Document:

EX-10.6

 

Exhibit 10.6

DIAMOND HILL INVESTMENT GROUP, INC.

2005 EMPLOYEE AND DIRECTOR EQUITY INCENTIVE PLAN

(Effective May 12, 2005)

      1. Purposes of the Plan. The purposes of this Plan are (a) to attract and retain the
best available personnel for positions of substantial responsibility, (b) to provide additional
incentive to Employees, Directors and Consultants, and (c) to promote the success of the Company’s
business.

      The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted
Stock Units, Restricted Stock, Stock Grants and Stock Appreciation Rights.

      2. Definitions. As used herein, the following definitions shall apply:

            (a) “Administrator” means the Board or any of its Committees as shall be administering the
Plan, in accordance with Section 4 of the Plan.

            (b) “Applicable Laws” means the requirements relating to the administration of equity-based
awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any
stock exchange or quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under
the Plan.

            (c) “Award” means, individually or collectively, a grant under the Plan of Incentive Stock
Options, Nonstatutory Stock Options, Restricted Stock Units, Restricted Stock, Stock Grants or
Stock Appreciation Rights.

            (d) “Award Agreement” means the written or electronic agreement setting forth the terms and
provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the
terms and conditions of the Plan.

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

            (f) “Cash Position” means as to any Performance Period, the Company’s level of cash and cash
equivalents.

            (g) “Change in Control” means the occurrence of any of the following events:

                  (i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or more of the total
voting power represented by the Company’s then outstanding voting securities;

                  (ii) The consummation of the sale or disposition by the Company of all or substantially all of
the Company’s assets;

 

 

                  (iii) A change in the composition of the Board occurring within a two-year period, as a result
of which fewer than a majority of the directors are Incumbent Directors; or

                  (iv) The consummation of a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity or its Parent) at least fifty
percent (50%) of the total voting power represented by the voting securities of the Company or such
surviving entity or its Parent outstanding immediately after such merger or consolidation.

            (h) “Code” means the Internal Revenue Code of 1986, as amended.

            (i) “Committee” means a committee of Directors appointed by the Board in accordance with
Section 4 of the Plan.

            (j) “Common Stock” means the common stock of the Company.

            (k) “Company” means Diamond Hill Investment Group, Inc., an Ohio corporation.

            (l) “Consultant” means any natural person, including an advisor, engaged by the Company to
render services to the Company.

            (m) “Director” means a member of the Board.

            (n) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the
Code.

            (o) “Earnings Per Share” means as to any Performance Period, the Company’s or a business
unit’s Net Income, divided by a weighted average number of Common Stock outstanding and dilutive
common equivalent shares deemed outstanding.

            (p) “Employee” means any person, including an Officer or Director, employed by the Company or
any Parent or Subsidiary of the Company, with the status of employment determined based upon such
factors as are deemed appropriate by the Administrator in its discretion, subject to any
requirements of the Code or the Applicable Laws. Neither service solely as a Director nor payment
of a Director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

            (q) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

            (r) “Fair Market Value” means, as of any date, the value of Common Stock determined as
follows:

                  (i) If the Common Stock is listed on any established stock exchange or a national market
system including, without limitation, The NASDAQ National Market or The

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NASDAQ SmallCap Market of The NASDAQ Stock Market, its Fair Market Value shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system on the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;

                  (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling
prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between
the high bid and low asked prices for the Common Stock on the day of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems reliable; or

                  (iii) In the absence of an established market for the Common Stock, the Fair Market Value
shall be determined in good faith by the Administrator.

            (s) “Fiscal Year” means the fiscal year of the Company.

            (t) “Freestanding SAR” means a Stock Appreciation Right that is granted independent of any
Option.

            (u) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

            (v) “Incumbent Directors” means directors who either (i) are Directors as of the effective
date of the Plan, or (ii) are elected, or nominated for election, to the Board with the
affirmative votes of at least a majority of the Incumbent Directors at the time of such election
or nomination (but will not include an individual whose election or nomination is in connection
with an actual or threatened proxy contest relating to the election of directors to the Company).

            (w) “Individual Objectives” means as to a Participant for any Performance Period, the
objective and measurable goals set by a process and approved by the Administrator (in its
discretion).

            (x) “Net Income” means as to any Performance Period, the Company’s or a business unit’s
income after taxes.

            (y) “Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive Stock
Option.

            (z) “Officer” means a person who is an officer of the Company within the meaning of Section
16 of the Exchange Act and the rules and regulations promulgated thereunder.

            (aa) “Operating Cash Flow” means as to any Performance Period, the Company’s or a business
unit’s sum of Net Income plus depreciation and amortization less capital expenditures plus changes
in working capital comprised of accounts receivable, inventories, other current assets, trade
accounts payable, accrued expenses, product warranty, advance payments from customers and
long-term accrued expenses.

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            (bb) “Operating Income” means as to any Performance Period, the Company’s or a business
unit’s income from operations but excluding any unusual items.

            (cc) “Option” means an Award of a right to purchase Common Stock or Restricted Stock granted
pursuant to Section 6 of the Plan.

            (dd) “Option Exchange Program” means a program whereby outstanding Options are surrendered in
exchange for Options with a lower exercise price.

            (ee) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in
Section 424(e) of the Code.

            (ff) “Participant” means the holder of an outstanding Award.

            (gg) “Performance Goals” means the goal(s) (or combined goal(s)) determined by the
Administrator (in its discretion) to be applicable to a Participant with respect to an Award. As
determined by the Administrator, the Performance Goals applicable to an Award may provide for a
targeted level or levels of achievement using one or more of the following measures: (i) Cash
Position, (ii) Earnings Per Share, (iii) Individual Objectives, (iv) Net Income, (v) Operating
Cash Flow, (vi) Operating Income, (vii) Return on Assets, (viii) Return on Equity, (ix) Return on
Sales, (x) Revenue, and (xi) Total Shareholder Return. The Performance Goals may differ from
Participant to Participant and from Award to Award. Prior to the grant date, the Administrator
shall determine whether any significant element(s) shall be included in or excluded from the
calculation of any Performance Goal with respect to any Participant. For example (but not by way
of limitation), the Administrator may determine that the measures for one or more Performance
Goals shall be based upon the Company’s pro-forma results and/or results in accordance with
generally accepted accounting principles.

            (hh) “Performance Period” means any Fiscal Year or such other period as determined by the
Administrator in its sole discretion.

            (ii) “Plan” means this 2005 Employee and Director Equity Incentive Plan.

            (jj) “Restricted Stock” means Common Stock acquired pursuant to an Award that is subject to a
vesting schedule and the Company’s repurchase option.

            (kk) “Restricted Stock Unit” means the right to receive Restricted Stock acquired pursuant to
a grant under Section 7 of the Plan.

            (ll) “Return on Assets” means as to any Performance Period, the percentage equal to the
Company’s or a business unit’s Operating Income before incentive compensation, divided by average
net Company or business unit, as applicable, assets.

            (mm) “Return on Equity” means as to any Performance Period, the percentage equal to the
Company’s Net Income divided by average shareholder’s equity.

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            (nn) “Return on Sales” means as to any Performance Period, the percentage equal to the
Company’s or a business unit’s Operating Income before incentive compensation, divided by the
Company’s or the business unit’s, as applicable, revenue.

            (oo) “Revenue” means as to any Performance Period, the Company’s or business unit’s net
sales.

            (pp) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in
effect when discretion is being exercised with respect to the Plan.

            (qq) “Section 16(b)” means Section 16(b) of the Exchange Act.

            (rr) “Service Provider” means an Employee, Director or Consultant.

            (ss) “Share” means a share of Common Stock or Restricted Stock, as the case may be and as
adjusted in accordance with Section 15 of the Plan.

            (tt) “Stock Appreciation Right” or “SAR” means an Award, granted alone or in connection with
an Option, that is designated as a Stock Appreciation Right pursuant to Section 9 of the Plan.

            (uu) “Stock Grant” means an Award of Shares of Common Stock acquired pursuant to a grant
under Section 8 of the Plan.

            (vv) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as
defined in Section 424(f) of the Code.

            (ww) “Tandem SAR” means a Stock Appreciation Right that is granted in connection with a
related Option, the exercise of which will require forfeiture of the right to purchase an equal
number of Shares under the related Option (and when a Share is purchased under the Option, the
Stock Appreciation Right will be canceled to the same extent).

            (xx) “Ten Percent Holder” means a person who owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary.

            (yy) “Total Shareholder Return” means as to any Performance Period, the total return (change
in Share price plus reinvestment of any dividends) of a Share.

      3. Stock Subject to the Plan.

            (a) Number of Shares. Subject to the provisions of Section 15 of the Plan, the maximum
aggregate number of Shares that may be granted and/or sold under the Plan is the total of (i)
500,000 Shares and (ii) an annual increase to be added on the last day of the Fiscal Year beginning
in 2005, equal to the lesser of (A) 100,000 Shares, (B) 5% of the Company’s total outstanding
Shares on such date, or (C) a lesser amount determined by the Board. The Shares may be authorized,
but unissued, or reacquired Common Stock. Shares will not be deemed to have been issued pursuant to
the Plan with respect to any portion of an Award that is settled in

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cash. Upon payment in Shares pursuant to the exercise of a SAR, the number of Shares available
for issuance under the Plan will be reduced only by the number of Shares actually issued in such
payment. If the exercise price of an Award is paid by tender to the Company of Shares owned by the
Participant, the number of Shares available for issuance under the Plan will be reduced by the
gross number of Shares for which the Award is exercised.

            (b) Share
Usage. If an Award expires or becomes unexercisable without having been exercised
in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which
were subject thereto shall become available for future grant or sale under the Plan (unless the
Plan has terminated); provided, however, that Shares that have actually been issued under the Plan
shall not be returned to the Plan and shall not become available for future distribution under the
Plan, except that if unvested Shares of Restricted Stock are repurchased by the Company, such
Shares shall become available for future grant under the Plan.

      4. Administration of the Plan.

            (a) Procedure.

                  (i) Section 162(m). To the extent that the Administrator determines it to be desirable to
qualify Awards granted hereunder as “performance-based compensation” within the meaning of Section
162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside
directors” within the meaning of Section 162(m) of the Code.

                  (ii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under
Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements
for exemption under Rule 16b-3.

                  (iii) Other Administration. Other than as provided above, the Plan shall be administered by
(A) the Board, or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.

            (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a
Committee, subject to the specific duties delegated by the Board to such Committee, the
Administrator shall have the authority, at its discretion:

                  (i) to determine the Fair Market Value;

                  (ii) to select the Service Providers to whom Awards may be granted hereunder;

                  (iii) to determine the number of Shares of Common Stock to be covered by each Award granted
hereunder;

                  (iv) to approve forms of agreement for use under the Plan;

                  (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any
Award granted hereunder. Such terms and conditions include, but are

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not limited to, the exercise price, the time or times when Awards may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions,
and any restriction or limitation regarding any Award or the Shares of Common Stock relating
thereto, based in each case on such factors as the Administrator, in its sole discretion, shall
determine;

                  (vi) to reduce the exercise price of any Award to the then current Fair Market Value if the
Fair Market Value of the Common Stock covered by such Award shall have declined since the date the
Award was granted;

                  (vii) to institute an Option Exchange Program;

                  (viii) to construe and interpret the terms of the Plan and Awards granted pursuant to the
Plan;

                  (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including
rules and regulations relating to sub-plans established for the purpose of satisfying applicable
foreign laws;

                  (x) to modify or amend each Award (subject to Section 25 of the Plan), including the
discretionary authority to extend the post-termination exercisability period of Awards longer than
is otherwise provided for in the Plan;

                  (xi) to allow Participants to satisfy withholding tax obligations by electing to have the
Company withhold from the Shares to be issued upon exercise of an Award that number of Shares
having a Fair Market Value equal to the minimum amount required to be withheld;

                  (xii) to authorize any person to execute on behalf of the Company any instrument required to
effect the grant of an Award previously granted by the Administrator; and

                  (xiii) to make all other determinations deemed necessary or advisable for administering the
Plan.

            (c) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and
interpretations shall be final and binding on all Participants and any other holders of Awards.

      5. Eligibility. Awards may be granted to Service Providers; provided, however, that
Incentive Stock Options may be granted only to Employees.

      6. Stock Options.

            (a) Share Limitations.

                  (i) No Service Provider shall be granted, in any Fiscal Year, Options to purchase more than
25,000 Shares. Notwithstanding the foregoing limitation, in connection with his or her initial
service as a Service Provider, a Service Provider may be granted Options to

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purchase up to an additional 25,000 Shares. The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company’s capitalization as described in
Section 15.

                  (ii) Each Option shall be designated in the Award Agreement as either an Incentive Stock
Option or a Nonstatutory Stock Option. Notwithstanding such designation, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Participant during any calendar year (under all plans of the
Company and any Parent or Subsidiary of the Company) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a)(ii), Incentive Stock
Options shall be taken into account in the order in which they were granted. The Fair Market Value
of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

                  (iii) If an Option is cancelled in the same Fiscal Year in which it was granted (other than in
connection with a transaction described in Section 15), the cancelled Option will be counted
against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation of the Option and
the grant of a new Option.

            (b) Term of Option. The term of each Option shall be stated in the Award Agreement. In the
case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such
shorter term as may be provided in the Award Agreement. Moreover, in the case of an Incentive Stock
Option granted to a Participant who, at the time the Incentive Stock Option is granted, is a Ten
Percent Holder, the term of the Incentive Stock Option shall be five (5) years from the date of
grant or such shorter term as may be provided in the Award Agreement.

            (c) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator
shall fix the period within which the Option may be exercised and shall determine any conditions
that must be satisfied before the Option may be exercised.

            (d) Option Exercise Price. The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be determined by the Administrator, subject to the following:

                  (i) In the case of an Incentive Stock Option that is:

                        (a) granted to an Employee who, at the time the Incentive Stock Option is granted, is a Ten
Percent Holder, the per Share exercise price shall be no less than one hundred ten percent (110%)
of the Fair Market Value per Share on the date of grant; and

                        (b) granted to any Employee other than a Ten Percent Holder, the per Share exercise price
shall be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of
grant.

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      Notwithstanding the foregoing, Incentive Stock Options may be granted with a per Share
exercise price of less than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant pursuant to a merger or other corporate transaction.

                  (ii) In the case of a Nonstatutory Stock Option, including a Nonstatutory Stock Option
intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the
Code, the per Share exercise price shall be no less than one hundred percent (100%) of the Fair
Market Value per Share on the date of grant.

            (e) Notification Upon Disqualifying Disposition Under Section 421(b) of the Code. Each Award
Agreement with respect to an Incentive Stock Option shall require the Participant to notify the
Company of any disposition of Shares issued pursuant to the exercise of such Option under the
circumstances described in Section 421(b) of the Code (relating to certain disqualifying
dispositions), within ten (10) days of such disposition

      7. Restricted Stock Units/Restricted Stock.

            (a) Grant of Restricted Stock Units or Restricted Stock. Subject to the terms and provisions
of the Plan, the Administrator, at any time and from time to time, may grant Restricted Stock Units
or Restricted Stock to Participants in such amounts as the Administrator shall determine, in its
sole discretion, provided that during any Fiscal Year, no Service Provider will receive grants of
Restricted Stock Units/Restricted Stock for more than an aggregate of 25,000 Shares of Restricted
Stock. Notwithstanding the foregoing limitation, in connection with his or her initial service as
a Service Provider, a Service Provider may be granted an aggregate of up to an additional 25,000
Shares of Restricted Stock and/or Shares of Restricted Stock underlying Restricted Stock Units. The
foregoing limitations shall be adjusted proportionately in connection with any change in the
Company’s capitalization as described in Section 15.

            (b) Issue and Vesting Date(s). At the time of the grant of Restricted Stock Units or
Restricted Stock, the Administrator shall establish issue and vesting date(s) with respect to the
Restricted Stock. The Administrator may divide the Restricted Stock into classes and assign
different issue dates or vesting schedules to such classes.

            (c) Repurchase Option. Each Restricted Stock Unit or Restricted Stock grant shall be
evidenced by an Award Agreement. The Award Agreement will grant the Company a repurchase option
with respect to any unvested Shares of Restricted Stock, exercisable upon the voluntary or
involuntary termination of the Service Provider’s relationship with the Company for any reason
(including death or Disability). The purchase price for Shares repurchased pursuant to the Award
Agreement will be the original purchase price paid for the Shares, if any, and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase option will lapse
at a rate determined by the Administrator.

            (d) Other Restrictions. The Administrator shall impose such other conditions and/or
restrictions on the Restricted Stock Units/Restricted Stock granted pursuant to the Plan as it may
deem advisable including, without limitation, a requirement that Participants pay a stipulated
purchase price for each share of Restricted Stock and/or restrictions under applicable federal or
state securities laws.

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            (e) Rights as a Shareholder. The holder of Restricted Stock shall have the rights equivalent
to those of a shareholder and may exercise full voting powers with respected to the Restricted
Stock during the restriction period.

            (f) Dividends And Other Distributions. During the period of restriction, Participants holding
Restricted Stock granted hereunder may, if the Administrator so determines, be credited with
regular cash dividends paid with respect to the underlying Shares while they are so held. The
Administrator may apply any restrictions to the dividends that the Administrator deems appropriate.
Without limiting the generality of the preceding sentence, if the grant or vesting of Restricted
Stock granted to a Participant is designed to comply with the requirements of “performance-based
compensation” under Section 162(m) of the Code, the Administrator may apply any restrictions it
deems appropriate to the payment of dividends declared with respect to such Restricted Stock, such
that the dividends and/or the Restricted Stock maintain eligibility therefor.

      8. Stock Grants.

            (a) Stock Grants. Subject to the terms and provisions of the Plan, the Administrator, at any
time and from time to time, may award Stock Grants in such amounts as the Administrator shall
determine, in its sole discretion, provided that during any Fiscal Year, no Service Provider will
receive Stock Grants for more than an aggregate of 25,000 Shares of Common Stock. Notwithstanding
the foregoing limitation, in connection with his or her initial service as a Service Provider, a
Service Provider may be granted an aggregate of up to an additional 25,000 Shares pursuant to Stock
Grants. The foregoing limitations shall be adjusted proportionately in connection with any change
in the Company’s capitalization as described in Section 15.

            (b) Restrictions. Generally, Shares issued in connection with a Stock Grant will not have any
vesting requirements or other restrictions; provided, however, that the Administrator may impose
such other conditions and/or restrictions on the Common Stock issued pursuant to Stock Grants as it
may deem advisable, in its sole discretion. Each Stock Grant shall be evidenced by an Award
Agreement.

      9. Stock Appreciation Rights.

            (a) Grant of SARs. Subject to the terms and conditions of the Plan, a SAR may be granted to
Service Providers at any time and from time to time as will be determined by the Administrator, in
its sole discretion, provided that during any Fiscal Year, no Service Provider will be granted SARs
covering more than 25,000 Shares. Notwithstanding the foregoing limitation, in connection with his
or her initial service as a Service Provider, a Service Provider may be granted SARs covering up to
an additional 25,000 Shares. The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company’s capitalization as described in Section 15. The
Administrator may grant Freestanding SARs, Tandem SARs, or any combination thereof.

            (b) Base Value and Other Terms. The Administrator, subject to the provisions of the Plan, will
have complete discretion to determine the terms and conditions of SARs granted

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under the Plan. The base value of Tandem SARs will equal the exercise price of the related
Option; provided, however, that the base value of a SAR shall not be less than one hundred percent
(100%) of the Fair Market Value of a Share on the grant date. A SAR may be exercised for all or
any portion of the Shares as to which it is exercisable; provided, that no partial exercise of a
SAR shall be for an aggregate base value of less than $1,000. The partial exercise of a SAR shall
not cause the expiration, termination or cancellation of the remaining portion thereof.

            (c) Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares
subject to the related Option upon the surrender of the right to exercise the equivalent portion of
the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its
related Option is then exercisable. With respect to a Tandem SAR granted in connection with an
Incentive Stock Option: (i) the Tandem SAR will expire no later than the expiration of the
underlying Incentive Stock Option; (ii) the value of the payout with respect to the Tandem SAR will
be for no more than one hundred percent (100%) of the difference between the exercise price of the
underlying Incentive Stock Option and the Fair Market Value of the Shares subject to the underlying
Incentive Stock Option at the time the Tandem SAR is exercised; and (iii) the Tandem SAR will be
exercisable only when the Fair Market Value of the Shares subject to the Incentive Stock Option
exceeds the exercise price of the Incentive Stock Option.

            (d) Exercise of Freestanding SARs. Freestanding SARs will be exercisable on such terms and
conditions as the Administrator, in its sole discretion, will determine.

            (e) Payment of SAR Amount. Upon exercise of a SAR, a Participant will be entitled to receive
payment from the Company in Shares of equivalent value to an amount determined by multiplying:

                  (i) The difference between the Fair Market Value of a Share on the date of exercise over the
base value; and

                  (ii) The number of Shares with respect to which the SAR is exercised.

            (f) Other Provisions. Each SAR grant will be evidenced by an Award Agreement that will specify
the exercise price, the term of the SAR, the conditions of exercise, and such other terms and
conditions as the Administrator, in its sole discretion, will determine.

      10. Performance-Based Restrictions on Awards. Any Award granted under the Plan may
vest subject to the satisfaction of one or more performance objectives. The Administrator may set
performance objectives, in its sole discretion, and the time period during which the performance
objectives must be met will be called the “Performance Period.”

            (a) General Performance Objectives. The Administrator may set performance objectives based
upon the achievement of Company-wide, divisional, or individual goals, or any other basis
determined by the Administrator in its discretion.

            (b) Section 162(m) Performance Objectives. For purposes of qualifying Awards as
“performance-based compensation” under Section 162(m) of the Code, the Committee, in its
discretion, may determine that the performance objectives applicable to

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Awards will be based on the achievement of Performance Goals. The Performance Goals will be
set by the Committee on or before the latest date permissible to enable the Awards to qualify as
“performance-based compensation” under Section 162(m) of the Code. In granting Awards which are
intended to qualify under Section 162(m) of the Code, the Committee will follow any procedures
determined by it from time to time to be necessary or appropriate to ensure qualification of the
Awards under Section 162(m) of the Code (e.g., in determining the Performance Goals).

      11. Exercise of Awards.

            (a) Procedure for Exercise. Any Award granted under the Plan shall be exercisable according to
the terms of the Plan and at such times and under such conditions as determined by the
Administrator and set forth in the Award Agreement. An Award may not be exercised for a fraction of
a Share. An Award shall be deemed exercised when the Company receives: (A) written or electronic
notice of exercise (in accordance with the Award Agreement) from the person entitled to exercise
the Award, and (B) full payment, as required by the Award Agreement and the Plan, for the Shares
with respect to which the Award is exercised. Shares issued upon exercise of an Award shall be
issued in the name of the Participant or, if requested by the Participant, in the name of the
Participant and his or her spouse and/or to a trust if, under Code Section 671 and applicable state
law, the Participant remains the beneficial owner of the Shares. Exercising an Award in any manner
shall decrease the number of Shares thereafter available, both for purposes of the Plan and for
issuance under the Award, by the number of Shares as to which the Award is exercised.

            (b) Rights as a Shareholder. Until the Shares are issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist with respect to the
Shares, notwithstanding the exercise of the Award. The Company shall issue (or cause to be issued)
such Shares promptly after the Award is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are issued, except as
provided in Section 15 of the Plan.

            (c) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service
Provider, other than upon the Participant’s death or Disability, the Participant may exercise, as
applicable, his or her Award to the extent that the Award is vested on the date of termination,
within three (3) months following the Participant’s termination or, in the case of an Award other
than an Incentive Stock Option, a greater/lesser period if specified in the Award Agreement (but in
no event later than the expiration of the term of such Award as set forth in the Award Agreement).
If, on the date of termination, the Participant is not vested as to his or her entire Award, the
Shares covered by the unvested portion of the Award shall revert to the Plan; provided, however,
that unvested Shares of Restricted Stock shall not automatically revert to the Plan but shall be
subject to the Company’s repurchase option as provided in the Award Agreement. If, after
termination, the Participant does not exercise his or her Award, as applicable, within the time
specified herein, the Award shall terminate, and the Shares covered by such Award shall revert to
the Plan.

12

 

            (d) Disability of Participant. If a Participant ceases to be a Service Provider as a result of
the Participant’s Disability, the Participant may exercise, as applicable, his or her Award, to the
extent that the Award is vested on the date of termination, within twelve (12) months following the
Participant’s termination or, in the case of an Award other than an Incentive Stock Option, a
greater/lesser period if specified in the Award Agreement (but in no event later than the
expiration of the term of such Award as set forth in the Award Agreement). If, on the date of
termination, the Participant is not vested as to his or her entire Award, the Shares covered by the
unvested portion of the Award shall revert to the Plan; provided, however, that unvested Shares of
Restricted Stock shall not automatically revert to the Plan but shall be subject to the Company’s
repurchase option as provided in the Award Agreement. If, after termination, the Participant does
not exercise his or her Award, as applicable, within the time specified herein, the Award shall
terminate, and the Shares covered by such Award shall revert to the Plan.

            (e) Death of Participant. If a Participant dies while a Service Provider, the Award may be
exercised, as applicable, by the Participant’s designated beneficiary, provided such beneficiary
has been designated prior to Participant’s death in a form acceptable to the Administrator, to the
extent that the Award is vested on the date of termination, within twelve (12) months following
Participant’s death or a greater/lesser period if specified in the Award Agreement (but in no event
later than the expiration of the term of such Award as set forth in the Award Agreement). If no
such beneficiary has been designated by the Participant, then such Award may be exercised by the
personal representative of the Participant’s estate or by the person(s) to whom the Award is
transferred pursuant to the Participant’s will or in accordance with the laws of descent and
distribution. If, at the time of death, Participant is not vested as to his or her entire Award,
the Shares covered by the unvested portion of the Award shall immediately revert to the Plan;
provided, however, that unvested Shares of Restricted Stock shall not automatically revert to the
Plan but shall be subject to the Company’s repurchase option as provided in the Award Agreement.
If the Award is not so exercised, as applicable, within the time specified herein, the Award shall
terminate, and the Shares covered by such Award shall revert to the Plan.

      12. Form of Consideration. The Administrator shall determine the acceptable form of
consideration for exercising an Award, including the method of payment. In the case of an Incentive
Stock Option, the Administrator shall determine the acceptable form of consideration at the time of
grant. Such consideration may consist entirely of:

            (a) cash;

            (b) check;

            (c) other Shares which, in the case of Shares acquired directly or indirectly from the
Company, (i) have been owned by the Participant for more than six (6) months on the date of
surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Award shall be exercised;

            (d) consideration received by the Company under a cashless exercise program implemented by the
Company in connection with the Plan;

13

 

            (e) a reduction in the amount of any Company liability to the Participant, including any
liability attributable to the Participant’s participation in any Company-sponsored deferred
compensation program or arrangement;

            (f) any combination of the foregoing methods of payment; or

            (g) such other consideration and method of payment for the issuance of Shares to the extent
permitted by Applicable Laws.

      13. Transferability of Awards. Unless determined otherwise by the Administrator,
Awards may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Participant, only by the Participant. If the Administrator makes an Award
transferable, such Award shall contain such additional terms and conditions as the Administrator
deems appropriate.

      14. Leaves of Absence. Unless the Administrator provides otherwise, vesting of Awards
granted hereunder will be suspended during any unpaid leave of absence. A Service Provider will not
cease to be an Employee in the case of any leave of absence approved by the Company. For purposes
of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a
leave of absence approved by the Company is not so guaranteed, then three (3) months following the
91st day of such leave any Incentive Stock Option held by the Participant will cease to
be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory
Stock Option.

      15. Adjustments Upon Changes in Capitalization, Merger or Change in Control.

            (a) Changes in Capitalization. Subject to any required action by the shareholders of the
Company, the number of Shares of Common Stock that have been authorized for issuance under the Plan
but as to which no Awards have yet been granted or which have been returned to the Plan upon
cancellation or expiration of an Award, the number of Shares that may be added annually to the Plan
pursuant to Section 3(a), the number of Shares of Common Stock as well as the price per share of
Common Stock covered by each such outstanding Award, and the numerical Share limits in Sections
3(a), 6(a), 7(a), 8(a) and 9(a) shall be proportionately adjusted for any increase or decrease in
the number of issued Shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been “effected without receipt of consideration.” Such adjustment
shall be made by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price of Shares of Common
Stock subject to an Award.

14

 

            (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the
Company, the Administrator shall notify each Participant as soon as practicable prior to the
effective date of such proposed transaction. The Administrator in its discretion may provide for a
Participant to have the right to exercise his or her Award until ten (10) days prior to such
transaction as to all Shares covered thereby, including Shares as to which the Award would not
otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase
option applicable to any Restricted Stock shall lapse as to all such Shares, provided the proposed
dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it
has not been previously exercised, an Award will terminate immediately prior to the consummation of
such proposed action.

            (c) Merger or Change in Control. In the event of a merger of the Company with or into another
corporation, or a Change in Control, each outstanding Award shall be assumed or an equivalent
option or right substituted by the successor corporation or a Parent or Subsidiary of the successor
corporation.

      In the event that the successor corporation refuses to assume or substitute for the Award, the
Participant shall fully vest in and have the right to exercise his or her Awards as to all Shares
covered thereby, including Shares as to which such Awards would not otherwise be vested or
exercisable. All restrictions on Restricted Stock or other vesting criteria will lapse, as
determined by the Board. In addition, if an Award becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a Change in Control, the Administrator shall notify the
Participant in writing or electronically that the Award shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Award shall terminate upon the
expiration of such period.

      For the purposes of this subsection (c), an Award shall be considered assumed if, following
the merger or Change in Control, the Award confers the right to purchase or receive, for each Share
subject to the Award immediately prior to the merger or Change in Control, the consideration
(whether stock, cash, or other securities or property); provided, however, that if such
consideration received in the merger or Change in Control is not solely common stock of the
successor corporation or its Parent, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon the exercise of the Award, for each
Share subject to such Award, to be solely common stock of the successor corporation or its Parent
equal in fair market value to the per share consideration received by holders of Common Stock in
the merger or Change in Control.

      Notwithstanding anything in this Section 15(c) to the contrary, an Award that vests, is earned
or paid-out upon the satisfaction of one or more Performance Goals, will not be considered assumed
if the Company or its successor modifies any of such Performance Goals without the Participant’s
consent; provided, however, a modification to such Performance Goals only to reflect the successor
corporation’s post-Change in Control corporate structure will not be deemed to invalidate an
otherwise valid Award assumption.

      16. No Effect on Employment or Service. Neither the Plan nor any Award shall confer
upon a Participant any right with respect to continuing the Participant’s relationship as a

15

 

Service Provider with the Company, nor shall they interfere in any way with the Participant’s
right or the Company’s right to terminate such relationship at any time, with or without cause.

      17. Date of Grant. The date of grant of an Award shall be, for all purposes, the date
on which the Administrator makes the determination granting such Award, or such other later date as
is determined by the Administrator. Notice of the determination shall be provided to each
Participant within a reasonable time after the date of such grant.

      18. Conditions Upon Issuance of Shares.

            (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Award unless
the exercise of such Award and the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the Company with
respect to such compliance.

            (b) Investment Representations. As a condition to the exercise of an Award, the Company may
require the person exercising such Award to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and without any present intention to sell
or distribute such Shares if, in the opinion of counsel for the Company, such a representation is
required.

      19. Inability to Obtain Authority. The inability of the Company to obtain authority
from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of
any liability in respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.

      20. Reservation of Shares. The Company, during the term of this Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.

      21. Withholding Taxes.

            (a) Cash. Whenever cash is to be paid pursuant to an Award, the Company shall have the right
to deduct therefrom an amount sufficient to satisfy any federal, state and local withholding tax
requirements related thereto.

            (b) Shares. Whenever Shares are to be delivered pursuant to an Award, the Company shall have
the right to require the Participant to remit to the Company in cash an amount sufficient to
satisfy any federal, state and local withholding tax requirements related thereto. With the
approval of the Administrator, in its sole discretion, a Participant may satisfy the foregoing
requirement by electing to have the Company withhold from delivery Shares having a value equal to
the amount of tax to be withheld. Such Shares shall be valued at their Fair Market Value on the
date as of which the amount of tax to be withheld is determined. Fractional share amounts shall be
settled in cash. Such a withholding election may be made with respect to all or any portion of the
Shares to be delivered pursuant to an Award. All elections by a Participant to have Shares
withheld for these purposes shall be made in such form and under

16

 

such conditions as the Administrator may deem necessary or advisable. The Company shall not
be required to issue any Shares under the Plan until such tax obligations are satisfied.

      22. Notification of Election Under Section 83(b) of The Code. If any Participant
shall, in connection with the acquisition of Shares under the Plan, make the election permitted
under Section 83(b) of the Code (i.e., an election to include in gross income in the year of
transfer the amounts specified in Section 83(b)), such Participant shall notify the Company of such
election within ten (10) days of filing notice of the election with the Internal Revenue Service,
in addition to any filing and notification required pursuant to regulations issued under the
authority of Code Section 83(b).

      23. Escrow. Each share of Restricted Stock issued pursuant to the terms of the Plan
which has not vested shall be held in escrow pursuant to the terms of the Award Agreement. The
Company may retain the certificates representing the Restricted Stock in the Company’s possession
until such time as all conditions and/or restrictions applicable to such Shares have been
satisfied.

      24. Shareholder Approval; Term. The Plan shall be subject to, and shall become
effective upon, approval by the shareholders of the Company, which shall be obtained within twelve
(12) months after the date the Plan is adopted by the Board. Such shareholder approval shall be
obtained in the manner and to the degree required under Applicable Laws. The Plan shall continue
in effect for a term of ten (10) years from its effective date unless terminated earlier under
Section 25 of the Plan.

      25. Amendment and Termination of the Plan.

            (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate
the Plan.

            (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment
to the extent necessary and desirable to comply with Applicable Laws.

            (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of
the Plan shall impair the rights of any Participant, unless mutually agreed otherwise between the
Participant and the Administrator, which agreement must be in writing and signed by the Participant
and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise
the powers granted to it hereunder with respect to Options granted under the Plan prior to the date
of such termination.

17EX-4.16 E-2 Amendment No. 12 to Credit Agreement

 

Exhibit 4.16

AMENDMENT NO. 12 TO

AMENDED AND RESTATED CREDIT AGREEMENT

This Amendment No. 12 to Amended and Restated Credit Agreement (this “Amendment”), dated as of
August 10, 2005, is entered into by and between SIFCO INDUSTRIES, INC. (the “Borrower”) and
NATIONAL CITY BANK (the “Bank”) for the purposes amending and supplementing the documents and
instruments referred to below.

WITNESSETH:

     WHEREAS, Borrower and Bank are parties to an Amended and Restated Credit Agreement made as of
April 30, 2002, as amended from time to time (as amended, the “Credit Agreement” providing for
$6,000,000 of revolving credits; all terms used in the Credit Agreement being used herein with the
same meaning); and

     WHEREAS, Borrower and Bank desire to further amend certain provisions of the Credit Agreement
to, among other things, amend and/or waive certain financial covenants applicable thereto;

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:

SECTION I — Amendments to Credit Agreement

	 	A.	 	Subsection 2A.02 of the Credit Agreement is hereby amended to extend the
Expiration Date from April 1, 2006 to October 1, 2006.
	 
	 	B.	 	Subsection 2B.16 of the Credit Agreement is hereby amended in its entirety to read as
follows:

	 
	 		 	2B.16 BORROWING BASE — (i) Borrower and Bank agree that the granting of Subject
Loans shall be subject to a Borrowing Base (defined below) pursuant to a borrowing
base report to be in form and substance satisfactory to Bank and submitted to Bank,
together with a receivables and payables report, on a monthly basis by the 20th day
of each month from the date of this Amendment through the date on which the aggregate
outstanding principal amount of the Subject Loans equals or exceeds $3,750,000.00,
after which such reports shall be submitted on a weekly basis by noon on Tuesday for
the preceding week. Weekly reporting shall continue regardless of any subsequent
decrease in the outstanding principal amount of the Subject Loans.

	 
	 	 	 	No Subject Loan shall be made if, after giving effect thereto, the aggregate unpaid
principal balance of the Subject Loans would exceed the lesser of the amount of the
Subject Commitment then in effect or the amount of the Borrowing Base then in effect.

	 
	 		 	(ii) The borrowing base (“Borrowing Base”) shall be an amount equal to eighty
percent (80%) of eligible accounts receivable of Borrower and the Domestic
Subsidiaries plus fifty percent (50%) of eligible finished goods inventory of
Borrower and the Domestic Subsidiaries.

	 
	 	C.	 	Subsection 3B.01 of the Credit Agreement is hereby amended in its entirety to
read as follows:
	 
	 	 	 	3B.01 TANGIBLE NET WORTH — Borrower shall not suffer or permit the Tangible Net
Worth of the Reporting Group, as of the end of any month, to be less than the
required minimum amount. The required minimum amount shall be $23,500,000. The
required minimum amount shall increase as of the last day of each fiscal year of
Borrower, commencing with fiscal year ending September 30, 2005, by an amount equal
to 50% of the consolidated Net Income of the Reporting Group for such fiscal year as
measured by Borrower’s annual audited financial statements for such fiscal year. If
Net Income is less than $0 for any fiscal year, the required minimum amount shall not
be reduced as of the end of that fiscal year.

	 
	 	D.	 	The following subsection 3B.03 is hereby added to the Credit Agreement.
	 
	 	 	 	3B.03 EBITDA — Borrower shall not, at the end of each EBITDA Measurement Period,
permit the aggregate of the Reporting Group’s Net Income for that period, plus the
Reporting Group’s interest

1

 

expense for that period, plus the Reporting Group’s federal, state, and local income tax
expense, if any, for that period, plus the Reporting Group’s depreciation and
amortization charges for that period, minus the Reporting Group’s foreign currency
translation adjustment to fall below the following amounts for the EBITDA Measurement
Periods ending on the following dates:

	 	 	 	 	 
	09/30/05
	 	$	450,000.00	 
	12/31/05
	 	$	1,050,000.00	 
	03/31/06
	 	$	2,300,000.00	 
	06/30/06 and thereafter
	 	$	3,800,000.00	 

Each “EBITDA Measurement Period” shall be a period of four (4) consecutive
quarter-annual fiscal periods of Borrower ending on the last day of the fourth such
period; EXCEPT that the EBITDA Measurement Period ending September 30, 2005 shall
consist of the one fiscal quarter ending on that date, the EBITDA Measurement Period
ending December 31, 2005 shall consist of the two fiscal quarters ending on that date
and the EBITDA Measurement Period ending March 31, 2006 shall consist of the three
fiscal quarters ending on that date.

SECTION II — Waiver

Bank hereby waives all violations of the Tangible Net Worth covenant (contained in subsection 3B.01
of the Credit Agreement) and the Fixed Charge covenant (contained in subsection 3B.02 of the Credit
Agreement) which occurred prior to the date hereof. The execution, delivery and effectiveness of
this Amendment and the specific waiver set forth herein shall not operate as a waiver of any other
right, power or remedy of Bank under the Credit Agreement or constitute a continuing waiver of any
kind.

SECTION
III — Representations and Warranties

Borrower hereby represents and warrants to Bank, to the best of Borrower’s knowledge, that

(A) none of the representations and warranties made in the Credit Agreement or any Related
Writing, (collectively, the “Loan Documents”) has ceased to be true and complete in any
material respect as of the date hereof; and

(B) as of the date hereof no “Default” has occurred that is continuing under the Loan
Documents.

SECTION IV — Acknowledgments Concerning Outstanding Loans

Borrower acknowledges and agrees that, as of the date hereof, all of Borrower’s outstanding loan
obligations to Bank are owed without any offset, deduction, defense, claim or counterclaim of any
nature whatsoever. Borrower authorizes Bank to share all credit and financial information relating
to Borrower with each of Bank’s parent company and with any subsidiary or affiliate company of such
Bank or of such Bank’s parent company.

SECTION V — References

On and after the effective date of this Amendment, each reference in the Credit Agreement to “this
Agreement”, “hereunder”, “hereof”, or words of like import referring to the Credit Agreement shall
mean and refer to the Credit Agreement as amended hereby. The Loan Documents, as amended by this
Amendment, are and shall continue to be in full force and effect and are hereby ratified and
confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not
operate as a waiver of any right, power or remedy of Bank under the Loan Documents or constitute a
waiver of any provision of the Loan Documents except as specifically set forth herein.

SECTION VI — Counterparts and Governing Law

This Amendment may be executed in any number of counterparts, each counterpart to be executed by
one or more of the parties but, when taken together, all counterparts shall constitute one
agreement. This Amendment, and the respective rights and obligations of the parties hereto, shall
be construed in accordance with and governed by Ohio law.

2

 

     IN WITNESS WHEREOF, the Borrower and the Bank have caused this Amendment to be executed by
their authorized officers as of the date and year first above written.

	 	 	 	 	 	 	 	 	 	 	 
	SIFCO INDUSTRIES, INC.	 	 	 	NATIONAL CITY BANK	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/ Frank A. Cappello
 

	 	 
	 	By:
	 	/s/ Denise A. Jakubovic
 

	 	 
	Name: Frank A. Cappello	 	 	 	Name: Denise A. Jakubovic	 	 
	Title: V.P. Finance and CFO	 	 	 	Title: Assistant Vice President	 	 

3

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