potentially acquirable under all Options granted shall not exceed the total number of shares of Stock remaining in the Plan Pool, less all shares of Stock potentially acquired under, or underlying, all other Rights outstanding under this Plan.

(b)           The Committee shall designate Options at the time a grant is authorized as either ISOs or Non-Qualified Options. ISOs may only be granted to Eligible Employees. In accordance with Section 422(d) of the Code, the aggregate Fair Market Value (determined as of the date an ISO is granted) of the shares of Stock as to which an ISO may first become exercisable by an Optionee in a particular calendar year may not exceed the Annual Vesting Amount. If an Optionee is granted Options in excess of the Annual Vesting Amount, or if such Options otherwise become exercisable with respect to a number of shares of Stock which would exceed the Annual Vesting Amount, such excess Options shall be Non-Qualified Options.

Section 3.2. Exercise Price.

The initial Exercise Price of each Option granted under this Plan shall be determined by the Committee in its discretion; provided, however, that the Exercise Price of an ISO shall not be less than (i) the Fair Market Value of the Common Stock on the date of grant of the Option, in the case of any Eligible Employee who does not own stock possessing more than ten percent (10%) of the total combined voting power of all classes of the capital stock of the Company (within the meaning of Section 422 (b) (6) of the Code), or (ii) one hundred and ten percent (110%) of such Fair Market Value in the case of any Eligible Employee who owns stock in excess of such amount.

Section 3.3. Terms and Conditions of Options.

(a)           All Options must be granted within ten (10) years of the Effective Date.

(b)           The Committee may grant ISOs and Non-Qualified Options, either separately or jointly, to an Eligible Employee. Directors who are not also Eligible Employees are only eligible to be granted Non-Qualified Options by the Committee.

(c)           Each grant of Options shall be evidenced by an Option Agreement in form and substance satisfactory to the Committee in its discretion, consistent with the provisions of this Article III.

 

  

10

  

(d)           Nothing contained in this Article III, any Option Agreement or in any other agreement executed in connection with the granting of an Option to an Eligible Employee under this Article III will confer upon any Optionee any right with respect to the continuation of his or her status as an employee of the Company or any Subsidiary.

(e)           Except as otherwise provided herein, each Option Agreement may specify the Vesting Period, if any, with respect to the total number of shares of Stock acquirable thereunder. Such Vesting Periods will be fixed by the Committee in its discretion, and may be accelerated or shortened by the Committee in its discretion.

(f)           Not less than one (1) share of Stock may be purchased at any one time through the exercise of an Option.

(g)           An Optionee shall have no rights as a shareholder of the Company with respect to any shares of Stock covered by Options granted to the Optionee until payment in full of the Exercise Price by such Optionee for the shares being purchased. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such Stock is fully paid for, except as provided in Section 2.3(b) hereof.

Section 3.4. Exercise of Options.

(a)           An Optionee must be an Eligible Employee or Director at all times from the date of grant until the exercise of the Options granted, except as provided in Section 3.5.

 

(b)           An Option may be exercised to the extent exercisable (i) by giving written notice of exercise to the Committee, specifying the number of full shares of Stock to be purchased and, if applicable, accompanied by full payment of the Exercise Price thereof and the amount of the Tax Withholding Liability pursuant to Section 3.4(c) below; and (ii) by giving assurances satisfactory to the Company that the shares of Stock to be purchased upon such exercise are being purchased for investment and not with a view to resale in connection with any distribution of such shares in violation of the 1933 Act; provided, however, that in the event the prior occurrence of the Registration or in the event resale of such Stock without such Registration would otherwise be permissible, this second condition will be inoperative if, in the opinion of counsel for the Company, such condition is not required under the 1933 Act or any other applicable law, regulation or rule of any governmental agency.

(c)           As a condition to the issuance of the shares of Stock upon full or partial exercise of a Non-Qualified Option, the Optionee will pay to the Company in cash, or in such other form as the Committee may determine in its discretion, the amount of the Company’s Tax Withholding Liability required in connection with such exercise.

(d)           The Exercise Price of an Option shall be payable to the Company either (i) in United States dollars, in cash or by check, or money order payable to the order of the Company, or (ii) at the discretion of the Committee, through the delivery of shares of the Stock owned by the Optionee (including, if the Committee so permits, a portion of the shares of Stock as to which the Option is then being exercised) with a Fair Market Value as of the date of delivery equal to the Exercise Price, or (iii) at the discretion of the Committee, by a combination of (i) and (ii) above. No shares of Stock shall be delivered to the Optionee until arrangements for full payment have been made.

 

  

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Section 3.5. Term and Termination of Option.

(a)           The Committee shall determine, and each Option Agreement shall state, the expiration date or dates of each Option, but such expiration date shall be not later than ten (10) years after the date such Option was granted. In the event an ISO is granted to a 10% shareholder, the expiration date or dates of each Option Period shall be not later than five (5) years after the date such Option is granted. The Committee may extend the expiration date or dates of an Option Period of any Non-Qualified Option after such date was originally set; provided, however such expiration date may not exceed the maximum expiration date described in this Section 3.5(a).

(b)           In the event of the termination of employment of an Optionee either by reason of (i) Just Cause Termination, or (ii) voluntary separation on the part of such Optionee for a reason other than Retirement or Disability, any Option or Options granted to the Optionee under this Plan, to the extent not previously exercised or surrendered by the Optionee, or expired by their terms, shall immediately terminate.

(c)           In the event of the termination of employment of an Optionee as a result of such Optionee’s Retirement, such Optionee shall have the right to exercise any Option or Options granted to the Optionee under this Plan, to the extent that they have not previously been exercised or surrendered by the Optionee, or expired by their terms, for a period of three (3) months after the date of retirement, but in no event may any Option be exercised later than the end of the Option Period. Notwithstanding any other provision contained herein, or in any Option Agreement, upon Retirement, any Option then held by an Optionee shall be exercisable immediately in full.

(d)           In the event of the termination of employment of an Optionee by reason of such Optionee’s Disability, such Optionee shall have the right to exercise any Option or Options held by the Optionee, to the extent that they previously have not been exercised or surrendered by the Optionee, or expired by their terms, notwithstanding any limitations placed on the exercise of such Options by this Plan or an Option Agreement, immediately in full and at any time within twelve (12) months after the last date on which such Optionee provides services as an officer or an employee of the Company before being disabled, but in no event may any Option be exercised later than the end of the Option Period.

(e)           In the event that an Optionee should die while employed by the Company, or within three (3) months after Retirement, any Option or Options granted to the Optionee under this Plan and not previously exercised or surrendered by the Optionee, or expired by their terms, shall vest and shall be exercisable, according to their respective terms, by the personal representative of such Optionee or by any person or persons who acquired such Options by bequest or inheritance from such Optionee, notwithstanding any limitations placed on the exercise of such Options by this Plan or any Option Agreement, immediately in full and at any time within twelve (12) months after the Death of such Optionee, but in no event may any Option be exercised later than the end of the Option Period. Any references herein to an Optionee shall be deemed to include any person entitled to exercise an Option under the terms of this Plan after the Death of such Optionee.

 

  

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Section 3.6. Change in Control Transaction.

At any time prior to the date of consummation of a Change in Control Transaction, the Committee may, in its absolute discretion and notwithstanding the terms of any Option Agreement, determine that all or any part of the Options theretofore granted under this Article III shall become immediately exercisable in full and may thereafter be exercised at any time before the date of consummation of the Change in Control Transaction (except as otherwise provided in Article II hereof, and except to the extent that such acceleration of exercisability would result in an “excess parachute payment” within the meaning of Section 280G of the Code).

Section 3.7. Restrictions On Transfer.

An Option granted under Article III may not be Transferred except by will or the laws of descent and distribution and, during the lifetime of the Optionee to whom it was granted, may be exercised only by such Optionee.

Section 3.8. Stock Certificates.

Certificates representing the Stock issued pursuant to the exercise of Options will bear all legends required by law and necessary to effectuate the provisions hereof. The Company may place a “stop transfer” order against such shares of Stock until all restrictions and conditions set forth in this Article III, the applicable Option Agreement, and in the legends referred to in this Section 3.8 have been complied with.

Section 3.9. Amendment and Discontinuance.

The Board may at any time terminate the Plan; provided, however, that the Board (unless its actions are approved or ratified by the shareholders of the Company within twelve months of the date that the Board amends the Plan) may not amend the Plan to:

(a)           Increase the total number of shares of Stock issuable pursuant to all Rights under the Plan, except as contemplated in Article 1 or Section 2.3(b) hereof; or

(b)           Change the class of employees eligible to receive Incentive Stock Options that may participate in the Plan.

No termination, amendment, or modification of the Plan shall affect adversely an Optionee’s rights under an existing Option Agreement without the consent of the Optionee or his legal representative.

 

  

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ARTICLE IV

RESTRICTED STOCK GRANTS

Section 4.1 Grants of Restricted Stock.

(a)           The Company may issue Restricted Stock to Eligible Employees and Directors as provided in this Article IV. Restricted Stock will be deemed issued only upon (i) authorization by the Committee, and (ii) the execution and delivery of a Restricted Stock Grant Agreement by the person to whom such Restricted Stock is to be issued and a duly authorized officer of the Company.

(b)           Each issuance of Restricted Stock pursuant to this Article IV will be evidenced by a Restricted Stock Grant Agreement between the Company and the Holder in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article IV. Each Restricted Stock Grant Agreement will specify the purchase price per share, if any, paid by the Holder for the Restricted Stock, such amount to be fixed by the Committee.

(c)           Without limiting the foregoing, each Restricted Stock Grant Agreement shall set forth the terms and conditions of any forfeiture provisions regarding the Restricted Stock, (including any provisions for accelerated vesting in the event of a Change in Control Transaction) as determined by the Committee.

(d)           At the discretion of the Committee, the Holder, as a condition to such issuance, may be required to pay to the Company in cash, or in such other form as the Committee may determine in its discretion, the amount of the Company’s Tax Withholding Liability required in connection with such issuance.

(e)           Nothing contained in this Article IV, any Restricted Stock Grant Agreement, or any other agreement executed in connection with the issuance of Restricted Stock under this Article IV will confer upon any Holder any right with respect to the continuation of his or her status as an employee of the Company or any Subsidiary.

Section 4.2. Restrictions on Transfer of Restricted Stock.

(a)           Shares of Restricted Stock acquired by a Holder may be Transferred only in accordance with the specific limitations on the Transfer of Restricted Stock imposed by applicable state or federal securities laws or set forth below, and subject to certain undertakings of the transferee set forth in Section 4.2(c). All Transfers of Restricted Stock not meeting the conditions set forth in this Section 4.2 are expressly prohibited.

(b)           Any prohibited Transfer of Restricted Stock is void and of no effect. Should such a Transfer be attempted, the Company may refuse to carry out the Transfer on its books, attempt to set aside the Transfer, enforce any undertaking or right under this Section 4.2, and/or exercise any other legal or equitable remedy.

 

  

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(c)           Any Transfer of Restricted Stock that would otherwise be permitted under the terms of this Plan is prohibited unless the transferee executes such documents as the Company may reasonably require to ensure the Company’s rights under a Restricted Stock Grant Agreement and this Article IV are adequately protected with respect to the Restricted Stock so Transferred. Such documents may include, without limitation, an agreement by the transferee to be bound by all of the terms of this Plan applicable to Restricted Stock and of the applicable Restricted Stock Grant Agreement, as if the transferee were the original Holder of such Restricted Stock.

(d)           To facilitate the enforcement of the restrictions on Transfer set forth in this Article IV, the Committee may, at its discretion, require the Holder of shares of Restricted Stock to deliver the certificate(s) for such shares with a stock power executed in blank by the Holder and the Holder’s spouse, to the Secretary of the Company or his or her designee, and the Company may hold said certificate(s) and stock power(s) in escrow and take all such actions as are necessary to ensure that all Transfers and/or releases are made in accordance with the terms of this Plan. Such certificates may be held in escrow so long as the shares of Restricted Stock evidenced thereby are subject to any restriction on Transfer under this Article IV or under a Restricted Stock Grant Agreement. Each Holder acknowledges that the Secretary of the Company (or his or her designee) is so appointed as the escrow agent with the foregoing authorities as a material inducement to the issuance of shares of Restricted Stock under this Article IV, that the appointment is coupled with an interest, and that it accordingly will be irrevocable. The escrow agent will not be liable to any party to a Restricted Stock Grant Agreement (or to any other party) for any actions or omissions unless the escrow agent is grossly negligent relative thereto. The escrow agent may rely upon any letter, notice or other document executed by any signature purported to be genuine.

Section 4.3. Compliance with Law.

Notwithstanding any other provision of this Article IV, Restricted Stock may be issued pursuant to this Article IV only after there has been compliance with all applicable federal and state securities laws, and such issuance will be subject to this overriding condition. The Company may include shares of Restricted Stock in a Registration, but will not be required to register or qualify Restricted Stock with the SEC or any state agency, except that the Company will register with, or as required by local law, file for and secure an exemption from such registration requirements from the applicable securities administrator and other officials of each jurisdiction in which a Holder would be issued Restricted Stock hereunder prior to such issuance.

 

  

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Section 4.4. Stock Certificates.

Certificates representing the Restricted Stock issued pursuant to this Article IV will bear all legends required by law and necessary to effectuate the provisions hereof. The Company may place a “stop transfer” order against shares of Restricted Stock until all restrictions and conditions set forth in this Article IV, the applicable Restricted Stock Grant Agreement and the legends referred to in this Section 4.4 have been complied with.

Section 4.5. Market Standoff.

To the extent requested by the Company and any underwriter of securities of the Company in connection with a firm commitment underwriting, no Holder of any shares of Restricted Stock will Transfer any such shares not included in such underwriting, or not previously registered in a Registration, during the one hundred twenty (120) day period following the effective date of the registration statement filed with the SEC under the 1933 Act in connection with such offering.

Section 4.6. Amendment and Discontinuance.

The Board may at any time terminate the Plan; provided, however, that the Board (unless its actions are approved or ratified by the shareholders of the Company within twelve months of the date that the Board amends the Plan) may not amend the Plan to:

(a)           Increase the total number of shares of Stock issuable pursuant to all Rights under the Plan, except as contemplated in Article I or Section 2.3(b) hereof; or

(b)           modify the requirements as to eligibility for participation under this Article IV.

No termination, amendment, or modification of the Plan shall affect adversely a Holder’s rights under an existing Restricted Stock Agreement without the consent of the Holder or his legal representative.

Section 4.7. Limitations.

The aggregate number of shares of Stock potentially distributable as Restricted Stock, shall not exceed the total number of shares of Stock remaining in the Plan Pool, less all shares of Stock potentially acquirable under, or underlying, all other Rights outstanding under this Plan.

ARTICLE V

LONG-TERM INCENTIVE COMPENSATION UNITS

Section 5.1. Awards of Units.

(a)           The Company may grant awards of Units to Eligible Employees as provided in this Article V. Units will be deemed granted only upon (i) authorization by the Committee, and (ii) the execution and delivery of a Unit Agreement by the Eligible Employee to whom Units are to be granted and an authorized officer of the Company.  Units may be granted in such amounts and to such Unit Recipients as the Committee may determine, subject to the limitations of Section 5.2 below.

(b)           Each grant of Units pursuant to this Article V will be evidenced by a Unit Award Agreement between the Company and the Unit Recipient in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article V.

(c)           Except as otherwise provided herein, Units will be converted into Retained Units only after the end of the Performance Period. The Performance Period shall be set by the Committee for each year’s awards.

 

  

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(d)            The percentage of the Units awarded under this Section 5.1 or credited pursuant to Section 5.5 that will be distributed to Unit Recipients shall depend on the levels of financial performance and other performance objectives achieved during each year of the Performance Period; provided, however, that the Committee may adopt one or more performance categories or eliminate all performance categories other than financial performance. Financial performance shall be based on the consolidated results of the Company and its Subsidiaries prepared on the same basis as the financial statements published for financial reporting purposes and determined in accordance with Section 5.1(e) below. Other performance categories adopted by the Committee shall be based on such measurements of performance as the Committee shall deem appropriate.

(e)           The conversion of Units into Retained Units will be based on the Company’s financial performance with results from other performance categories applied as a factor, not exceeding one (1), against financial results. The annual financial and other performance results will be averaged over the Performance Period and translated into percentage factors according to graduated criteria established by the Committee for the entire Performance Period. The resulting percentage factors shall determine the percentage of Units that will be converted to Retained Units. No conversion to Retained Units shall be made if a minimum average percentage of the applicable measurement of performance, financial and other, to be established by the Committee is not achieved for the Performance Period. The performance levels achieved for each Performance Period and percentage of Units converted to Retained Units shall be conclusively determined by the Committee.

(f)           The percentage of Units awarded which are converted to Retained Units based on the levels of performance (including any Units credited under Section 5.5) will be determined as soon as practicable after each Performance Period.

(g)           As soon as practical after determination of the number of Retained Units, such Retained Units shall be distributed in the form of a combination of Stock and cash in the relative percentages as between the two as determined by the Committee. Units that have been awarded, but which do not become Retained Units, shall be canceled.

(h)           Notwithstanding any provision in this Article V other than Section 5.2, if the Committee determines that it is appropriate under the circumstances, the Committee may award to any Eligible Employee by virtue of hire, promotion or upgrade to a higher job grade classification, or special individual circumstances, an award of Units, with respect to one or more Performance Periods that began in prior years and at the time of the award have not yet been completed.

(i)           Notwithstanding any other provision of this Plan, the Committee may reduce or eliminate awards to a Unit Recipient who has been demoted to a lower job grade classification, and where circumstances warrant, may permit continued participation, proration or early distribution, or a combination thereof, of awards which would otherwise be canceled.

 

  

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Section 5.2. Limitations.

The aggregate number of shares of Stock potentially distributable under all Units granted, including any Units credited pursuant to Section 5.5, shall not exceed the total number of shares of Stock remaining in the Plan Pool, less all shares of Stock potentially acquirable under, or underlying, all other Rights outstanding under this Plan.

Section 5.3. Terms and Conditions.

(a)           All awards of Units must be made within ten (10) years of the Effective Date.

(b)           The award of Units shall be evidenced by a Unit Award Agreement in form and substance satisfactory to the Committee in its discretion, consistent with the provisions of this Article V.

(c)           Nothing contained in this Article V, any Unit Award Agreement or in any other agreement executed in connection with the award of Units under this Article V will confer upon any Unit Recipient any right with respect to the continuation of his or her status as an employee of the Company or any of its Subsidiaries.

(d)           A Unit Recipient shall have no rights as a shareholder of the Company with respect to any Units until the Retained Unit has been converted into shares of Stock. No adjustment shall be made in the number of Units for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such Stock is fully paid for, except as provided in Sections 2.3(b) and 5.6(a).

Section 5.4. Special Distribution Rules.

(a)           Except as otherwise provided in this Section 5.4, a Unit Recipient must be an Eligible Employee from the date a Unit is awarded to him or her continuously through and including the date of conversion to a Retained Unit.

(b)           In case of the Death or Disability of a Unit Recipient prior to the end of any Performance Period, the number of Retained Units converted for the Unit Recipient for such Performance Period shall be reduced pro rata based on the number of months remaining in the Performance Period after the month of Death or Disability. The Retained Units, reduced in the discretion of the Committee to the percentage indicated by the levels of performance achieved prior to the date of Death or Disability, if any, shall be distributed in cash or Stock within a reasonable time after Death or Disability. All other Units awarded to the Unit Recipient for such Performance Period shall be canceled.

 

  

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(c)           If a Unit Recipient enters into Retirement prior to the end of any Performance Period, the Units converted to Retained Units for such Unit Recipient shall be prorated to the end of the year in which such Retirement occurs and distributed in cash and/or Stock at the end of the Performance Period based upon the Company’s performance for such period.

(d)           In the event of the termination of the Unit Recipient’s status as an Eligible Employee prior to the end of any Performance Period for any reason other than Death, Disability or Retirement, all Units awarded to the Unit Recipient with respect to any such Performance Period shall be immediately forfeited and canceled.

(e)           Upon a Unit Recipient’s promotion to a higher job grade classification, the Committee may, in its discretion, award to the Unit Recipient the total Units, or any portion thereof, which are associated with the higher job grade classification for the then current Performance Period.

Section 5.5. Dividend Equivalent Units.

The Committee may provide in a grant and in the Unit Agreement that on any record date for dividends on the Common Stock, an amount equal to the dividend payable on the number of shares of Common Stock covered by the Unit will be determined and credited on the payment date to each Unit Recipient’s account for each Unit which has been awarded to the Unit Recipient and not converted to a Retained Unit or canceled.  Such amount will be converted within the account to an additional number of Units equal to the number of shares of Common Stock that could be purchased at Fair Market Value on such dividend payment date. These Units will be treated for purposes of this Article V in the same manner as those Units granted pursuant to Section 5.1.

Section 5.6. Adjustments.

(a)           In addition to the provisions of Section 2.3(b), if an extraordinary change occurs during a Performance Period which significantly alters the basis upon which the performance levels were established under Section 5.1 for that Performance Period, to avoid distortion in the operation of this Article V, but subject to Section 5.2, the Committee may make adjustments in such performance levels to preserve the incentive features of this Article V, whether before or after the end of the Performance Period, to the extent it deems appropriate in its sole discretion, which adjustments shall be conclusive and binding upon all parties concerned. Such changes may include, without limitation, adoption of, or changes in, accounting practices, tax laws and regulatory or other laws or regulations; economic changes not in the ordinary course of business cycles; significant corporate transactions; or compliance with judicial decrees or other legal authorities.

(b)           At any time prior to the date of consummation of a Change in Control Transaction, the Committee may determine, notwithstanding the terms of any Unit Agreement, that all or any part of the Units theretofore awarded under this Article V shall become immediately Retained Units (reduced pro rata based on the number of months remaining in the Performance Period after the consummation of the Change in Control Transaction) and may thereafter be distributed in cash and/or Stock at any time before the date of consummation of the Change in Control Transaction (except as otherwise provided in Article II hereof, and except to the extent that such acceleration of distribution would result in an “excess parachute payment” within the meaning of Section 280G of the Code).

 

  

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Section 5.7. Other Conditions.

(a)           No person shall have any claim to be granted an award of Units under this Article V and there is no obligation for uniformity of treatment of Eligible Employees or Unit Recipients under this Article IV.

(b)           The Company shall have the right to deduct from any distribution or payment in cash under this Article V, and the Unit Recipient or other person receiving shares of Stock under this Article V shall be required to pay to the Company any Tax Withholding Liability. The number of shares of Stock to be distributed to any individual Unit Recipient may be reduced by the number of shares of Stock, the Fair Market Value of which on the Distribution Date is equivalent to the cash necessary to pay any Tax Withholding Liability, where the cash to be distributed is not sufficient to pay such Tax Withholding Liability, or the Unit Recipient may deliver to the Company cash sufficient to pay such Tax Withholding Liability.

(c)           Distribution of shares of Stock under this Article V may be delayed until the requirements of any applicable laws or regulations, and any stock exchange or applicable NASDAQ requirements, are satisfied. The shares of Stock distributed under this Article V shall be subject to such restrictions and conditions on disposition as counsel for the Company shall determine to be desirable or necessary under applicable law.

(d)           For the purpose of distribution of Units in cash, the value of a Unit shall be the Fair Market Value on the Distribution Date.

(e)           Notwithstanding any other provision of this Article V, no Dividend Equivalent Credits shall be made and no conversion of Dividend Equivalent Units to Retained Units shall be made if at the time a Dividend Equivalent Credit or conversion of Dividend Equivalent Units to Retained Units would otherwise have been made:

(i)           Any regular dividend on the Common Stock has been omitted and not subsequently paid or there exists any default in payment of dividends on any such outstanding shares of capital stock of the Company;

(ii)           The rate of dividends on the Common Stock is lower than at the time the Dividend Equivalent Units were awarded, adjusted for any change of the type addressed to in Section 2.3(b);

(iii)           Estimated consolidated net income of the Company for the twelve-month period preceding the month the Dividend Equivalent Credit or conversion of Dividend Equivalent Units to Retained Units would otherwise have been made is less than the sum of the amount of the Dividend Equivalent Credits and Retained Units eligible for distribution under this Article V in that month plus all dividends applicable to such period on an accrual basis, either paid, declared or accrued at the most recently paid rate, on all outstanding shares of Common Stock; or

 

  

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(iv)           The Dividend Equivalent Credit or conversion of Dividend Equivalent Units to Retained Units would result in a default in any agreement by which the Company is bound.

(f)           In the event net income available under Section 5.7(e) above for Dividend Equivalent Credits and conversion of Dividend Equivalent Units to Retained Units is sufficient to cover part but not all of such amounts, the following order shall be applied in making payments: (i) Dividend Equivalent Credits, and then (ii) conversion of Dividend Equivalent Units to Retained Units.

 

Section 5.8. Designation of Beneficiaries.

A Unit Recipient may designate a beneficiary or beneficiaries to receive all or part of the Stock and/or cash to be distributed to the Unit Recipient under this Article V in case of Death. A designation of beneficiary may be replaced by a new designation or may be revoked by the Unit Recipient at any time. A designation or revocation shall be on a form to be provided for that purpose and shall be signed by the Unit Recipient and delivered to the Company prior to the Unit Recipient’s Death. In case of the Unit Recipient’s Death, any amounts to be distributed to the Unit Recipient under this Article V with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with this Article V to the designated beneficiary or beneficiaries. The amount distributable to a Unit Recipient upon Death and not subject to such a designation shall be distributed to the Unit Recipient’s estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution under this Article V, the amount in question may be paid to the estate of the Unit Recipient, in which event the Company shall have no further liability to anyone with respect to such amount.

Section 5.9. Restrictions On Transfer.

Units granted under Article V may not be Transferred, except as provided in Section 5.8, and, during the lifetime of the Unit Recipient to whom it was awarded, cash and Stock receivable with respect to Retained Units may be received only by such Unit Recipient.

Section 5.10. Amendment and Discontinuance.

The Board may at any time terminate the Plan; provided, however, that the Board (unless its actions are approved or ratified by the shareholders of the Company within twelve months of the date that the Board amends the Plan) may not amend the Plan to:

(a)           Increase the total number of shares of Stock issuable pursuant to all Rights under the Plan, except as contemplated in Article I or Section 2.3(b) hereof; or

 

  

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(b)           modify the requirements as to eligibility for participation under this Article V.

No termination, amendment, or modification of the Plan shall affect adversely a Unit Recipient’s rights under an existing Unit Award Agreement without the consent of the Unit Recipient or his legal representative.

Section 5.11.  Compliance with Rule 16b-3.

With respect to persons subject to Section 16 of the 1934 Act, transactions under this Article V are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act.  To the extent any provision of this Article V or action by the Board or the Committee fails so to comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee.

ARTICLE VI

STOCK APPRECIATION RIGHTS

Section 6.1. Grants of SARs.

(a)           The Company may grant SARs under this Article VI. SARs will be deemed granted only upon (i) authorization by the Committee, and (ii) the execution and delivery of a SAR Agreement by the Eligible Employee to whom the SARs are to be granted and a duly authorized officer of the Company. The aggregate number of shares of Stock which shall underlie SARs granted hereunder shall not exceed the total number of shares of Stock remaining in the Plan Pool, less all shares of Stock potentially acquirable under or underlying all other Rights outstanding under this Plan.

(b)           Each grant of SARs pursuant to this Article VI shall be evidenced by a SAR Agreement between the Company and the SAR Recipient, in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article VI.

Section 6.2. Terms and Conditions of SARs.

(a)           All SARs must be granted within ten (10) years of the Effective Date.

(b)           Each SAR issued pursuant to this Article VI shall have an initial Base Value.

(c)           Nothing contained in this Article VI, any SAR Agreement or in any other agreement executed in connection with the granting of a SAR under this Article VI will confer upon any SAR Recipient any right with respect to the continuation of his or her status as an employee of the Company or any of its Subsidiaries.

(d)           Except as otherwise provided herein, each SAR Agreement may specify the SAR Vesting Period. Such SAR Vesting Periods will be fixed by the Committee and may be accelerated or shortened by the Committee, at its discretion.

 

  

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(e)           SARs relating to less than one (1) share of Stock may not be exercised.

(f)           A SAR Recipient shall have no rights as a shareholder of the Company with respect to any shares of Stock underlying such SAR. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such Stock is fully paid for, except as provided in Section 2.3(b).

Section 6.3. Restrictions On Transfer of SARs.

SARs granted under this Article VI may not be Transferred, except as provided in Section 6.7, and during the lifetime of the SAR Recipient to whom it was granted, may be exercised only by such SAR Recipient.

Section 6.4. Exercise of SARs.

(a)           A SAR Recipient, or his or her executors or administrators, or heirs or legatees, shall exercise a SAR of the SAR Recipient by giving written notice of such exercise to the Committee.  SARs may be exercised only upon the completion of any SAR Vesting Period applicable to such SAR.

(b)           Within ten (10) business days of the SAR Exercise Date applicable to a SAR exercised in accordance with Section 6.4(a), the SAR Recipient shall be paid in cash the difference between the Base Value of such SAR (as adjusted, if applicable under Section 6.2(c), as of the most recently preceding quarterly period) and the Fair Market Value of the Common Stock as of the SAR Exercise Date, as such difference is reduced by the Company’s Tax Withholding Liability arising from such exercise.

Section 6.5. Termination of SARs.

The Committee shall determine, and each SAR Agreement shall state, the SAR Period. The Committee may extend the expiration date or dates of a SAR Period after such date is originally set; provided, however, such expiration date may not exceed 10 years from the date of grant of the SAR.

Section 6.6. Change in Control Transaction.

At any time prior to the date or consummation of a Change in Control Transaction, the Committee may, in its absolute discretion and notwithstanding the terms of any SAR Agreement, determine that all or any part of the SARs theretofore granted under this Article VI shall become immediately exercisable in full and may thereafter be exercised at any time before the date of consummation of the Change in Control Transaction (except as otherwise provided in Article II hereof, and except to the extent that such acceleration of exercisability would result in an “excess parachute payment” within the meaning of Section 280G of the Code).

 

  

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Section 6.7. Designation of Beneficiaries.

A SAR Recipient may designate a beneficiary or beneficiaries to receive all or part of the cash to be paid to the SAR Recipient under this Article VI in case of Death. A designation of beneficiary may be replaced by a new designation or may be revoked by the SAR Recipient at any time. A designation or revocation shall be on a form to be provided for that purpose and shall be signed by the SAR Recipient and delivered to the Company prior to the SAR Recipient’s Death. In case of the SAR Recipient’s Death, the amounts to be distributed to the SAR Recipient under this Article VI with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with this Article VI to the designated beneficiary or beneficiaries. The amount distributable to a SAR Recipient upon Death and not subject to such a designation shall be distributed to the SAR Recipient’s estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution under this Article VI, the amount in question may be paid to the estate of the SAR Recipient in which event the Company shall have no further liability to anyone with respect to such amount.

Section 6.8. Amendment and Discontinuance.

The Board may at any time terminate the Plan; provided, however, that the Board (unless its actions are approved or ratified by the shareholders of the Company within twelve months of the date that the Board amends the Plan) may not amend the Plan to:

(a)           Increase the total number of shares of Stock issuable pursuant to all Rights under the Plan, except as contemplated in Section 2.3(b) hereof; or

(b)           modify the requirements as to eligibility for participation under this Article VI.

No termination, amendment, or modification of the Plan shall affect adversely a SAR Recipient’s rights under a SAR Agreement without the consent of the SAR Recipient or his legal representative.

ARTICLE VII

MISCELLANEOUS

Section 7.1. Application of Funds.

The proceeds received by the Company from the sale of Stock pursuant to the exercise of Rights will be used for general corporate purposes.

 

  

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Section 7.2. No Obligation to Exercise Right.

The granting of a Right shall impose no obligation upon the recipient to exercise such Right.

Section 7.3. Term of Plan.

Except as otherwise specifically provided herein, Rights may be granted pursuant to this Plan from time to time within ten (10) years from the Effective Date.

Section 7.4. Captions and Headings; Gender and Number.

Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part of, and shall not serve as a basis for, interpretation or construction of this Plan. As used herein, the masculine gender shall include the feminine and neuter, and the singular number shall include the plural, and vice versa, whenever such meanings are appropriate.

Section 7.5. Expenses of Administration of Plan.

All costs and expenses incurred in the operation and administration of this Plan shall be borne by the Company or by a Subsidiary.

Section 7.6. Exculpation and Indemnification.

In connection with this Plan, no member of the Board or the Committee shall be personally liable for any act or omission to act in such person’s capacity as a member of the Board or the Committee, nor for any mistake in judgment made in good faith, unless arising out of, or resulting from, such person’s own bad faith, gross negligence, willful misconduct, or criminal acts. To the extent permitted by applicable law and regulation, the Company shall indemnify and hold harmless the members of the Board or the Committee, and each other officer or employee of the Company to whom any duty or power relating to the administration or interpretation of this Plan may be assigned or delegated, from and against any and all liabilities (including any amount paid in settlement of a claim with approval of the Board) and any costs or expense (including reasonable counsel fees) incurred by such person arising out of, or as a result of, such person’s duties, responsibilities, and obligations under this Plan, other than such liabilities, costs, and expenses as may arise out of, or result from, the bad faith, gross negligence, willful misconduct, or criminal acts of such persons.

Section 7.7. Governing Law.

Without regard to the principles of conflicts of laws the laws of the State of North Carolina shall govern and control the validity, interpretation, performance and enforcement of this Plan.

 

Section 7.8. Inspection of Plan.

A copy of this Plan, and any amendments thereto, shall be maintained by the Secretary or Assistant Secretary of the Corporation and shall be shown to any proper person making inquiry about it.

 

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