Document:

Exhibit
10.1

EMPLOYMENT
AGREEMENT

THIS AGREEMENT by
and among Vertis, Inc. (the “Company”), Vertis Holdings, Inc. (“Holdings”) and
Michael DuBose (the “Executive”) is effective as of November 28, 2006 (the “Effective
Date”).

WHEREAS, the Company desires to employ the Executive,
and the Executive desires to be employed by the Company, in the capacities and
on the terms and conditions set forth in this Agreement;

NOW, THEREFORE, in
consideration of the mutual covenants and promises contained herein, and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by the parties hereto, it is hereby agreed as follows:

1.                   EMPLOYMENT AT WILL.  The employment of the Executive by the
Company shall be at will and shall be terminable by either party upon 30 days’
prior written notice or as otherwise set forth in Section 4. The provisions of
Sections 4 and 5 shall govern the consequences of any termination of the
Executive’s employment.

2.                   POSITION AND
DUTIES.

(a)              During his employment with the
Company, the Executive shall serve as the Chief Executive Officer of the
Company and Holdings and Chairman of the Board of Directors of the Company (the
“Board”) and of Holdings, and shall perform such duties and have such
responsibilities as are customarily assigned to such position and other duties
assigned to him by the Board which are commensurate with such position, and
shall also perform or hold such other duties and responsibilities with respect
to the Company or its subsidiaries not inconsistent therewith as may from time
to time be assigned to him by the Board. The Executive will report directly to
the Board.

(b)              During his employment with the
Company, and excluding any periods of vacation and sick leave to which the
Executive is entitled, the Executive shall devote his full business attention
and time to the business and affairs of the Company and shall use all
reasonable efforts to carry out his responsibilities faithfully and
efficiently. However, the Executive may serve on corporate, industry, civic or
charitable boards or committees, so long as these activities do not materially
interfere with the performance of the Executive’s responsibilities to the
Company.  It is further agreed that
Executive may, through May 2009, continue to provide those services, if any,
requested by the Board of Directors of Aftermarket Technology Corp. pursuant to
the Amended and Restated Employment Agreement of July 1, 2002.  The Executive represents that such services
will not interfere with the Executive’s ability to perform his duties to the
Company.

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3.               COMPENSATION.

(a)               BASE SALARY.  During his employment with the Company, the
Executive shall receive an annual base salary of $750,000, as adjusted by the
Board from time to time as set forth below (the “Annual Base Salary”). The
Annual Base Salary shall be paid in accordance with the Company’s regular
payroll practice for its senior executives, as in effect from time to time. The
Annual Base Salary shall be reviewed for adjustment by the Board at least annually
during the Executive’s employment with the Company, with such review to occur
as soon as practicable each year after the Company’s release of audited
financial statements for the prior year.

(b)               ANNUAL CASH BONUS.  For fiscal years during the Executive’s
employment with the Company, the Executive shall participate in an annual cash
incentive compensation plan (currently the Company’s Management Incentive
Compensation Plan), as adopted and approved by the Board from time to time,
with applicable corporate and individual performance targets and maximum award
amounts determined by the Board. The target bonus of the Executive pursuant to
the annual cash incentive compensation plan shall be determined in accordance
with the Management Incentive Compensation Plan (or the applicable replacement
or successor plan) with respect to each such fiscal year, but said target bonus
shall be set at a level at least equal to seventy-five percent (75%) of the
Annual Base Salary.  Any cash bonuses
payable to the Executive will be paid at the time the Company normally pays
such bonuses to its senior executives and will be subject to the terms and
conditions of the applicable annual cash incentive compensation plan.

(c)             LONG-TERM
INCENTIVE COMPENSATION.  During the
Executive’s employment with the Company, the Executive shall be eligible to
receive long-term equity incentive compensation awards (which may consist of
stock options or other types of awards, as determined by the Board in its
discretion) pursuant to the Company’s equity incentive compensation plans and
programs in effect from time to time. These awards shall be granted in the
discretion of the Board, shall include such terms and conditions (including
performance objectives) as the Board deems appropriate, and shall be subject to
such other agreements affecting the capital securities of the Company as the
Board may determine to be appropriate. 
However, said other agreements shall specify that Executive is entitled
to receive, as soon as practicable after execution of this Agreement, an
initial grant of 600,000 shares of restricted stock.  Further, the Company and Executive agree that
any such other agreements relating to the award to the Executive of restricted
stock shall provide (i) that the Executive may make an election pursuant to
Section 83(b) of the Internal Revenue Code to recognize as ordinary income an
amount equal to the fair market value of the restricted stock as of the date of
transfer and (ii) that the Company shall be responsible for the reasonable
cost of obtaining a valuation of the fair market value of the restricted stock
as of the date of transfer.

(d)            OTHER
BENEFITS.  During the Executive’s
employment with the Company, the Executive shall be eligible to participate in
the retirement, welfare benefit, and fringe benefit plans, practices, policies
and programs of the Company (including any medical, prescription, dental,
disability, life insurance, accidental death and travel accident insurance
plans and 

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programs maintained by
the Company) to the same extent, and subject to substantially the same terms
and conditions, as these arrangements are made available generally to the
senior officers of the Company. During the Executive’s employment with the
Company, the Company shall also maintain for the benefit of the Executive the
additional long-term disability insurance coverage described in Section 5(b).
In addition to the health coverage provided above, the Company shall purchase
and maintain through December 31, 2014 a single family policy equivalent in all
material aspects to the Company’s health coverage, except with deductibles of
$2,500 per person per annum and subject to such coverage exclusions as may be
applied by the insurer based on its underwriting and other market policy terms
to act as a secondary policy to the Company’s health coverage. However,
coverage provided by the Company under the preceding sentence for the Executive
or any of his eligible dependents will end before December 31, 2014, for
any such person who becomes eligible for coverage under another employer
provided health insurance plan or Medicare.

(e)             VACATION;
EXPENSES.  The Executive shall be
entitled to 4 weeks annual paid executive leave in accordance with the
provisions of the Company’s executive leave policy as in effect from time to
time, which shall be taken at times selected by the Executive with due regard
for the business needs of the Company. The Company shall pay or reimburse the
Executive for ordinary and necessary business expenses incurred by him in the
performance of his duties in accordance with the Company’s usual policies.

(f)             RELOCATION;
TEMPORARY HOUSING.  The Executive shall
be reimbursed (upon presentation of appropriate documentation) for reasonable
commuting, moving and other cost-of-relocation expenses incurred by the
Executive in relocating to Executive’s principal employment location.  The Executive will be reimbursed for
reasonable costs incurred in traveling between his principal employment
location and other employment locations in accordance with the Company’s
existing reimbursement policies (including amounts expended for meals and
lodging at other employment locations). 
It is understood that on or before September 30, 2007 (the “Relocation
Date”), the Executive’s principal employment location shall be Williams,
Oregon.  After the Relocation Date, the
Executive’s principal employment location shall be that Company office as to
which agreement is reached by the Company and the Executive by September 30,
2007 (the “Post-September 30, 2007 Principal Employment Location”)  and, as soon as is reasonably practicable
after the Relocation Date or such other date, not later than the first
anniversary of the Executive’s commencement of employment with the Company, as
may be agreed upon by the Board, the Executive shall change his principal place
of residence to the metropolitan area encompassing the Post-September 30, 2007
Principal Employment Location.  The
above-described reimbursement shall also include any incremental tax liability
incurred by the Executive with respect to the reimbursements for relocation
costs and traveling costs, so that the Executive is in the same tax position he
would have been in if such reimbursement were not subject to income tax,
provided, however, that, after the Relocation Date, the Executive shall not be
reimbursed for incremental tax liability attributable to reimbursement for
amounts expended for meals and lodging. Upon termination other than a
Termination for Cause or by the Executive without Good Reason , the Executive
will be reimbursed for the reasonable cost-of-relocation expenses by the
Executive in relocating back to Williams, Oregon.

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4.                  TERMINATION OF
EMPLOYMENT.

(a)               DEATH OR DISABILITY.  The Executive’s employment shall terminate
automatically upon the Executive’s death during his employment with the
Company. The Company shall be entitled to terminate the Executive’s employment
because of the Executive’s Disability. “Disability” means that (1) the
Executive is permanently disabled within the meaning of the long-term disability
plan of the Company in which the Executive participates and as to rights under
the supplemental long-term disability coverage described in section 5(b) the
definition therein or (2) if there are no such plan(s) in effect, that (i) the
Executive has been absent from the full-time performance of the Executive’s
duties with the Company for a period of 120 days, (ii) the Company shall have
given the Executive a notice of termination for Disability, and (iii) within 30
days after such notice of termination is given, the Executive shall not have
returned to the full-time performance of the Executive’s duties. The effective
date of any such termination for Disability shall be (A) in the case of a
termination pursuant to clause (1), the date on which the Executive is
determined to be disabled for purposes of such plan(s) or, in the case of a
termination pursuant to clause (2), the date which is 30 days following the
notice of termination for Disability (either such date, the “Disability
Effective Time”).

(b)           TERMINATION
BY THE COMPANY.

(i)              The Company may terminate the
Executive’s employment with the Company for Cause or without Cause. Except as
set forth in Section 4(b)(ii), “Cause” shall mean (i) gross negligence or
willful misconduct by the Executive in connection with the performance of his
duties hereunder that is materially injurious to the Company, monetarily or
otherwise, (ii) the conviction of the Executive by a court of competent
jurisdiction for felony criminal conduct or (iii) material violation by the
Executive of the provisions of Section 6 of this Agreement, unless, in the case
of clauses (i) or (iii), the event constituting Cause is curable and has been
cured by the Executive within ten business days of his receipt of written
notice from the Company that an event constituting Cause has occurred and
specifying in reasonable detail the actions required to effect a cure.

(ii)             Notwithstanding the provisions of
Section 4(b)(i), following a Change in Control (as defined herein), “Cause”
shall only mean (A) the conviction of the Executive by a court of competent
jurisdiction for felony criminal conduct; or (B) the willful engaging by the
Executive in fraud or dishonesty which is demonstrably and materially injurious
to the Company or its reputation, monetarily or otherwise. For purposes of this
Section 4(b), no act, or failure to act, on the Executive’s part shall be
deemed “willful” unless committed, or omitted by the Executive in bad faith.

(iii)            A termination of the Executive’s
employment for Cause shall require a vote of a majority of the Board. Following
a Change in Control a termination of the Executive’s employment for Cause shall
not be effective unless it is accomplished in accordance with the following
procedures. The Board shall give the Executive written notice (“Notice of
Termination for Cause”) of its intention to terminate the Executive’s 

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employment for Cause, setting forth in reasonable
detail the specific conduct of the Executive that it considers to constitute
Cause and the specific provision(s) of this Agreement on which it relies, and
stating the date, time and place of the Special Board Meeting for Cause. The “Special
Board Meeting for Cause” means a meeting of the Board called and held
specifically and exclusively for the purpose of considering the Executive’s
termination for Cause. The Special Board Meeting for Cause must take place not
less than thirty business days after the Executive receives the Notice of
Termination for Cause. The Executive shall be given an opportunity, together
with counsel, to be heard at the Special Board Meeting for Cause. The Executive’s
termination for Cause shall be effective when a resolution is duly adopted at
the Special Board Meeting for Cause stating that, in the good faith opinion of
the Board, the Executive is guilty of the conduct described in the Notice of
Termination for Cause and that such conduct constitutes Cause under the
applicable provision of this Agreement.

(c)           TERMINATION
BY THE EXECUTIVE.

(i)            The Executive may terminate
employment with the Company for Good Reason or without Good Reason. “Good
Reason” shall mean the occurrence of any of the following events, without the
Executive’s consent (other than in connection with an event constituting
Cause): (a) any action by the Company which results in a significant diminution
in the Executive’s position, authority, duties or responsibilities as
contemplated by this Agreement; (b) a reduction in the Executive’s Annual Base
Salary or the Executive’s annual cash bonus opportunity under the Management
Incentive Compensation Plan (or a successor plan) or a failure by the Company
to timely pay any portion of the Executive’s current or deferred compensation;
(c) the Company requiring the Executive to be based at an office that is
greater than 50 miles from where the Executive’s office is located at such time
except for required travel on the Company’s business to an extent substantially
consistent with the business travel obligations which the Executive undertook
on behalf of the Company prior to a Change in Control; or (d) the failure by
the Company to obtain from any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company an express written assumption and
agreement to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had
taken place unless, in each case, such action is remedied by the Company within
ten business days after receipt of a Notice of Termination for Good Reason (as
defined below) given by the Executive. 
In the event the Company relocates its headquarters pursuant to the
recommendation of the Executive, the terms of subsection 4(c)(i)(c) shall not
apply to such relocation.

(ii)           Except in the case of a Limited
Change in Control (as defined in Section 5(d) hereof) the Executive shall
automatically be deemed to have Good Reason (“Deemed Good Reason”) despite the
absence of any of the events or circumstances described in the second sentence
of Section 4(c)(i) for the thirty day period commencing on the first
anniversary of a Change in Control; provided, however, that if the Executive
terminates his employment pursuant to the provisions of this subparagraph (ii),
the Executive’s entitlement to the benefits provided in Section 5(d) (and the
benefits 

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provided in connection with a termination described in
such Section) may be conditioned by the Company on the Executive continuing to
serve the Company for up to six months following the Notice of Termination for
Good Reason (the “Transition Period”). A failure by the Executive to comply
with such a request absent an event or circumstance described in the second
sentence of Section 4(c)(i) (as such definition is modified by the last
sentence of this Section 4(c)(ii)) will result in the termination being treated
as a termination described in Section 5(a). In the event that the Company
invokes its right to require the Executive to continue to serve the Company
during the Transition Period, the Executive’s Annual Base Salary shall not be
reduced during such period, nor shall the Executive’s annual bonus opportunity
(which bonus, if any, (i) shall be paid out on a pro-rata basis for the
applicable period during which the Executive was employed, (ii) shall be paid
at the time such bonuses are paid to the Company’s executives generally and
(iii) shall be based upon the Company’s (and if applicable the Executive’s)
scheduled performance against target applicable to the portion of the
performance period during which the Executive was employed - in each case
consistent with (and not in duplication of) the provisions of Section 5(e)).
Notwithstanding the definition of Good Reason set forth in the second sentence
of Section 4(c)(i), the Company may, in its discretion, change the Executive’s
authority, position, duties or responsibilities during the Transition Period,
without such change constituting Good Reason.

(iii)               A termination of employment by
the Executive for Good Reason or Deemed Good Reason shall be effected by giving
the Company written notice (“Notice of Termination for Good Reason”) of the
termination, setting forth in the case of a termination for Good Reason in
reasonable detail the specific conduct of the Company that constitutes Good
Reason and the specific provision(s) of this Agreement on which the Executive
relies. A termination of employment by the Executive for Good Reason shall be
effective ten business days following the date when the Notice of Termination for
Good Reason is given, unless, if applicable, the event constituting Good Reason
is remedied by the Company prior to that date. Actions by the Company which
constitute Good Reason shall be disregarded in the calculation of termination
benefits described in Section 5.

(iv)               A termination of the Executive’s
employment by the Executive without Good Reason shall be effected by giving the
Company 30 days’ written notice of the termination.

(d)         DATE
OF TERMINATION; RESIGNATION.  The “Date
of Termination” means the date of the Executive’s death, the Disability
Effective Time or the date on which the termination of the Executive’s
employment by the Company for Cause or without Cause or by the Executive for
Good Reason or without Good Reason is effective. Following termination of the
Executive’s employment for any reason, the Executive shall immediately resign
from the Board and from all other offices and positions he holds with the
Company and its subsidiaries if requested by the Board.

 

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5.               OBLIGATIONS OF
THE COMPANY UPON TERMINATION.  The
Executive shall only be entitled to payments pursuant to one of the sections
5(a), (b), (c) or (d) at a time.

(a)          TERMINATION
BY THE COMPANY (OTHER THAN TERMINATIONS FOR CAUSE, DEATH OR DISABILITY), OR TERMINATION
BY THE EXECUTIVE FOR GOOD REASON.  If the
Company terminates the Executive’s employment for any reason other than for
Cause (other than a termination for Disability or death), or the Executive
terminates his employment for Good Reason, then, except for any termination to
which Section 5(d) applies, the Company shall pay to the Executive (i) a cash
payment equal to two times the sum of (A) the Executive’s Annual Base Salary
immediately prior to the Date of Termination and (B) the greatest of (1) the
annual bonus earned by the Executive for the last completed fiscal year prior
to the fiscal year in which the Date of Termination occurs, (2) the annual
bonus the Executive would have earned for the fiscal year in which the Date of
Termination occurs absent such termination (which amount shall be based upon
the Company’s (and if applicable the Executive’s) actual performance against
target (expressed as a percentage of achievement of targeted performance)
applicable to the portion of the performance period during which the Executive
was employed, with such percentage level of achievement annualized for the full
fiscal year) and (3) the annual target bonus the Executive would have been
eligible to earn for the fiscal year in which the Date of Termination occurs
(the greatest of such amounts being referred to hereafter as the “Applicable
Bonus Amount”); and (ii) any unpaid amounts of the Executive’s Annual Base
Salary for periods prior to the Date of Termination and earned annual bonuses
for completed fiscal years prior to the Date of Termination. The payment
described in clause (i) of the preceding sentence shall be made ratably over
the two-year period following the Date of Termination, in accordance with the
Company’s normal payroll practices and the payments described in clause (ii) of
the preceding sentence shall be made within 30 days of the Date of Termination.
Upon termination of employment under this subsection (a), the Executive may
elect to continue health (including prescription drug), dental and vision
coverage from the Company for himself and his eligible dependents in accordance
with the continuation of coverage requirements of Internal Revenue Code Section
4980B (“COBRA”), provided that the Company will not require any premium payment
for such COBRA coverage greater than the premium for such coverage then being
charged for active employees.  If such
COBRA coverage ends before December 31, 2014, then upon expiration of COBRA
coverage the Company will at the Company’s expense continue to cover the
Executive and his eligible dependents under the Company’s health (including
prescription drug), dental and vision coverages (or substantially equivalent
coverage under an alternative arrangement) through December 31, 2014, provided
that the Company may charge a premium for such coverages no greater than the
premium for such coverages then being charged for active employees.  However, coverage provided by the Company
under the preceding sentence for the Executive or any of his eligible
dependents will end before December 31, 2014, for any such person who
becomes eligible for coverage under another employer provided health insurance
plan or Medicare.  To the extent any such
continued coverage is provided under a self-insured arrangement, the Company
provided premium equivalent value of such continued coverage will be treated as
imputed taxable income to the Executive, subject to any withholding and
reporting requirements imposed by law. 
In addition to the health coverage provided above, the Company shall
purchase and maintain through December 31, 2014 a single family policy
equivalent in all material aspects to the Company’s health coverage, except
with deductibles of $2,500 per person per annum and subject to such 

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coverage exclusions as may be applied by the insurer
based on its underwriting and other market policy terms to act as a secondary
policy to the Company’s health coverage. However, coverage provided by the
Company under the preceding sentence for the Executive or any of his eligible
dependents will end before December 31, 2014, for any such person who
becomes eligible for coverage under another employer provided health insurance
plan or Medicare. In addition, upon termination of employment under this
subsection (a), if the Executive elects to convert his Company provided group
term life insurance and/or group long-term disability insurance coverage(s) to
an individual life and/or long-term disability insurance policy(ies), the
Company will reimburse the Executive for the first six months of premiums he
pays for such converted policy(ies).  Any
such reimbursement will be treated as taxable income to the Executive, subject
to any withholding and reporting requirements imposed by law.  For purposes of this Agreement, the Executive’s
employment shall be deemed to have been terminated within the thirteen month
period following a Change in Control and during the Term by the Company without
Cause (and shall be governed by Section 5(d)), if the Executive’s employment is
terminated by the Company without Cause either (i) during the l20 day period
prior to the execution of an agreement, the consummation of which would result
in a Change in Control or (ii) following the execution of an agreement, the
consummation of which would result in a Change in Control and such termination
is effective at the time, or during the pendency, of such Change in Control (in
either case whether or not such Change in Control actually occurs).

(b)             DEATH AND
DISABILITY.  If the Executive’s
employment is terminated by the Company due to Disability or terminated
automatically upon the Executive’s death then, (i) the Company shall pay to the
Executive (or the Executive’s estate, as applicable) in a lump sum in cash
within 30 days after the Date of Termination, any portion of the Executive’s
Annual Base Salary earned through the Date of Termination that has not been
paid and earned annual bonuses for completed fiscal years prior to the Date of
Termination, (ii) all outstanding equity awards shall be treated according to
the provisions of the plan and agreements under which such awards were granted:, (iii) and in the case of the
Executive’s death Company shall pay to the Executive (or the Executive’s
estate, as applicable), ratably over the two-year period following the Date of
Termination, in accordance with the Company’s normal payroll practices, the
severance benefits described in clause (i) of Section 5(a) above; and (iv)
and in the case of Disability the Company shall have in place disability
insurance in addition to the Company’s regular short term and long term
policies for all executives, additional long term disability policy providing
to the Executive under its terms a minimum of $20,000 per month of benefits
payable to the Executive (or the Executive’s representative under power of attorney,
court order or other legally binding authority) for the period of the Executive’s
long term disability as such term is defined in the additional long term
disability policy.  Executive agrees to
cooperate with Company’s key man life insurance programs including reasonable
underwriting. All such key man life insurance policies shall be payable to the
Company or its assignee. Upon termination of employment under this subsection
(b), the Executive (and/or his eligible dependents, as applicable) may elect to
continue health (including prescription drug), dental and vision coverage from
the Company in accordance with the continuation of coverage requirements of
Internal Revenue Code Section 4980B (“COBRA”), provided that the Company will
not require any premium payment for such COBRA coverage greater than the
premium for such coverage then being charged for active employees.  If such COBRA coverage ends before December
31, 2014, then upon expiration of COBRA coverage the Company will at the
Company’s expense continue to cover the Executive 

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(and/or his eligible dependents, as applicable) under
the Company’s health (including prescription drug), dental and vision coverages
(or substantially equivalent coverage under an alternative arrangement) through
December 31, 2014, provided that the Company may charge a premium for such
coverages no greater than the premium for such coverages then being charged for
active employee.  However, coverage
provided by the Company under the preceding sentence for the Executive or any
of his eligible dependents will end before December 31, 2014, for any such
person who becomes eligible for coverage under another employer provided health
insurance plan or Medicare.  To the
extent any such continued coverage is provided under a self-insured
arrangement, the Company provided premium equivalent value of such continued
coverage will be treated as imputed taxable income to the Executive (or income
in respect of the decedent, as applicable), subject to any withholding and
reporting requirements imposed by law. 
In addition, upon termination of employment under this subsection (b)
due to Disability, if the Executive elects to convert his Company provided
group term life insurance coverage to an individual life insurance policy, the
Company will reimburse the Executive for the first six months of premiums he
pays for such converted policy.  Any such
reimbursement will be treated as taxable income to the Executive, subject to
any withholding and reporting requirements imposed by law. In addition to the
health coverage provided above, the Company shall purchase and maintain through
December 31, 2014 a single family policy equivalent in all material aspects to
the Company’s health coverage, except with deductibles of $2,500 per person per
annum and subject to such coverage exclusions as may be applied by the insurer
based on its underwriting and other market policy terms to act as a secondary
policy to the Company’s health coverage. However, coverage provided by the
Company under the preceding sentence for the Executive or any of his eligible
dependents will end before December 31, 2014, for any such person who
becomes eligible for coverage under another employer provided health insurance
plan or Medicare.

(c)               BY THE COMPANY FOR CAUSE; BY THE
EXECUTIVE OTHER THAN FOR GOOD REASON.  If
the Executive’s employment is terminated by the Company for Cause or the
Executive voluntarily terminates employment other than for Good Reason then,
(i) the Company shall pay to the Executive in a lump sum in cash within thirty
days after the Date of Termination, any portion of the Executive’s Annual Base
Salary earned through the Date of Termination that has not been paid and earned
annual bonuses for completed fiscal years prior to the Date of Termination and
(ii) all outstanding equity awards shall be treated according to the provisions
of the plan and agreements under which such awards were granted.  Upon termination of employment under this
subsection(c), the Executive may elect to continue health (including prescription
drug), dental and vision coverage from the Company in accordance with the
continuation of coverage requirements of Internal Revenue Code Section 4980B (“COBRA”),
provided that the Company will not require any premium payment for such COBRA
coverage greater than the premium for such coverage then being charged for
active employees.  If such COBRA coverage
ends before December 31, 2014, then upon expiration of COBRA coverage the
Company will at the Company’s expense continue to cover the Executive (and/or
his eligible dependents, as applicable) under the Company’s health (including
prescription drug), dental and vision coverages (or substantially equivalent
coverage under an alternative arrangement) through December 31, 2014, provided
that the Company may charge a premium for such coverages no greater than the
premium for such coverages then being charged for active employee.  However, 

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coverage provided by the
Company under the preceding sentence for the Executive or any of his eligible
dependents will end before December 31, 2014, for any such person who
becomes eligible for coverage under another employer provided health insurance
plan or Medicare.  To the extent any such
continued coverage is provided under a self-insured arrangement, the Company provided
premium equivalent value of such continued coverage will be treated as imputed
taxable income to the Executive (or income in respect of the decedent, as
applicable), subject to any withholding and reporting requirements imposed by
law.  In addition to the health coverage
provided above, the Company shall purchase and maintain through December 31,
2014 a single family policy equivalent in all material aspects to the Company’s
health coverage, except with deductibles of $2,500 per person per annum and
subject to such coverage exclusions as may be applied by the insurer based on
its underwriting and other market policy terms to act as a secondary policy to
the Company’s health coverage. However, coverage provided by the Company under
the preceding sentence for the Executive or any of his eligible dependents will
end before December 31, 2014, for any such person who becomes eligible for
coverage under another employer provided health insurance plan or Medicare.

(d)              CHANGE IN CONTROL TERMINATION.

(i)                       If, within the 13-month
period immediately following the occurrence of a Change in Control, the
Executive’s employment by the Company is terminated by the Company other than
for Cause or by the Executive for Good Reason (subject, if applicable, to the
proviso set forth in the first sentence of Section 4(c)(ii)), then the Company
shall pay to the Executive (i) a cash payment equal to three times the sum of
(A) the Executive’s Annual Base Salary immediately prior to the Date of
Termination and (B) the Applicable Bonus Amount; and (ii) any unpaid amounts of
the Executive’s Annual Base Salary for periods prior to the Date of Termination
and earned annual bonuses for completed fiscal years prior to the Date of
Termination. The cash payments described in clause (i) and (ii) of the
preceding sentence shall be made in a lump sum within 30 days following the
Date of Termination. Notwithstanding the foregoing, if the amounts of such
payments cannot be finally determined on or before a date when a payment is
due, the Company shall pay to the Executive on such day an estimate, as
reasonably determined by the Company, of the minimum amount of such payments to
which the Executive is clearly entitled and shall pay the remainder of such
payments, if any, as soon as the amount thereof can be determined.  Upon termination of employment under this
subsection (d), the Executive (and/or his eligible dependents, as applicable)
may elect to continue health (including prescription drug), dental and vision
coverage from the Company for himself and his eligible dependents in accordance
with the continuation of coverage requirements of Internal Revenue Code Section
4980B (“COBRA”), provided that the Company will not require any premium payment
for such COBRA coverage greater than the premium for such coverage then being
charged for active employees.  If such
COBRA coverage ends before December 31, 2014, then upon expiration of COBRA
coverage the Company will at the Company’s expense continue to cover the
Executive and his eligible dependents under the Company’s health (including
prescription drug), dental and vision coverages (or substantially equivalent
coverage under an alternative arrangement) through December 31, 2014, provided
that the Company may charge a premium for 

 10
  
 

 

such coverages no greater than the premium for such
coverages then being charged for active employees.  However, coverage provided by the Company
under the preceding sentence for the Executive or any of his eligible
dependents will end before December 31, 2014, for any such person who becomes
eligible for coverage under another employer provided health insurance plan or
Medicare.  To the extent any such
continued coverage is provided under a self-insured arrangement, the Company
provided premium equivalent value of such continued coverage will be treated as
imputed taxable income to the Executive (or income in respect of the decedent,
as applicable), subject to any withholding and reporting requirements imposed
by law.  In addition to the health
coverage provided above, the Company shall purchase and maintain through
December 31, 2014 a single family policy equivalent in all material aspects to
the Company’s health coverage, except with deductibles of $2,500 per person per
annum and subject to such coverage exclusions as may be applied by the insurer
based on its underwriting and other market policy terms to act as a secondary
policy to the Company’s health coverage. However, coverage provided by the
Company under the preceding sentence for the Executive or any of his eligible dependents
will end before December 31, 2014, for any such person who becomes
eligible for coverage under another employer provided health insurance plan or
Medicare.  In addition, upon termination
of employment under this subsection (d), if the Executive elects to convert his
Company provided group term life insurance and/or group long-term disability
insurance coverage(s) to an individual life and/or long-term disability
insurance policy(ies), the Company will reimburse the Executive for the first
six months of premiums he pays for such converted policy(ies).  Any such reimbursement will be treated as
taxable income to the Executive, subject to any withholding and reporting
requirements imposed by law.

(ii)           For
purposes of this Agreement, a “Change in Control” shall be deemed to have
occurred on the first date after the Effective Date on which (1) any Person (as
defined below) shall acquire, whether by purchase, exchange, tender offer,
merger, consolidation or otherwise, beneficial ownership of securities of the
Company constituting fifty percent (50%) or more of the combined voting power
of the securities of the Company, (2) any Person shall acquire all or
substantially all of the assets of the Company pursuant to a sale, dissolution
or liquidation or (3) any Person shall acquire the ability to appoint or elect
a majority of the members of the Board. For purposes of the preceding sentence,
“Person” shall have the meaning given in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended from time to time, as such term is modified
and used in Sections 13(d) and 14(d) thereof, except that such term shall not
include (i) Holdings, Thomas H. Lee Partners or Thomas H. Lee Equity Fund IV,
L.P., Evercore Capital Partners L.P. and each of their respective affiliates
(the “Designated Investors”), (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of its
affiliates, (iii) an underwriter temporarily holding securities pursuant to an
offering of such securities and (iv) a corporation owned, directly or
indirectly, by the Designated Investors, such that the aggregate ownership of
securities or assets of the Company or the ability to appoint or elect
directors of the Company that is attributable to such Designated Investors
would not decrease to a level that would result in a Change in Control, if such
ownership or ability was deemed to be held directly in the Company. The
completion of an initial public offering in which no Person acquires 

 11
  
 

 

beneficial ownership of
fifty percent (50%) or more of the combined voting power of the securities of
such Person shall not constitute a Change in Control, nor shall the acquisition
of beneficial ownership of securities of the Company by a Person which has a
class of securities registered under Section 12 of the Securities Exchange Act
of 1934, as amended, if such acquisition does not result in the Designated
Investors owning thirty percent (30%) or less of the combined voting power of
the securities of the Company. Notwithstanding the foregoing, other than for
purposes of the existence of Deemed Good Reason (as defined in Section
4(c)(i)), a Change in Control shall be deemed to have occurred on the date when
the Designated Investors together with the senior management of the Company (as
determined by the Designated Investors) cease to beneficially own at least
thirty percent (30%) or more of the combined voting power of the securities of
the Company (a “Limited Change in Control”).

(iii)          For purposes of this Agreement, the
Executive’s employment shall be deemed to have been terminated within the
thirteen month period following a Change in Control and during the Term by the
Company without Cause (and shall be governed by this Section 5(d)), if the
Executive’s employment is terminated by the Company without Cause either (i)
during the l20 day period prior to the execution of an agreement, the
consummation of which would result in a Change in Control or (ii) following the
execution of an agreement, the consummation of which would result in a Change
in Control and such termination is effective at the time, or during the
pendency, of such Change in Control (in either case whether or not such Change
in Control actually occurs).

(e)              PRO-RATA BONUS PAYMENTS.  Except as set forth in the following
sentence, for purposes of this Section 5, bonus amounts shall only be
considered to be earned if the Executive was employed by the Company through
the last day of the performance period to which the bonus relates. In case of a
termination described in Section 5(a), 5(b) or 5(d), in addition to the
payments provided in such Section, the Executive shall be considered to have
earned an annual bonus (the “Pro-rata Bonus”) equal to the bonus (if any) the
Executive would have received (as determined consistent with the provisions set
forth below) had the Executive remained employed by the Company through the
last day of the fiscal year during which the Date of Termination occurs,
multiplied by a fraction, the numerator of which is the number of days in such
fiscal year during which the Executive was employed by the Company and the
denominator of which is 365. The Pro-rata Bonus for purposes of a termination
described in Section 5(d), shall be determined, as near as practicable, based
on actual performance achieved for the fiscal year through the Date of
Termination, expressed as a percentage of targeted performance for that period.
For purposes of a termination described in Section 5(a) or 5(b), such Pro-rata
Bonus payment shall be based on the actual results for the completed fiscal
year during which the Date of Termination occurs. In the event of a termination
described in Section 5(a), 5(b) or 5(d), the payment of any amount of Pro-rata
Bonus which becomes due in accordance with this Section 5(e) shall be made at
the time the Company normally pays such bonuses to its senior executives,
irrespective of whether any such bonuses are paid to other senior executives
for such fiscal year, and will be subject to the terms and conditions of the
applicable annual cash incentive compensation plan but without giving effect to
any requirement therein that the Executive remain employed with the Company
through the 

 12
  
 

 

payment date or the last day of the applicable fiscal
year in order to receive payment thereunder. Exhibit A hereto sets forth
examples of the calculation of the Pro-rata Bonus.

(f)               OUTPLACEMENT SERVICES.  If the Executive’s employment is terminated
under the circumstances described in Section 5(a) or 5(d), the Company shall
pay the cost of providing the Executive with outplacement services, up to a
maximum of five percent (5%) of the sum of the Base Salary and the Applicable
Bonus Amount, provided that such services are (a) utilized by the Executive
within six months following the Date of Termination and (b) provided by a
recognized outplacement provider. Such payment shall be made by the Company
directly to the service provider promptly following the provision of such
services and the presentation to the Company of documentation of the provision
of such services. Such services shall include office facilities and telephone
answering services during such six month period.

(g)              ACCRUED BENEFITS.  Upon the Executive’s termination of
employment for any reason, in addition to any other amounts and benefits
provided for in Section 5, the Executive (and his beneficiaries and dependents,
as applicable) shall be entitled to receive all vested benefits under the
Company’s benefit plans policies and programs in which the Executive
participated, in accordance with the terms of such plans (except to the extent
that such benefits are duplicative of benefits provided for in Section 5).

(h)            RELEASE.  The Executive shall not be entitled to any
payment or benefit provided under Sections 5(a), 5(d), 5(e), and 5(f), other
than COBRA continuation coverage at the Executive’s expense, unless (1) the
Executive executes and delivers to the Company a release, in form and substance
acceptable to the Company, by which the Executive releases the Company from all
claims arising from the Executive’s employment by the Company, in consideration
for such payment or benefit, and (2) the Executive shall not be in breach of
any of the provisions of Section 6 of this Agreement at any time during the
effectiveness thereof.  In no event will
such payment or benefit be provided prior to such release becoming effective
upon expiration of the applicable withdrawal period.

(i)              409A SAFE HARBOR.  Notwithstanding anything in this Agreement to
the contrary, in no event shall the Company commence payment or distribution to
the Executive of any amount that constitutes nonqualified deferred compensation
within the meaning of Section 409A of the Code, earlier than the earliest
permissible date under Section 409A of the Code that such amount could be
paid without additional taxes or interest being imposed upon the Executive
under Section 409A of the Code.  If
any payments are delayed pursuant to the immediately preceding sentence, the
Company shall accrue such payments and pay them without interest, in a lump sum
cash payment, to the Executive on the first business day upon which the payment
may be made in compliance with Section 409A of the Code.  The Company and the Executive agree that they
will execute any and all amendments to this Agreement as they mutually agree in
good faith may be necessary to ensure compliance with the distribution
provisions of Section 409A of the Code or as otherwise needed to ensure
that the continuation of welfare benefits under this Agreement complies with
Section 409A.

(j)              TAX GROSS UP.  If any taxable income is imputed to the
Executive under this Section 5 due to Company provided health (including
prescription drug), dental or vision 

 13
  
 

 

coverage, or if the
Company makes a taxable reimbursement to the Executive for any life or
disability insurance premiums, the Company will also make an additional “tax
gross up” payment to the Executive equal to (1) multiplied by (2), with the
result then divided by (3), where: (1) is the total of such imputed taxable
income and taxable reimbursements; (2) is the aggregate federal, state, local
and Medicare tax rate applicable to the Executive, and (3) is one minus such
aggregate tax rate.  The tax gross up
calculation will be performed on a calendar year basis, the payment will be
made within 90 days after the end of each calendar year, and the state and
local tax rates will be based on Executive’s legal residence as of the last day
of the calendar year in question.  In the
case of imputed income in respect of a decedent under subsection (b), the
aggregate tax rate will be adjusted accordingly to reflect the tax rate
applicable to such income.

6.                  CONFIDENTIALITY;
COMPETITION; SOLICITATION; INTELLECTUAL PROPERTY; RETURN OF PROPERTY.

(a)               The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its
predecessors or affiliated companies and their respective businesses that the
Executive obtains or has obtained during the Executive’s employment by the Company
or any of its predecessors or affiliated companies and that is not public
knowledge (other than as a result of the Executive’s violation of his
obligations to the Company, including those set forth herein) (“Confidential
Information”). The Executive shall not communicate, divulge or disseminate
Confidential Information at any time during or after the Executive’s employment
with the Company, except with the prior written consent of the Company or as
otherwise required by law or legal process (of which the Executive has
delivered to the Company prompt prior notice).

(b)              During the
Executive’s employment with the Company and for a period of two years after the
termination of the Executive’s employment with the Company, the Executive shall
not, without the prior written consent of the Board, directly or indirectly
engage in or be interested in (as owner, partner, stockholder, employee,
director, officer, agent, consultant or otherwise), with or without
compensation, any business which is in competition with any line of business
actively being conducted or to the Executive’s knowledge, contemplated on the
Date of Termination by the Company or any of its subsidiaries or affiliates.
Nothing herein will prohibit the Executive from acquiring or holding not more than
one percent of any class of publicly traded securities of any business.

(c)              Except as set
forth below, during the Executive’s employment with the Company and for a
period of two years after the termination of the Executive’s employment with
the Company, the Executive shall not, without the prior written consent of the
Board, directly or indirectly, hire any person who was employed by the Company
or any of its subsidiaries or affiliates within the six-month period preceding
the date of such hiring or solicit, entice, persuade or induce any person or
entity doing business with the Company and its subsidiaries or affiliates, to
terminate such relationship or to refrain from extending or renewing the
same.  However, this Section 6(c) shall
not apply to any person employed by the Company or any of its subsidiaries or
affiliates who previously was employed by any company in which the Executive
was employed.

 

 14
  

(d)              The Executive agrees that the
restrictions set forth in this Section 6 are reasonable and necessary to
protect the legal interests of the Company. The Executive further agrees that
the Company shall be entitled to injunctive relief in the event of any actual
or threatened breach of the restrictions and shall not be required to post bond
or prove actual damages. If the scope or content of any restriction contained
in this Agreement is too broad to permit enforcement of such restriction to its
full extent, then the restriction shall be enforced to the maximum extent
permitted by law, and the parties hereby consent that the scope or restriction
shall be judicially modified accordingly in any proceeding brought with respect
to the enforcement of the restriction.

(e)              The
Executive agrees that any and all intellectual property developed within the
scope of employment or relating to the Company’s business, existing or which in
the future may exist, including all patents, copyrights, trademarks or trade
names, all ideas, concepts, themes, inventions, designs, improvements and
discoveries conceived or developed, whether by the Executive or others, shall
remain the sole and exclusive property of the Company.

(f)               Immediately
upon any termination of employment with the Company, the Executive shall
promptly deliver to the Company all equipment, notebooks, documents, memoranda,
reports, files, samples, books, correspondence, mailing lists, calendars, card
files, rolodexes and all other records or materials relating to the Company’s
business which are or have been in the possession or control of the Executive.
The Executive shall not maintain any copy or other reproduction whatsoever of
any of the items described in this Section 6(f) after the termination of such
employment.

7.               INDEMNIFICATION.  Except to the extent inconsistent with the
Company’s certificate of incorporation or bylaws, the Company will indemnify
the Executive and hold him harmless to the fullest extent permitted by law with
respect to his service as an officer and director of the Company and its
subsidiaries, which indemnification shall be provided following termination of
employment for so long as the Executive may have liability with respect to his
service as an officer and director of the Company and its subsidiaries. The
Executive will be covered by a directors’ and officers’ insurance policy with
respect to his acts as an officer and director to the same extent as all other
Company officers and directors under such policies.

8.                  DISPUTE RESOLUTION; ATTORNEYS’
FEES.  Other than with respect to the
Company’s right to obtain injunctive relief under Section 6 (which shall not be
subject to the provisions of this Section 8), all disputes arising under or
related to the employment of the Executive or the provisions of this Agreement
shall be settled by arbitration under the rules of the American Arbitration
Association then in effect, such arbitration to be held in Baltimore Maryland,
as the sole and exclusive remedy of either party. The arbitration shall be heard
by one arbitrator mutually agreed upon by the parties, who must be a former
judge. In the event that the parties cannot agree upon the selection of the
arbitrator within 10 days, each party shall select one arbitrator and those
arbitrators shall select a third arbitrator who will serve as the sole
arbitrator. The arbitrator shall have the authority to order expedited
discovery, hearing and decision, including the ability to set outside time
limits for such discovery, hearing and decision. The parties shall direct the
arbitrator to render a decision not later than 90 days following the
arbitration hearing. Judgment on any arbitration award may be entered in any
court of competent 

 15
 

jurisdiction. The
Company shall pay all reasonable legal fees and expenses incurred by the
Executive in connection with any such arbitration or other legal proceeding
which occurs on or following a Change in Control.

9.                  SUCCESSORS.

(a)                   This Agreement is personal to
the Executive and without the prior written consent of the Company the
Executive’s rights under the Agreement shall not be assignable (except by will
or the laws of descent and distribution). This Agreement shall inure to the
benefit of and be enforceable by the Executive’s legal representatives.

(b)             This Agreement shall inure to the
benefit of and be binding upon the Company and its successors and assigns.

(c)             The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would have been required to
perform it if no such succession had taken place. As used in this Agreement,
the term “Company” shall mean both the Company as defined above and any such
successor.

10.           MISCELLANEOUS.

(a)              This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Maryland,
without reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no force or
effect. This Agreement may not be amended or modified except by a written
agreement executed by the parties hereto or their respective successors and
legal representatives.

(b)              All notices and other
communications under this Agreement shall be in writing and shall be given by
hand delivery to the other party, by overnight courier or by certified mail,
return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Michael DuBose

If to the Company:

Vertis, Inc.

250 W. Pratt Street, 18th Floor, Baltimore, Maryland 21201

Attention: Chief Legal Officer

 16
 

 

with a copy to:

Thomas H. Lee Partners

75 State Street

Suite 2600

Boston,
Massachusetts 02109

Attention:   Anthony J. DiNovi

Scott M. Sperling

Soren Oberg

Fax: (617)
227-3514

or to such other address
as either party furnishes to the other in writing in accordance with this
Section 10(b).

(c)              Notwithstanding any other
provision of this Agreement, the Company may withhold from amounts payable
under this Agreement all federal, state, local and foreign taxes that are
required to be withheld by applicable laws or regulations.

(d)              The Executive’s or the Company’s
failure to insist upon strict compliance with any provisions of, or to assert
any right under, this Agreement shall not be deemed to be a waiver of such
provision or right or of any other provision of or right under this Agreement.

(e)              Except as set forth in this
Section 10(e), as of the Effective Date, this Agreement shall constitute the
entire understanding of the parties with respect to subject matter herein and
supersede any other agreement or other understanding, whether oral or written,
express or implied, between them to the extent that such agreements or
understandings contain provisions addressed herein.

(f)               This Agreement shall terminate
upon the termination of the Executive’s employment, except that terms of this
Agreement which must survive the termination of this Agreement in order to be
effectuated (including, without limitation, the provisions of Sections 5, 6, 7
and 8) shall survive. Upon the termination of the Executive’s employment,
Executive consents to the notification by the Company to the Executive’s new
employer of Executive’s obligations under this Agreement.

(g)              The Executive is not required to
seek other employment or to attempt in any way to mitigate or reduce any
amounts payable to the Executive by the Company pursuant to Section 5 hereof.
Except with respect to alternative medical, dental, prescription and vision
care insurance obtained from a subsequent employer, the amount of any payment
or benefit provided for in this Agreement shall not be reduced by any
compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.

(h)              This Agreement may be executed in
several counterparts, each of which shall be deemed an original and which
together shall constitute but one and the same instrument.

 17
 

 

IN WITNESS WHEREOF, the
Executive and the Company have executed this Agreement under seal, as of the
day and year first above written.

	
  

  	
  VERTIS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  VERTIS HOLDINGS,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Michael DuBose

  

 

 18

EXHIBIT A

Solely for
purposes of illustration and clarification of the provisions of Section 5(e),
and not in limitation thereof, the following examples are provided. The bonus
formula under the annual cash incentive compensation plan in effect for the fiscal
year in the examples below is 75% of Base Salary payable upon 100% achievement
of targeted performance for the fiscal year; the Company’s bonus plan for the
year sets forth that reduced amounts are payable for achievement between 90%
and 99% of targeted performance (for each 1% above 90%, the Executive would
earn 10% of targeted bonus, until 100% achievement yields 100% payout of
targeted bonus) but no bonus is payable for achievement at or below 90%.

Example 1: Assume
that (A) actual performance against interim quarterly targeted performance
through June 30th is 100%; (B) actual performance against targeted performance
through December 31st is 85%; (C) Executive’s employment is terminated under
circumstances described in Section 5(d) on July 1st; and (D) Executive’s Base
Salary on the Date of Termination is $100,000. The Pro-rata Bonus payable to
Executive is $37,500 determined as follows:

Pro-rata Bonus = (182 days employed through Date of Termination / 365)
x 100% achievement x (75% x $100,000 Base Salary)

Example 2: Assume
the same facts as Example 1, except that Executive’s employment is terminated
under circumstances described in Section 5(a) or 5(b). The Pro-rata Bonus
payable to Executive is zero because actual performance for the completed
fiscal year in which the Date of Termination occurs is below the 91% minimum
threshold required for a payout under the plan.

Example 3: Assume
the same facts as Example 2, except that the actual performance against
targeted performance through December 31st is 95%. The Pro-rata Bonus payable
to Executive is $18,750 determined as follows:

Pro-rata Bonus = (182
days employed through Date of Termination / 365) x 50% x (75% x $100,000 Base
Salary)

 

 19Exhibit
10.1

FIFTH

EXTENSION AND MODIFICATION

OF

EMPLOYMENT AGREEMENT

THIS FIFTH EXTENSION AND MODIFICATION OF EMPLOYMENT AGREEMENT (the “Extension”)
is entered into as of April 30, 2007 by and between California Coastal
Communities, Inc., a Delaware corporation (“Employer”), and RAYMOND J. PACINI (“Executive”).

W  I  T  N  E  S  S  E  T  H:

WHEREAS, Executive and Employer have entered into an Employment
Agreement dated as of May 1, 1998, an Extension and Modification of
Employment Agreement dated December 7, 1999,  a Second Extension and Modification of
Employment Agreement dated April 30, 2001, a Third Extension and
Modification of Employment Agreement dated March 17, 2003, and a Fourth
Extension and Modification of Employment Agreement dated March 14, 2005 (collectively,
the “Employment Agreement”), through which Executive has provided various
executive capacities to Employer and Employer has obtained various executive
services by Executive; and

WHEREAS, Employer desires to obtain the benefit of continued service from
Executive by extending the Employment Agreement, and Executive desires to
render continued services to Employer by extending the Employment Agreement
pursuant to the terms and conditions of this Extension;

NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises and covenants herein contained, the parties agree as follows:

SECTION 1.           CONTINUING EFFECTIVENESS OF
EMPLOYMENT AGREEMENT.  Except to the
extent of any modification made pursuant to the terms of this Extension, the
Employment Agreement shall continue to remain in full force and effect
following the date hereof.

SECTION 2.           EXTENSION OF TERM.  Employer and Executive hereby agree to extend
the term of the Employment Agreement until April 30, 2009.

SECTION 3.           BASE SALARY.  Effective January 1, 2005 and until the
expiration of the term set forth in Section 2 above, Employer agrees to
pay Executive a base salary of at least Three Hundred and Fifty Thousand
Dollars ($350,000) per year in semi-monthly installments on the same dates
the other senior officers of Employer are paid.

(i)            Paid
Time Off.  Executive shall be
entitled to five (5) weeks of paid time off (“PTO”) each twelve-month period,
in accordance with the terms and provisions set forth in that certain
Hearthside Homes/California Coastal Communities Employee Handbook Addendum

 1
 

dated December 4, 2006 (the “Addendum”) a copy of which has been
delivered to Executive; and Executive hereby represents and warrants that (i)
the Addendum has been fully read and understood, and (ii) Executive agrees to
be bound by the Addendum with respect to all matters of PTO.

SECTION 4.  OUTSIDE CONSULTING.  Subject to the prior approval of the
Compensation Committee of Employer’s Board of Directors, Executive may be
permitted to act as an outside consultant or director to companies and
businesses that are not in competition with Employer.   There shall be no reduction in the
compensation to be paid to Executive under the Employment Agreement, provided
that the consulting services rendered by Executive do not have a material
adverse effect on Executive’s ability to render services to Employer under the
Employment Agreement.

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

	
   

  	
  “EMPLOYER”

  
	
   

  	
   

  
	
   

  	
  CALIFORNIA
  COASTAL COMMUNITIES, INC.

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ SANDRA G. SCIUTTO

  	
   

  
	
   

  	
   

  	
  Sandra G.
  Sciutto

  
	
   

  	
   

  	
  Chief Financial
  Officer

  
	
   

  	
   

  
	
   

  	
  “EXECUTIVE”

  
	
   

  	
   

  
	
   

  	
   

  	
  /s/ RAYMOND J. PACINI

  	
   

  
	
   

  	
   

  	
  Raymond J. Pacini

  

 

 2

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