Document:

EXHIBIT 10.5

 

AMENDED AND RESTATED RETENTION AGREEMENT

 

THIS AMENDED AND RESTATED RETENTION AGREEMENT (the “Agreement”),
is made on this 4th day of May, 2005 (the “Effective Date”),
by and between GARDENBURGER, INC., an Oregon Corporation (the “Company”)
and Lori Abert Luke (the “Executive”).

 

WHEREAS, the Executive serves as a valued employee of
the Company and along with other key members of management of the Company
(collectively, the “Executives”) provides essential services to the Company;
and

 

WHEREAS, the Company and the Executive have entered
into that certain Employment Agreement dated February 26, 2004, and an
Amendment to Employment Agreement dated March 24, 2005, pursuant to which the
Executive serves as the Vice President, Marketing and R&D of the Company
(collectively, the “Employment Agreement”); and

 

WHEREAS, in addition to the benefits that the
Executive may be entitled to receive under the Employment Agreement, the
Company and the Executive are parties to a Retention Agreement, dated January
27, 2005, and an Amendment to Retention Agreement, dated March 24, 2005,
pursuant to which the Company desires to establish an incentive for the
Executive to continue to be employed by the Company through and following the
execution of a definitive agreement relating to a Change in Control (as defined
in Section 2.4) or a Going Private Transaction (as defined in Section 2.7); and

 

WHEREAS, the Executive
has informed the Company that the Executive will be unable to devote
Executive’s complete unimpaired attention to continue providing services to the
Company to assist the Company in negotiating a transaction which contemplates a
Change in Control or Going Private Transaction and will be forced to consider
other employment opportunities, due to the personal financial risks that such a
Change in Control or Going Private Transaction imposes on the Executive, unless
the Company agrees to modify the terms of the Retention Agreement as provided
for in this Amended and Restated Retention Agreement; and

 

WHEREAS, the Company is
aware that the Executives are being recruited by other potential employers and
that certain of the Executives have already received offers regarding
alternative employment opportunities; and

 

WHEREAS, the Company has
determined that Executive’s continued services with the Company are important
to the Company’s efforts to maximize value pursuant to a Change in Control or
Going Private Transaction and that the Company would suffer adverse
consequences if Executive’s employment with the Company terminated.

 

NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants and promises contained herein, and intending to be legally
bound hereby, the parties agree as follows:

 

 

1.                                       Retention
Bonus.

 

1.1.  Bonus
Amount and Conditions.  Subject to Sections 1.2, 3, 4
and 5.1, the Company shall pay to the Executive the Retention Bonus (as defined
in Section 2.9) to the Executive if: promptly, upon request of
the Company, the Executive executes and delivers a release of claims against
the Company, which release shall be in the same form as Paragraph 9 to the
Separation Agreement attached to the Employment Agreement between the Executive
and the Company; and the
earlier to occur of:

 

(a)                                  the
Executive has remained continuously employed by the Company through the earlier
of:  (i) the date of a full and complete
execution of a definitive agreement (the “Definitive Agreement”), the
consummation of which would result in either: 
(A) a Change in Control; or (B) a Going Private Transaction; or (ii)
January 27, 2007; or

 

(b)                                 the
Executive’s employment by the Company is terminated by the Company without
Cause (as defined in Section 2.3) other than
in connection with Executive’s death or Disability (as defined in Section 2.6).

 

1.2.  Timing and Form of Payment.

 

(a)                                  Subject
to Section 1.1, the Company shall pay to the Executive:  seventy-five percent (75%) of the Retention
Bonus in a lump sum as soon as administratively feasible following the earlier
of:  (i) the date of a full and complete
execution of a Definitive Agreement (the “Signing”); or (ii) January 27, 2007; provided, however,
that Executive shall not be entitled to the payment contemplated in this
Paragraph 1.2(a) unless the Executive exercises all reasonable efforts to
support a Signing which contemplates a Change in Control or Going Private
Transaction.

 

(b)                                 Subject to Section 1.1, the Company
shall pay the Executive the remaining twenty-five percent (25%) of the
Retention Bonus in a lump sum as soon as administratively feasible following
the earlier of:  (i) the date of the
consummation of the transactions contemplated by the Definitive Agreement; or
(ii) January 27, 2007,
provided, however, that Executive shall not be entitled to the payment
contemplated in this Paragraph 1.2(b) unless the Executive, after the
Signing,  exercises all reasonable
efforts to support the consummation of the applicable Change in
Control or Going Private Transaction and to cooperate with the Company to
consummate the Change in Control (including, if so requested by the Company,
providing assistance to the prospective buyer in obtaining financing for the
Change in Control) or Going Private Transaction.

 

2.                                       Certain
Definitions.  As used herein:

 

2.1.  “Affiliate”
means, with respect to a Person (as defined below), another Person that
directly or indirectly controls, or is controlled by, or is under common
control with such Person.

 

2

 

2.2.  “Base
Salary” means the annual amount equal to Two Hundred and Six Thousand
Dollars ($206,000), as adjusted by the Board of Directors of the Company from
time to time.

 

2.3.  “Cause”
shall have the meaning set forth in Article I of the Employment Agreement.

 

2.4.  “Change
in Control” shall have the meaning set forth in Article I of the Employment
Agreement, as amended.”

 

2.5.  “Definitive
Agreement” shall have the meaning assigned to it in Section 1.1(a)(i) of
this Agreement.

 

2.6.  “Disability”
shall have the meaning set forth in Article I of the Employment Agreement.

 

2.7.  “Going
Private Transaction” shall have the meaning set forth in Section (a)(3) of
Rule 13e-3 promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).

 

2.8.  “Person”
means any individual, entity or group (within the meaning of Section 13(d)(3)
or 14(d)(2) of the Exchange Act.

 

2.9.  “Retention
Bonus” means the amount equal to:

 

(a)                                  if
the Executive has remained continuously employed by the Company through the
date of the Signing and the Signing occurs on or before July 27, 2006, an
amount equal to twelve (12) months of Base Salary in effect at the time of the
payment pursuant to Section 1.2; or

 

(b)                                 if
the Executive has remained continuously employed by the Company through the
earlier of:  (i) the date of the Signing
which Signing occurs after July 27, 2006, or (ii) January 27, 2007, an amount
equal to sixteen (16) months of Base Salary in effect at the time of the
payment pursuant to Section 1.2; or

 

(c)                                  if
payment to the Executive is due as a result of Section 1.1(b) and the
Executive’s termination of employment occurs on or before July 27, 2006, the
product of:  (i) the amount equal to
twelve (12) months of Base Salary in effect at the time of the Executive’s
termination of employment; multiplied by (ii) the quotient of:  (A) the number of days commencing on January
27, 2005 and ending on the date of the Executive’s termination of employment;
divided by (B) either:  (1) in the event
of a Signing, the number of days commencing on January 27, 2005 and ending on
the date of the Signing; or (2) in the event a Signing does not occur prior to
January 27, 2007, then 730; or

 

(d)                                 if
payment to the Executive is due as a result of Section 1.1(b) and the
Executive’s termination of employment occurs at anytime after July 27, 2006,
the product of:  (i) the amount equal to
sixteen (16) months of Base Salary in effect at the time of the Executive’s
termination of employment; multiplied by (ii) the quotient of:  (A) the number of days 

 

3

 

commencing on
January 27, 2005 and ending on the date of the Executive’s termination of
employment; divided by (B) either:  (1)
in the event of a Signing, the number of days commencing on January 27, 2005,
and ending on the date of the Signing; or (2) in the event a Signing does not
occur prior to January 27,2007, then 730.

 

2.10.  “Signing”
shall have the meaning assigned to it in Section 1.2(a)(i) of this Agreement.

 

3.                                       Parachute
Payments.  Payments under this
Agreement shall be made without regard to whether the deductibility of such
payments (or any other payments) would be limited or precluded by Section 280G
of the Internal Revenue Code of 1986 (the “Code”) and without regard to whether
such payments would subject the Executive to the federal excise tax levied on
certain “excess parachute payments” under Section 4999 of the Code; provided,
however, that if the Total After-Tax Payments (as defined below) would be
increased by the limitation or elimination of any amount payable under this
Agreement, then amounts payable under this Agreement will be reduced to the
extent necessary to maximize the Total After-Tax Payments.  The determination of whether and to what
extent payments under this Agreement are required to be reduced in accordance
with the preceding sentence will be made at the Company’s expense by an
independent, certified public accountant selected by the Executive and
reasonably acceptable to the Company.  In
the event of any underpayment or overpayment under this Agreement (as determined
after the application of this Section 3), the amount of such underpayment or
overpayment will be immediately paid by the Company to the Executive or
refunded by the Executive to the Company, as the case may be, with interest at
the applicable federal rate provided for in Section 7872(f)(2) of the
Code.  For purposes of this Agreement,
“Total After-Tax Payments” means the total of all “parachute payments” (as that
term is defined in Section 280G(b)(2) of the Code) made to or for the benefit
of the Executive (whether made hereunder or otherwise), after reduction for all
applicable federal taxes (including, without limitation, the tax described in
Section 4999 of the Code).

 

4.                                       Certain
Limitations.

 

4.1.  Cash
Flow Limitation.  Notwithstanding any
other provision of this Agreement to the contrary, the aggregate amount of any
payments due under this Agreement or any similar retention agreements executed
now or in the future with any other employee of the Company or any of its
Affiliates (each a, “Key Employee”) to the Executive and one or more Key
Employees in a single fiscal year shall be limited so that in no event shall
the aggregate amount to be paid in cash cause the Company’s Available Credit
plus Cash to fall below $1,500,000 (“Cash Flow Ceiling”); and in the event the
Available Credit plus Cash would fall below such amount, the Company shall
deliver to the Executive to the extent required by this Agreement a payment in
an amount equal to the product of (i) the Cash Flow Ceiling multiplied by (ii)
a fraction, the numerator of which is the aggregate amount of such Executive’s
full payment hereunder for the fiscal year and the denominator of which is the
aggregate amount of all payments due to the Executive and all other Key
Employees in such fiscal year (“Cash Flow Permitted Amount”).  To the extent that payments under this
Agreement to the Executive in a single fiscal year would exceed the Cash Flow
Ceiling (“Cash Flow Shortfall”), the Company shall pay the Cash Flow Permitted
Amount to the Executive and shall pay the Cash Flow Shortfall (in whole or in
part) as rapidly as permitted by the terms of this Section 4.1.  The 

 

4

 

obligation to pay
the Cash Flow Shortfall shall constitute subordinated debt of the Company until
paid.  The Company may, in the sole
discretion of the Board, elect to waive the annual cash flow limitation set
forth above, and absent such a waiver, the limitation shall apply to payments
due under this Agreement.  For purposes
of this Section 4.1, “Available Credit plus Cash” means credit available to the
Company as calculated by the Chief Financial Officer or an acceptable designee
using the borrowing worksheet supplied by the Company’s Senior Lender plus the
total amount of cash in the Company’s bank account(s).

 

4.2.  Debt Limitations.  Notwithstanding any other provision of this
Agreement to the contrary, if a payment of any amount to the Executive under
this Agreement would, if made, be prohibited pursuant to any agreement to which
the Company (as defined below) is or from time to time becomes a party,
evidencing or governing indebtedness for borrowed money (each, a “Debt
Agreement”), the Company shall identify to the Executive the part, if any, of
the amount that the Company is permitted to pay in cash under the Debt Agreement
(the “Permitted Cash Amount”).  If any
amount is payable under this Agreement in excess of the Permitted Cash Amount
(the “Debt Covenant Shortfall”) on the applicable payment date, the Company
shall pay the Permitted Cash Amount and shall pay the Debt Covenant Shortfall
(in whole or in part) as rapidly as permitted by and in accordance with the
terms of the Debt Agreement.  The
obligation to pay the Debt Covenant Shortfall shall constitute subordinated
debt of the Company until paid.  The
Company shall use commercially reasonable efforts to obtain a waiver of any
such prohibition as may be contained in any applicable Debt Agreement, but the
Company shall not be obligated to post additional collateral or to accelerate
or increase its debt payments to obtain such waiver.

 

4.3. 
Notwithstanding anything to the contrary in this Agreement, the
limitations contained in Sections 4.1 and 4.2 of this Agreement on the payment
of monies to which the Executive is entitled to receive under this Agreement
shall not apply if the triggering event that entitles the Executive to receive
monies under this Agreement is a Signing which contemplates a Sale Transaction,
as defined in the Employment Agreement between the Company and the Executive or
a consummation of a Sale Transaction.

 

5.                                       Miscellaneous.

 

5.1.  No
Liability of Officers and Directors for Severance Upon Insolvency.  Notwithstanding any other provision of this
Agreement and intending to be bound by this provision, the Executive hereby (a)
waives any right to claim payment of amounts owed to him, now or in the future,
pursuant to this Agreement from directors or officers of the Company if the
Company becomes insolvent and/or files a petition for relief under the United
States Bankruptcy Code in any state or Federal court (as determined in good
faith by the Board), and (b) fully and forever releases and discharges the
Company’s officers and directors from any and all claims, demands, liens,
actions, suits, causes of action or judgments arising out of any present or future
claim for such amounts.

 

5.2.  Waiver
of Civil Code Section 1542.  The
Company and the Executive each understand and agree that the releases provided
herein extend to all claims of every nature and kind, whether known or unknown,
suspected or unsuspected.  It is
expressly understood and agreed that the parties hereby waive the provisions of
Section 1542 of the California Civil Code 

 

5

 

(and any statute
or law of similar construction in any other jurisdiction), which provides as
follows:

 

 

A
general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor.

 

5.3.  Successors
and Assigns. The Company may assign this Agreement to any successor to all
or substantially all of its assets and business by means of liquidation,
dissolution, merger, consolidation, transfer of assets, or otherwise.  The rights of the Executive hereunder are
personal to the Executive and may not be assigned by him.

 

5.4.  Governing
Law.  This Agreement shall be
governed by and construed in accordance with the laws of the State of
California without regard to the principles of conflicts of laws.

 

5.5.  Enforcement.  Any legal proceeding arising out of or
relating to this Agreement will be instituted in the United States District
Court, Central District of California, Santa Ana Division, or if that court
does not have or will not accept jurisdiction, in any court of general
jurisdiction in the State of California, County of Orange, and the Executive
and the Company hereby consent to the personal and exclusive jurisdiction of
such court(s) and hereby waive any objection(s) that they may have to personal
jurisdiction, the laying of venue of any such proceeding and any claim or
defense of inconvenient forum.

 

5.6.  Waivers;
Separability.  The waiver by either
party hereto of any right hereunder or any failure to perform or breach by the
other party hereto will not be deemed a waiver of any other right hereunder or
any other failure or breach by the other party hereto, whether of the same or a
similar nature or otherwise.  No waiver
will be deemed to have occurred unless set forth in a writing executed by or on
behalf of the waiving party.  No such
written waiver will be deemed a continuing waiver unless specifically stated
therein, and each such waiver will operate only as to the specific term or condition
waived.  If any provision of this
Agreement is declared to be invalid or unenforceable, in whole or in part, such
invalidity or unenforceability shall not affect the remaining provisions hereof
which shall remain in full force and effect.

 

5.7.  Notices.  All notices and communications that are
required or permitted to be given hereunder must be in writing and will be
deemed to have been duly given when delivered personally or upon mailing by
registered or certified mail, postage prepaid, return receipt requested, as
follows:

 

6

 

If to the Company, to:

 

Gardenburger, Inc.

15615 Alton Parkway, Suite 350

Irvine, California  92618

Attention:  Robert Trebing

With a copy to:

 

Pepper Hamilton LLP

5 Park Plaza, Suite 1700

Irvine, California  92614

Attention:  Michael A. Rule, Esquire

 

If to Executive, to:

 

Ms.
Lori Abert Luke

1111
Duffer Lane

North
Salt Lake City, UT 84054

 

or to
such other address as may be specified in a notice given by one party to the
other party hereunder.

 

5.8.  Entire
Agreement; Amendments.  This
Agreement contains the entire agreement and understanding of the parties
relating to the provision of a retention bonus and merges and supersedes all
prior and contemporaneous discussions, agreements and understandings of every
nature relating to that subject.  This
Agreement may not be changed or modified, except by an Agreement in writing
signed by each of the parties hereto.

 

5.9.  Withholding.  The Company will withhold from any payments
due to Executive hereunder, all taxes, FICA or other amounts required to be
withheld pursuant to any applicable law.

 

5.10.  Headings
Descriptive.  The headings of
sections and paragraphs of this Agreement are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of
this Agreement.

 

5.11.  Counterparts.  This Agreement may be executed in multiple
counterparts, each of which will be deemed to be an original, but all of which
together will constitute but one and the same instrument.

 

[Signature
page follows]

 

7

 

IN WITNESS WHEREOF, the parties hereto have executed
this Agreement on the date and year first above written.

 

	
   

  	
  GARDENBURGER, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Scott
  C. Wallace

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
    Chief Executive
  Officer and President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  EXECUTIVE

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Lori Abert
  Luke

  
	
   

  	
  Lori Abert Luke

  

 

8Exhibit
10.1

 

WINMARK
CORPORATION

 

STOCK
OPTION PLAN

FOR
NONEMPLOYEE DIRECTORS

(As
Amended and Restated Through February 10, 2005)

 

 

1.             Purpose. 
This Stock Option Plan (“Plan”) for Winmark Corporation, a Minnesota
corporation (“Company”), is intended (a) to advance the interests of the
Company by providing nonemployee members of the Board of Directors with
additional incentive to promote the success of the Company’s business; (b) to
increase the proprietary interest of the nonemployee directors in the success
of the Company; and (c) to attract, reward, and retain highly qualified
individuals as nonemployee directors of the Company.

 

2.             Definitions. 
In addition to definitions that may be contained elsewhere herein, for
purposes of this Plan and option agreements entered into pursuant hereto, the
following terms are defined as follows:

 

(a)           “Affiliate” shall mean a Parent or
Subsidiary of the Company.

 

(b)
          “Board” means the Board of
Directors of the Company.

 

(c)           “Code” means the Internal Revenue
Code of 1986, as amended from time to time, and any successor thereto.

 

(d)           “Committee” means the Committee
referred to in Section 3 of the Plan.

 

(e)           “Disability” means disability as
determined under procedures established by the Committee for purposes of this
Plan or as defined in Section 22(e)(3) of the Code.

 

(f)            “Exchange Act” means the Securities
Exchange Act of 1934, as amended from time to time.

 

(g)           “Fair Market Value” as of any date
shall mean (i) if such stock is listed on the Nasdaq National Market, Nasdaq
SmallCap Market, or an established stock exchange, the price of such stock at
the close of the regular trading session of such market or exchange on such
date, as reported by The Wall Street Journal or a comparable reporting
service, or, if no sale of such stock shall have occurred on such date, on the
next preceding day on which there was a sale of stock; (ii) if such stock
is not so listed on the Nasdaq National Market, Nasdaq SmallCap Market, or an
established stock exchange, the average of the closing “bid” and “asked” prices
quoted by the OTC Bulletin Board, the National Quotation Bureau, or any
comparable reporting service on such date or, if there are no quoted “bid” and “asked”
prices on such date, on the next preceding date for which there are such
quotes; or (iii) if such stock is not publicly traded as of such date, the per
share value as determined by the Board, or the Committee, in its sole
discretion, pursuant to the Company’s By-Laws.

 

(h)           “Option” or “Stock Option” means a
nonqualified stock option granted pursuant to Section 5 below.

 

 

(i)            “Option Agreement” means any written
agreement, contract, or other instrument or document evidencing any Option
granted hereunder and signed by both the Company and the Participant.

 

(j)            “Parent” shall mean any corporation
which owns, directly or indirectly in an unbroken chain, fifty percent (50%) or
more of the total voting power of the Company’s outstanding stock.

 

(k)           “Participant” means any person
entitled to participate in this Plan as set forth in Section 4 hereof.

 

(l)            The “Plan” means the Winmark
Corporation Stock Option Plan for Nonemployee Directors, as amended hereafter
from time to time, including the form of Option Agreement as modified by the
Committee from time to time.

 

(m)          “Stock” means the Common Stock, no par
value per share, of the Company.

 

(n)           A “Subsidiary” shall mean any
corporation of which fifty percent (50%) or more of the total voting power of
outstanding stock is owned, directly or indirectly in an unbroken chain, by the
Company.

 

(o)           “Subsidiary Board” shall mean the
board of directors of any Subsidiary of the Company.

 

 

3.             Administration. 
The Plan will be administered by the Company’s Compensation Committee (“Committee”).   Stock Options under the Plan will be granted
pursuant to Section 5.  The Committee
will have full authority to interpret the Plan, to promulgate such rules and
regulations with respect to the Plan as it deems desirable, and to make all
other determinations necessary or appropriate for the administration of the
Plan.  Such determinations will be final
and binding upon all persons having an interest in the Plan.

 

4.             Eligibility. 
Options will be granted only to persons who at the time of the grant are
members of the Board and who are not otherwise employees of the Company or any
Affiliate of the Company (“Nonemployee Director” or “Nonemployee Directors”).

 

 

5.             Options.

 

(a)           Initial and Annual Grants.

 

                (i)            Pursuant to this Plan, each person elected to serve as a
Nonemployee Director of the Board will be granted an Option to purchase
Twenty-Five Thousand (25,000) shares of Stock (the “Initial Option”).  Except as otherwise provided herein, each
such Initial Option:  (i) will be granted
to the Participant by the Board at the meeting coinciding with or immediately
following the Participant’s election; (ii) will be subject to all terms of this
Plan; and (iii) will vest and become exercisable in five equal annual
increments, beginning on the first anniversary of the date of the grant of the
Initial Option; provided, in each instance, that the Participant has
continuously served as a Nonemployee Director until such date, and if not, such
Initial Option or any nonvested portion thereof will be forfeited in its
entirety.  Each such vested Initial
Option will remain exercisable for a term ending on the earlier of the date
that is five years from the date of vesting of the first increment or that is
thirty days following the last day on which the Participant served as a
Nonemployee Director.

 

                (ii)           Each Participant may be entitled to the grant of an annual
Option to purchase that number of shares of Stock as determined by the
Committee (the “Annual Option”).  Except
as otherwise provided herein, each such Annual Option:  (i) will be granted to the Participant by the
Board at the meeting coinciding with or immediately following the Participant’s
election or re-election; (ii) will be subject to all terms of this Plan; and
(iii) will vest and become exercisable in five equal annual increments,
beginning on the first anniversary of the date of the grant of the Annual
Option; provided, in each instance, that the Participant has continuously
served as a Nonemployee Director until such date, and if not, such Annual
Option or any nonvested portion thereof will be forfeited in its entirety.  Each such vested Annual Option will remain
exercisable for a term ending on the earlier of the date that is five years
from the date of vesting of the first increment or that is thirty days
following the last day on which the Participant served as a Nonemployee
Director.

 

(b)           Exercise Price.  The exercise price per share of Stock
purchasable under an Option granted pursuant to Section 5(a) will be the Fair
Market Value on the day the Option is granted to the Participant.

 

(c)           Method of Exercise.  Stock Options may be exercised in whole or in
part at any time during the term of the Option, as described in Section
5(a).  Payment of the exercise price will
be made by (i) cash or certified bank check, (ii) delivery of shares of Stock
already owned by the Participant, or (iii) any combination of the
foregoing.  For purposes of this
paragraph, shares of Stock that are delivered in payment of the exercise price
will be valued at their Fair Market Value as of the date of the exercise of the
Option.

 

 

(d)           Withholding.  The Company’s obligation to deliver shares
upon the exercise of Options will be subject to applicable federal, state, and
local tax withholding requirements. 
Unless otherwise determined by the Committee, the Participant may satisfy
such obligation, in whole or in part, by electing to have the Company or its
Affiliate withhold shares of Stock otherwise issuable to the Participant as a
result of the exercise of the Stock Option, or by electing to deliver to the
Company already-owned shares of Stock, in either case having a Fair Market
Value equal to the minimum required tax withholding, based on the minimum
statutory withholding rates for federal and state tax purposes, including
payroll taxes, that are applicable to the supplemental income resulting from
such exercise.  In no event may the
Company or its Affiliate withhold shares having a Fair Market Value in excess
of such statutory minimum required tax withholding.  The Participant’s election to have shares
withheld or to deliver already-owned shares of Common Stock for this purpose
shall be made on or before the date the Stock Option is exercised or, if later,
the date that the amount of tax to be withheld is determined under applicable
tax law.  Such election shall be approved
by the Committee and otherwise comply with such rules as the Committee may
adopt to assure compliance with Rule 16b-3, or any successor
provision, as then in effect, of the General Rules and Regulations under the
Securities Exchange Act of 1934, if applicable.

 

(e)           Restrictions on Transfer of Option.  Each Option granted under this Plan will be
transferable only by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Code or Title I of
the Employee Retirement Income Security Act (“ERISA”), or the rules
thereunder.  Except as permitted by the
preceding sentence, no Option granted under the Plan or any of the rights and
privileges thereby conferred will be transferred, assigned, pledged, or
hypothecated in any way (whether by operation of law or otherwise), and no such
option, right, or privilege will be subject to execution, attachment, or
similar process.  An Option may be
exercised during the Participant’s lifetime only by the Participant or his or
her guardian or legal representative.

 

6.             Shares of Stock Subject to the Plan.

 

                (a)           General.  There will be reserved and available for
issuance upon the exercise of Options granted from time to time under the Plan
an aggregate of Two Hundred Thousand (200,000) shares of the Stock.  Such shares may consist, in whole or in part,
of authorized but unissued shares of Stock or issued shares that have been
reacquired by the Company.  If any shares
subject to an Option are not issued because the Option is not exercised, such
shares will again be available for distribution in connection with future
options.

 

                (b)           Adjustments
for Recapitalizations.  In the event
of any merger, reorganization, consolidation, recapitalization, stock dividend,
stock split, or other change in corporate structure affecting the Stock, such
substitution or adjustment will be made in the number and option price of
shares purchasable pursuant to Section 5(a), in the aggregate number of shares
reserved for issuance under the Plan under this Section 6, and in the number
and option price of shares subject to outstanding Options granted under the
Plan as may be determined to be appropriate by the Board to prevent dilution or
enlargement of Option rights granted hereunder, provided that the number of
shares subject to any Option will always be a whole number.

 

 

7.             Death or Disability of Participant.

 

(a)           Termination by Death.  If a Participant’s service on the Board or
any Subsidiary Board terminates by reason of death, any Stock Option held by
such Participant may thereafter be exercised by the legal representative of the
Participant’s estate or by any person who acquired the Option by will or the
laws of descent and distribution for a period of one year from the date of such
death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.  The
Option shall be exercisable only to the extent that such Option was exercisable
as of the date of death.

 

(b)           Termination by Reason of
Disability.  If a Participant’s
service on the Board or any Subsidiary Board terminates by reason of
Disability, the Participant may exercise such portion of the Option as was
exercisable at the date of termination until the expiration of the stated term
of such Stock Option; provided, however, that, if the Participant dies prior to
the expiration of the Option, any unexercised Stock Option held by such
Participant will thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one year from the date of death
or until the expiration of the stated term of such Stock Option, whichever
period is the shorter.

 

8.             Restrictions on Transfer of Stock.  Unless a registration statement under the
Securities Act of 1933 and applicable state securities laws is in effect with
respect to Stock to be purchased upon exercise of options to be granted under
the Plan, the Company may require that the Participant represent to and agree
with the Company in writing that he or she is acquiring such shares of Stock
for the purpose of investment and with no present intention to transfer, sell,
or otherwise dispose of such shares of Stock. 
Further, in the absence of such registration, no shares of Stock
acquired pursuant to exercise at an Option may be transferred unless, in the
opinion of counsel to the Company, such transfer is in compliance with
applicable securities laws, and each certificate representing any shares of
Stock issued to a Participant hereunder will have endorsed thereon an
appropriate legend referring to the restrictions against transfer.  As a further condition to the issuance of
Stock to Participant, Participant agrees to the following:

 

                                                                (a)           Lock-Up Period Limitation.  In the event the Company advises Participant
that it plans an underwritten public offering of its Stock in compliance with
the Securities Act of 1933, as amended, and the underwriter(s) seek to impose
restrictions under which certain shareholders may not sell or contract to sell
or grant any option to buy or otherwise dispose of part or all of their rights
to the Stock underlying Options, Participant will not, for a period not to
exceed 180 days from the prospectus, sell or contract to sell or grant an
option to buy or otherwise dispose of any Option granted to Participant
pursuant to the Plan or any of the underlying shares of Stock without the prior
written consent of the underwriter(s) or its representative(s).

 

                                                                (b)           Blue-Sky Limitation.  In the event the Company makes any public
offering of its securities and determines in its sole discretion that it is
necessary to reduce the number of issued but unexercised Options so as to
comply with any state’s securities or Blue Sky law limitations with respect
thereto, the Board shall have the right (i) to accelerate the exercisability of
any Option and the date on which such Option must be exercised, provided that
the Company gives Participant prior written notice of such acceleration, and
(ii) to cancel any Options or portions thereof which Participant does not
exercise prior to or contemporaneously with such public offering.

 

 

                                                                (c)           Accounting Compliance.  In the event of an acquisition of the Company
through the sale of substantially all of the Company’s assets and the
consequent discontinuance of its business or through a merger, consolidation,
exchange, reorganization, reclassification, extraordinary dividend, divestiture
or liquidation of the Company (collectively referred to as a “transaction”),
Participant will comply with Rule 145 of the Securities Act of 1933 and any
other restrictions imposed under other applicable legal or accounting
principles if Participant is an “affiliate” (as defined in such applicable
legal and accounting principles) at the time of the transaction, and
Participant will execute any documents necessary to ensure compliance with such
rules.

 

The Company reserves the right to place a
legend on any stock certificate issued upon the exercise of an Award pursuant
to the Plan to assure compliance with this Section 8.

 

9.             Amendment of the Plan.  The Board may suspend or terminate the Plan
or any portion thereof at any time. 
Further, either the Board or the Committee may amend the Plan from time
to time as may be deemed to be in the best interests of the Company and its
Affiliates; provided, however, that no such amendment, alteration, or
discontinuation will be made (a) that would impair the rights of a Nonemployee
Director with respect to Options theretofore awarded, without such person’s
consent, or (b) without the approval of the shareholders if such approval is
necessary to comply with any legal, tax, or regulatory requirement, including
any approval requirement that is a prerequisite for exemptive relief from
Section 16(b) of the Exchange Act.

 

10.           Applicability of Plan to Outstanding Stock Options.  This Plan will not affect the terms and
conditions of any Stock Options currently outstanding to any Nonemployee
Director of the Company, nor will it affect any of the rights of any
Nonemployee Director to whom such a Stock Option was granted.

 

11.           Effective Date of Plan.  This Plan was originally effective September
24, 1993.  The restated Plan will become
effective upon the date of its adoption by the Board, subject to approval of
the shareholders of the Company at the next shareholders’ meeting.

 

12.           Change in Control Provisions.

 

(a)           Impact of Event.  All options granted hereunder will become
fully exercisable and vested in the event of a “Change in Control” as defined
in Section 12(b) or a “Potential Change in Control” as defined in Section
12(c).

 

(b)           Definition of “Change in Control.”  For purposes of Section 12(a), a “Change In
Control” means the happening of any of the following:

 

(i)            When any “person” as defined in
Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d)
thereof, including a “group” as defined in Section 13(d) of the Exchange Act,
but excluding the Company or any subsidiary or parent or any employee benefit
plan sponsored or maintained by the Company or any subsidiary or parent
(including any trustee of such plan acting as trustee), directly or indirectly,
becomes the “Beneficial Owner” (as defined in Rule 13d-3 under the Exchange
Act, as amended from time to time), of securities of the Company representing
20 percent or more of the combined voting power of the Company’s then
outstanding securities;

 

 

(ii)           When, during any period of 24
consecutive months during the existence of the Plan, the individuals who, at
the beginning of such period, constitute the Board (“Incumbent Directors”)
cease for any reason other than death to constitute at least a majority
thereof; provided, however, that a director who was not a director at the
beginning of such 24-month period will be deemed to have satisfied such
24-month requirement (and be deemed an Incumbent Director) if such director was
elected by, or on the recommendation or, or with the approval of, at least 60%
of the directors who then qualified as Incumbent Directors either actually
(because they were directors at the beginning of such 24-month period) or by
prior operation of this Section 12(b)(ii); or

 

(iii)          The approval by the shareholders of an
acquisition of the Company by an entity other than the Company or a subsidiary
or parent through purchase of assets, or by merger, or otherwise.

 

(c)           Definition of “Potential Change in
Control.”  For purposes of Section
12(a), a “Potential Change in Control” means the approval by the Board of an
agreement by the Company the consummation of which would result in a Change in
Control of the Company as defined in Section 12(b).

 

13.           Nonexclusivity of the Plan.  The adoption of this Plan will not be
construed as limiting the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including the granting of stock options
otherwise than under this Plan.  Such
arrangements may be either generally applicable or applicable only in specific
cases.

 

14.           Miscellaneous.

 

(a)           Governing Law.  This Plan will be governed by and construed
in accordance with the laws of the State of Minnesota, and all terms will be
interpreted and construed so that there will not be committed any violation of
applicable state or federal securities laws.

 

(b)           No Additional Rights of Service.  Participation in or eligibility for
participation in the Plan does not grant any person any right of service as a
Director, and the Company retains the right to terminate service of any
Director pursuant to Company’s Articles, Bylaws, and applicable law.

 

APPROVED and adopted by the
Board of Directors of Winmark Corporation as of February 10, 2005.

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