Document:

Exhibit 10.1

 

SPORT-HALEY, INC.

 

2008 STOCK OPTION PLAN

 

1.             Purpose.  The purpose of this 2008 Stock Option Plan
(the “Plan”) of Sport-Haley, Inc., a Colorado corporation (the “Company”),
is to advance the interests of the Company and the Company’s stockholders by
enhancing the Company’s ability to attract, retain and motivate persons who are
expected to make important contributions to the Company and by providing such
persons with equity ownership opportunities and performance-based incentives
that are intended to better align the interests of such persons with those of
the Company’s stockholders.  Except where
the context otherwise requires, the term “Company” shall include any of the
Company’s present or future parent or subsidiary corporations as defined in
Sections 424(e) or (f) of the Internal Revenue Code of 1986, as
amended, and any regulations promulgated thereunder (the “Code”) and any other
business venture (including, without limitation, joint venture or limited
liability company) in which the Company has a controlling interest, as
determined by the Board of Directors of the Company (the “Board”).

 

2.             Definitions.

 

a.             “Affiliate” means (i) any
entity in which the Company, directly or indirectly, owns 50% or more of the
combined voting power, as determined by the Committee, (ii) any “parent
corporation” of the Company (as defined in Section 424(e) of the
Code), (iii) any “subsidiary corporation” of any such parent corporation
(as defined in section 424(f) of the Code) of the Company and (iv) any
trades or businesses, whether or not incorporated which are members of a
controlled group or are under common control (as defined in Sections 414(b) or
(c) of the Code) with the Company.

 

b.             “Award” means any form
of stock option granted or other award granted under the Plan, including
Incentive Stock Options, Non-Qualified Stock Options and Stock Appreciation
Rights (“SAR”).

 

c.             “Award
Agreement” means a written or electronic agreement setting
forth the terms and provisions applicable to an Award granted under the
Plan.  Each Award Agreement is subject to
the terms and conditions of the Plan.

 

d.             “Board “ means the Board
of Directors of the Company.

 

e.             “Change of
Control” shall be deemed to have occurred upon any of the
following events:

 

i.              any “person” (as defined in Section 3(a)(9) of
the Exchange Act, and as modified in Section 13(d) and 14(d) of
the Exchange Act) other than (i) the Company or any of its subsidiaries, (ii) any
employee benefit plan of 

 

 

the Company or any of its subsidiaries, (iii) any Affiliate, (iv) a
company owned, directly or indirectly, by stockholders of the Company in
substantially the same proportions as their ownership of the Company or (v) an
underwriter temporarily holding securities pursuant to an offering of such
securities (a “Person”), becomes the “beneficial owner” (as defined in Rule 13d-3
of the Exchange Act), directly or indirectly, of securities of the Company
representing more than 50% of the shares of voting stock of the Company then
outstanding;

 

ii.             the consummation of any
merger, organization, business combination or consolidation of the Company or
one of its subsidiaries with or into any other entity, other than a merger,
reorganization, business combination or consolidation which would result in the
holders of the voting securities of the Company outstanding immediately prior
thereto holding securities which represent immediately after such merger,
reorganization, business combination or consolidation more than 50% of the
combined voting power of the voting securities of the Company or the surviving
company or the parent of such surviving company;

 

iii.            the consummation of a sale
or disposition by the Company of all or substantially all of the Company’s
assets, other than a sale or disposition if the holders of the voting
securities of the Company outstanding immediately prior thereto hold securities
immediately thereafter which represent more than 50% of the combined voting
power of the voting securities of the acquiror, or parent of the acquiror, of
such assets;

 

iv.            the stockholders of the
Company approve a plan of complete liquidation or dissolution of the Company;
or

 

v.             individuals who, as of the
Effective Date, constitute the Board (the “Incumbent Board”) cease for any
reason to constitute at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the Effective Date whose election by the
Board, was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an election
contest with respect to the election or removal of directors or other solicitation
of proxies or consents by or on behalf of a person other than the Board.

 

Solely
with respect to any Award that is subject to Section 409A of the Code,
this definition is intended to comply with the definition of change in 

 

2

 

control
under Section 409A of the Code as amended, and, to the extent that the
above definition does not so comply, such definition shall be void and of no
effect and, to the extent required to ensure that this definition complies with
the requirements of Section 409A of the Code, the definition of such term
set forth in regulations or other regulatory guidance issued under Section 409A
of the Code by the appropriate governmental authority is hereby incorporated by
reference into and shall form part of this Plan as fully as if set forth herein
verbatim and the Plan shall be operated in accordance with the above definition
of Change in Control as modified to the extent necessary to ensure that the
above definition complies with the definition prescribed in such regulations or
other regulatory guidance insofar as the definition relates to any Award that
is subject to Section 409A of the Code.

 

f.              “Cause” means as
defined in an Employee’s employment agreement, or if none, then cause means
willful misconduct by the grantee or willful failure by the grantee to perform
his or her responsibilities to the Company (including, without limitation,
breach by the grantee of any provision of any employment, consulting, advisory,
nondisclosure, non-competition or other similar agreement between the grantee
and the Company), as determined by the Company, which determination shall be
conclusive.

 

g.             “Code” means the
Internal Revenue Code of 1986, as amended, and any successor Code, and related
rules, regulations and interpretations.

 

h.             “Committee” means the
Compensation Committee of the Board, or such other committee designated by the
Board, which is authorized to administer the Plan under Section 3 hereof,
and shall be composed of only Non-Employee Directors.  The members of the Committee shall also meet
the “independence” requirements of the Nasdaq Stock Market, Inc. or such
other “independence” definition applicable to the Company’s reports to the
Securities and Exchange Commission.  The
number of persons who shall serve on the Committee shall be specified from time
to time by the Board; however, in no event shall there be fewer than two
members of the Committee.  The Committee
will be composed in a manner such that the Plan will qualify under Rule 16b-3
with regard to Awards to persons who are subject to Section 16 of the
Exchange Act.  If at any time the
Committee has fewer than two members or the Committee otherwise ceases to
exist, then the Plan shall be administered by the Board, and all references
herein to the Committee shall refer to the Board.

 

i.              “Common
Stock” means Common Stock of the Company, no par value per share.

 

j.              “Company” means
Sport-Haley, Inc.

 

3

 

k.             “Consultant” means any individual
who renders services directly to the Company or to the Company’s customers, any
individual defined and designated from time to time by the Committee as a
Consultant, or any individual from a group of individuals defined and
designated from time to time by the Committee.

 

l.              “Covered
Employee” means an employee who is a “Covered Employee”
within the meaning of Section 162(m) of the Code.

 

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

 

n.             “Disability” means an
inability to perform the Employee’s or Non-Employee Director’s material
services for the Company for a period of 90 consecutive days or a total of 180
days, during any 365-day period, in either case as a result of incapacity due
to mental or physical illness, which is determined to be total and permanent.  A determination of Disability shall be made
by a physician satisfactory to both the Participant (or his guardian) and the
Company, provided that if the Employee or Non-Employee Director (or his
guardian) and the Company do not agree on a physician, the Employee or
Non-Employee Director and the Company shall each select a physician and these
two together shall select a third physician, whose determination as to
Disability shall be final, binding and conclusive with respect to all parties.  Notwithstanding the above, eligibility for
disability benefits under any policy for long-term disability benefits provided
to the Participant by the Company shall conclusively establish the Participant’s
disability.  Solely with respect to any
Award that is subject to Section 409A of the Code, this definition is
intended to comply with the definition of disability under Section 409A of
the Code, as amended, and, to the extent that the above definition does not so
comply, such definition shall be void and of no effect and, to the extent
required to ensure that this definition complies with the requirements of Section 409A
of the Code, the definition of such term set forth in regulations or other
regulatory guidance issued under Section 409A of the Code by the appropriate
governmental authority is hereby incorporated by reference into and shall form
part of this Plan as fully as if set forth herein verbatim and the Plan shall
be operated in accordance with the above definition of Disability as modified
to the extent necessary to ensure that the above definition complies with the
definition prescribed in such regulations or other regulatory guidance insofar
as the definition relates to any Award that is subject to Section 409A of
the Code.

 

o.             “Effective
Date” means the date that the Plan is approved by the shareholders of the
Company.

 

p.             “Employee” means any
employee of the Company or a Subsidiary, including any Subsidiary that become
such after the Effective Date.

 

4

 

q.             “Exchange
Act” means the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder.

 

r.              “Fair
Market Value” means, on any date, the average of the high and low
sales prices of the Common Stock on the principal national securities exchange,
which includes the National Association of Securities Dealers Automated
Quotation System (“Nasdaq”) Global Market, Capital Market, or other market on
which such Common Stock is listed or admitted to trading or if not traded on
that date, then on the date last traded; or if such Common Stock is not so
listed or admitted to trading, the arithmetic mean of the per share closing bid
price and per share closing asked price on such date as quoted on any other
system of Nasdaq or such other market in which such prices are regularly
quoted; or if there have been no published bid or asked quotations, the
Committee shall, in good faith and in accordance with Section 422 of the
Code, establish the method for determining the Fair Market Value of the Common
Stock.

 

s.             “Incentive
Stock Option” means any Stock Option designated and qualified as
an “incentive stock option” as defined in Section 422 of the Code.

 

t.              “Non-Employee
Director” means a member of the Board who is not, and who has
not been during the last three fiscal years been, an employee or executive
officer of the Company or any Subsidiary.

 

u.             “Non-Qualified
Stock Option” means any Stock Option that is not an Incentive
Stock Option.

 

v.             “Option” or “Stock Option” means any option to
purchase shares of Stock granted pursuant to Sections 7 and 8.

 

w.            “Participant” means any
individual to whom an Award is granted under the Plan.

 

x.             “Plan” means this
Plan, which shall be known as the “Sport-Haley, Inc. 2008 Stock Option
Plan.”

 

y.             “Rule 16b-3” means Rule 16b-3
promulgated under the Exchange Act, as amended, or any successor rule.

 

z.             “SAR” or “Stock Appreciation Right” means an Award
granted as a Stock Appreciation Right under the Plan.  An SAR is an Award entitling the recipient to
receive shares of Stock having a value equal to the excess of the Fair Market
Value of the Stock on the date of exercise over the exercise price of the Stock
Appreciation Right multiplied by the number of shares of Stock with respect to 

 

5

 

which the Stock Appreciation Right shall have been exercised.

 

aa.           “Section 409A” means Section 409A
of the Code and the regulations and other guidance promulgated thereunder.

 

bb.          “Stock” means the
Common Stock, no par value per share, of the Company, subject to adjustments
pursuant to Section 5.

 

cc.           “Subsidiary” means any
corporation or other entity (other than the Company) in (i) which the
Company has at least a 50 percent interest, either directly or indirectly or (ii) of
which it has a right to elect or appoint 50% or more of the board of directors
or other governing body.

 

dd.          “Ten
Percent Owner” means an Employee who owns or is deemed to own (by
reason of the attribution rules of Section 424(d) of the Code)
more than 10 percent of the combined voting power of all classes of stock of
the Company or any parent or Subsidiary corporation.

 

3.             Administration.

 

a.             The Plan shall be
administered by the Committee.  The
Committee shall have the authority to:

 

i.              construe and interpret the
terms and conditions of the Plan and any Award issued under the Plan (and any
Award Agreement relating thereto) in its sole discretion and to otherwise
supervise the administration of the Plan;

 

ii.             promulgate, amend and
rescind rules relating to the implementation of the Plan;

 

iii.            make all determinations
necessary or advisable for the administration of the Plan, including the
selection of Employees, Directors, Consultants and other key persons who shall
be granted Awards, the number of shares of Common Stock to be subject to each
Award, the Award price, the vesting or duration of Awards, and the designation
of Awards as Incentive Stock Options or Non-Qualified Stock Options;

 

iv.            accelerate at any time the
exercisability or vesting of all or any portion of any Award; provided, however, subject to Section 11,
the Committee shall not have any discretion to accelerate or waive any term or
condition of an Award if such discretion would cause the Award to have adverse
tax consequences to the Participant under Section 409A of the Code;

 

6

 

v.             determine and modify from
time to time the terms and conditions, including restrictions, not inconsistent
with the terms of the Plan, of any Award, which terms and conditions may differ
among individual Awards and grantees, and to approve the form of written
instruments evidencing the Awards;

 

vi.            subject to the provisions of
Sections 7. c. i. and 8. b. and e., extend at any time the period in which
Stock Options may be exercised;

 

vii.           determine the disposition of
Awards in the event of a Participant’s divorce or dissolution of marriage;

 

viii.          determine whether Awards
will be granted alone or in combination or in tandem with other Awards; and

 

ix.            determine whether cash will
be paid or Awards will be granted in replacement of, or as alternatives to,
other grants under the Plan or any other incentive or compensation plan of the
Company, a Subsidiary or an acquired business unit; and

 

x.             approve in advance each
particular Award to be granted hereunder in a manner which will cause the Award
to be exempt from Section 16(b) of the Exchange Act by virtue of Rule 16b-3.

 

b.             Subject to the requirements
of applicable law, the Committee may correct any defect, supply any omission,
or reconcile any inconsistency in the Plan, any Award, or any Award Agreement;
take any and all other actions it deems necessary or advisable for the proper
administration of the Plan; designate persons other than members of the
Committee to carry out its responsibilities; and prescribe such conditions and
limitations as it may deem appropriate; except
that the Committee may not delegate its authority with regard to the selection
for participation of, or the granting of Awards to, persons subject to the
reporting or other provisions of Section 16 of the Exchange Act, or a
Covered Employee.  Any determination,
decision, or action of the Committee in connection with the construction,
interpretation, administration, or application of the Plan shall be final, conclusive
and binding upon all persons validly claiming under or through persons
participating in the Plan.

 

c.             The Committee may at any
time, and from time to time amend or cancel any outstanding Award, but only
with the consent of the person to whom the Award was granted.

 

4.             Eligibility.  Participants under the Plan will be such full
or part-time officers and other 

 

7

 

Employees, Non-Employee Directors and key persons (including
consultants and prospective employees) of the Company and its Subsidiaries as
are selected from time to time by the Committee in its sole discretion.

 

a.             Any Employee is eligible to
become a Participant in the Plan.  An
Employee may receive Non-Qualified Stock Options or Incentive Stock
Options.  Incentive Stock Options may
only be granted to Employees of the Company or its parent or Subsidiary as
defined in Sections 424(e) or (f) of the Code, as applicable, while
each such entity is a “corporation” described in Section 7701(a)(3) of
the Code and Treasury Regulation Section 1.421-1(i)(1).  No Incentive Stock Option shall be granted to
a person in his capacity as a Employee of a Subsidiary if the Company has less
than a 50% ownership interest in such Subsidiary.

 

b.             Directors who are not
Employees of the Company or a Subsidiary are eligible to receive Non-Qualified
Stock Options.

 

c.             Consultants who are not
Employees or Directors of the Company are eligible to receive Non-Qualified
Stock Options.

 

5.             Shares
Available.  Subject to Section 5.
a. and 5. b. of the Plan, the maximum number of shares of Common Stock
available for Award grants shall be 200,000 (which comprises 50,000 shares of
Common Stock for Non-Qualified Stock Options and SARs and 150,000 shares of
Common Stock for Incentive Stock Options). 
Shares of Common Stock subject to an unexercised and expired or
terminated Award shall be available for an Award subsequently granted in
accordance with the Plan.

 

a.             Changes in
Stock. Subject to Section 5. b. hereof, if, as a result of any
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar change in the Company’s capital
stock, the outstanding shares of Stock are increased or decreased or are
exchanged for a different number or kind of shares or other securities of the
Company, or additional shares or new or different shares or other securities of
the Company or other non-cash assets are distributed with respect to such
shares of Stock or other securities, or, if, as a result of any merger or
consolidation, sale of all or substantially all of the assets of the Company,
the outstanding shares of Stock are converted into or exchanged for securities
of the Company or any successor entity (or a parent or subsidiary thereof), the
Committee shall make an appropriate or proportionate adjustment in (i) the
number of Stock Options or SARs that can be granted to any one individual
grantee, (ii) the number and kind of shares or other securities subject to
any then outstanding Awards under the Plan, and (iii) the price for each
share subject to any then outstanding Stock Options and SARs under the Plan,
without changing the aggregate exercise price (i.e.,
the exercise price multiplied by the number of Stock Options and SARs) as to
which such 

 

8

 

Stock Options and SARs remain exercisable.  The Committee shall also make equitable or
proportionate adjustments in the number of shares subject to outstanding Awards
and the exercise price and the terms of outstanding Awards to take into
consideration cash dividends paid other than in the ordinary course or any
other extraordinary corporate event.  The
adjustment by the Committee shall be final, binding and conclusive.  No fractional shares of Stock shall be issued
under the Plan resulting from any such adjustment, but the Committee in its
discretion may make a cash payment in lieu of fractional shares.

 

b.             Change in
Control.  Unless
otherwise provided in the Award, in the event of a Change in Control:

 

i.              the Board or the Committee
may accelerate vesting and the time at which all Options then outstanding may
be exercised so that those types of Awards may be exercised in full for a
limited period of time on or before a specified date fixed by the Board or the
Committee, after which specified date all unexercised Options and all rights of
Participants thereunder shall terminate, or the Board or Committee may
accelerate vesting and the time at which Options may be exercised so that those
types of Awards may be exercised in full for their then remaining term.

 

Notwithstanding
the above provisions of this Section 5. b., the Board or the Committee
shall not be required to take any action described in the preceding provisions
of this Section 5. b., and any decision made by the Board or the
Committee, in its sole discretion, not to take some or all of the actions
described in the preceding provisions of this Section 5. b. shall be
final, binding and conclusive with respect to the Company and all other
interested persons.

 

ii.             Right of
Cash-Out. If approved by the Board prior to or within thirty
(30) days after such time as a Change in Control shall be deemed to have
occurred, the Board shall have the right for a forty-five (45) day period
immediately following the date that the Change in Control is deemed to have
occurred to require all, but not less than all, Participants to transfer and
deliver to the Company all Awards previously granted to the Participants in
exchange for an amount equal to the “cash value” (defined below) of the
Awards.  Such right shall be exercised by
written notice to all Participants.  For
purposes of this Section 5. b. ii., the cash value of an Award shall equal
the sum of (i) the cash value of all benefits to which the Participant
would be entitled upon settlement or exercise of any Award which is not an
Option and (ii) in the case of any Award that is an Option, the excess of
the “market value” (defined below) per share over the option price, multiplied
by the number of shares subject to such Award. 
For 

 

9

 

purposes of the preceding sentence, “market value” per share shall mean
the higher of (x) the average of the Fair Market Value per share of Common
Stock on each of the five trading days immediately following the date a Change
in Control is deemed to have occurred or (y) the highest price, if any,
offered in connection with the Change in Control.  The amount payable to each Participant by the
Company pursuant to this Section 5. b. ii. shall be in cash or by
certified check and shall be reduced by any taxes required to be withheld.

 

c.             Substitute
Awards.  In connection with a merger or
consolidation of an entity with the Company or the acquisition by the Company
of property or stock of an entity, the Board or the Committee may grant Awards
in substitution for any options or other stock or stock-based awards granted by
such entity or an Affiliate thereof. 
Substitute Awards may be granted on such terms as the Board or the
Committee deems appropriate in the circumstances, notwithstanding any
limitations on Awards contained in the Plan. 
Substitute Awards shall not count against the overall share limit set
forth in Section 5, except as may be required by reason of Section 422
and related provisions of the Code.

 

6.             Term.   The
Plan will become effective upon approval of the Plan by the Company’s
stockholders on February 21, 2008 and shall continue in effect until February 21,
2018.

 

7.             Non-Qualified
Stock Options.

 

a.             Non-Qualified Stock Options
may be granted to Employees, Non-Employee Directors and key persons (including
Consultants and prospective employees).

 

b.             Exercise
Price.  The exercise price to be paid
for each share of Common Stock deliverable upon exercise of each Non-Qualified
Option granted under the Plan shall not be less than one hundred percent (100%)
of the Fair Market Value per share on the date of grant of such Non-Qualified
Option.

 

c.             Terms and
Conditions of Non-Qualified Options.  Non-Qualified Options shall be in such form
as the Committee may from time to time approve, shall be subject to the
following terms and conditions and may contain such additional terms and
conditions, not inconsistent with the Plan as the Committee shall deem
desirable:

 

i.              Option
Term and Conditions and Limitations on Exercise.  The term of each Non-Qualified Stock Option
shall be fixed by the Committee. 
However, no Non-Qualified Option shall be exercisable more than ten
years after the Stock Option is granted.

 

(1)           Non-Qualified Stock Options
granted to Non-Employee Directors 

 

10

 

or Employees subject to the reporting requirements of Section 16
of the Exchange Act shall be exercisable beginning six months after date of
grant.

 

(2)           Non-Qualified Stock Options
granted to Consultants and other key persons shall be exercisable beginning 12
months after the date of grant.

 

ii.             Manner of
Exercise.  In order to
exercise a Non-Qualified Option, the person or persons entitled to exercise
such Non-Qualified Option shall deliver to the Company payment in full for (i) the
shares being purchased and (ii) unless other arrangements have been made
with the Committee, any required withholding taxes.  The payment of the exercise price for each
Non-Qualified Option shall either be (x) in cash or by certified check
payable and acceptable to the Company, (y) with the consent of the
Committee, which consent may be granted or withheld in the Committee’s sole
discretion, and upon compliance with such instructions as the Committee may
specify, at the person’s written request the Company may deliver certificates
for the shares of Common Stock for which the Non-Qualified Option is being
exercised to a broker for sale on behalf of the person, provided that the
person has irrevocably instructed such broker to remit directly to the Company
on the person’s behalf from the proceeds of such sale the full amount of the
exercise price, plus all required withholding taxes or (z) by any other
means set forth in the Grantee’s Award Agreement that is consistent with
applicable laws, regulations or rules.

 

iii.            Proceeds.  The proceeds received from the sale of shares
of Common Stock pursuant to exercise of Non-Qualified Options exercised under
the Plan will be used for general corporate purposes.

 

iv.            Non-Qualified
Options not Transferable. Except as provided below, no Non-Qualified
Option granted hereunder shall be transferable other than by (i) will or
by the laws of descent and distribution or (ii) pursuant to a domestic
relations order, and during the lifetime of the Participant to whom any such
Non-Qualified Option is granted, it shall be exercisable only by the
Participant (or his guardian).  Any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to
subject to execution, attachment or similar process, any Non-Qualified Option
granted hereunder, or any right thereunder, contrary to the provisions hereof,
shall be void and ineffective, shall give no right to the purported transferee
and shall, at the sole discretion of the Committee, result in forfeiture of the
Non-Qualified Option with respect to the shares involved in such attempt.  

 

11

 

With respect to a specific Non-Qualified Option, in accordance with rules and
procedures established by the Committee from time to time, the Participant (or
his guardian) may transfer, for estate planning purposes, all or part of such
Non-Qualified Option to one or more immediate family members or related family
trusts or partnerships or similar entities as determined by the Committee.  Any Non-Qualified Option that is transferred
in accordance with the provisions of this Section 7. c. iv. may only be
exercised by the person or persons who acquire a proprietary interest in the
Non-Qualified Options pursuant to the transfer.

 

v.             Adjustment
of Non-Qualified Options.  In
the event that at any time after the Effective Date the outstanding shares of
Common Stock are changed into or exchanged for a different number or kind of
shares or other securities of the Company by reason of merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares, Change of Control, or the like, the Board or the Committee shall make
appropriate and equitable adjustments to all Non-Qualified Options then
outstanding as provided in Sections 5. a. and 5. b.

 

d.             Option
Repricing.   Only with
concurrent shareholder approval, the Committee, in its absolute discretion, may
grant to holders of outstanding Non-Qualified Options, in exchange for the surrender
and cancellation of such Non-Qualified Options, new Non-Qualified Options
having exercise prices lower (or higher with any required consent) than the
exercise price provided in the Non-Qualified Options so surrendered and
canceled and containing such other terms and conditions as the Committee may
deem appropriate.

 

8.             Incentive
Stock Options.  The terms
specified in this Section 8 shall be applicable to all Incentive Stock
Options.  Options which are specifically
designated as Non-Qualified Options shall not
be subject to the terms of this Section 8.

 

a.             Incentive Stock Options may
be issued only to Employees as set forth in Section 4. a.  Incentive Stock Options must be issued under
the Plan within ten years from the Effective Date of the Plan.

 

b.             Term.  Subject to Section 8. e., the term of
each Incentive Stock Option shall be fixed by the Committee.  However, no Incentive Stock Option shall be
exercisable more than ten years after the Stock Option is granted.

 

c.             Exercise
Price.  Subject to Section 8. c.,
the exercise price per share shall not be less than one hundred percent (100%)
of the Fair Market Value per share on the date of grant of the Incentive Stock
Option.

 

12

 

i.                                          Manner
of Exercise.  Incentive
Stock Options may be exercised by the grantee by payment of the aggregate
exercise price to the Company, plus applicable tax withholding, in cash, or
through the cashless exercise procedure, in the same manner as provided for
Non-Qualified Stock Options in Section 7. c. ii.

 

d.                                      Limitations
on Exercise.  No Incentive
Stock Option shall be exercisable more than three (3) months after the
Optionee ceases to be an Employee for any reason other than death or
disability, or more than one (1) year after the Optionee ceases to be an
Employee due to death or Disability.

 

e.                                       Ten
Percent Owner.  In the case
of an Incentive Stock Option that is granted to a Ten Percent Owner, the option
price of such Incentive Stock Option shall be not less than 110 percent of the
Fair Market Value on the grant date.  In
addition, the Option term shall not exceed five (5) years measured from
the date of grant.  For purposes of the
immediately preceding sentence, the attribution rules under Section 424(d) of
the Code shall apply for purposes of determining an Employee’s ownership.

 

f.                                         Incentive
Stock Options Not Transferable.  No Incentive Stock Option granted hereunder (a) shall
be transferable other than by will or by the laws of descent and distribution
and (b) except as permitted in regulations or other guidance issued under Section 422
of the Code, shall be exercisable during the Optionee’s lifetime by any person
other than the Optionee (or his or her guardian).

 

g.                                      Annual
Limit on Incentive Stock Options. To the extent required for “incentive
stock option” treatment under Section 422 of the Code, the aggregate Fair
Market Value (determined as of the time of grant) of the shares of Stock with
respect to which Incentive Stock Options granted under this Plan and any other
plan of the Company or its parent and subsidiary corporations become
exercisable for the first time by an Optionee during any calendar year shall
not exceed $100,000.  To the extent that
any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock
Option.

 

h.                                      Compliance with
Code Section 422.  All Options that
are intended to be Incentive Stock Options described in Code Section 422
shall be designated as such in the Award Agreement and in all respects shall be
issued in compliance with Code Section 422.

 

9.                                       Stock
Appreciation Rights.

 

a.                                       Exercise
Price of SARs. The exercise price of an SAR shall not be less
than 100 percent of the Fair Market Value of the Stock on the date of grant.

 

13

 

b.                                      Grant
and Exercise of SARs.  SARs may be
granted by the Committee independently of any Stock Option granted pursuant to
Sections 7 and 8 of the Plan.

 

c.                                       Terms
and Conditions of SARs.  SARs
shall be subject to such terms and conditions as shall be determined from time
to time by the Committee.

 

d.                                      Duration
of SARs.  Each SAR shall be exercisable
at such times and subject to such terms and conditions as the Committee may
specify in the applicable SAR agreement.

 

e.                                       Exercise
of SARs.  SARs may be exercised by
delivery to the Company of a written notice of exercise signed by the proper
person or by any other form of notice (including electronic notice) approved by
the Committee, together with any other documents required by the Committee.

 

10.                                 Deferral
of Awards.  Except as
provided in Section 10. a., at the discretion of the Committee, payment of
an Award or any portion thereof may be deferred until a time established by the
Committee.  Deferrals shall be made in
accordance with guidelines established by the Committee to ensure that such
deferrals comply with applicable requirements of the Code and its
regulations.  Deferrals shall be
initiated by the delivery of a written, irrevocable election by the Participant
to the Committee or its nominee.  Such
election shall be made prior to the date specified by the Committee.

 

a.                                       Section 409A
Compliance.  To the
extent that any Award is determined to constitute “nonqualified deferred
compensation” within the meaning of Section 409A (a “409A Award”), the
Award shall be subject to such additional rules and requirements as
specified by the Committee from time to time in order to comply with Section 409A.  In this regard, if any amount under a 409A
Award is payable upon a “separation from service” (within the meaning of Section 409A)
to a Grantee who is then considered a “specified employee” (within the meaning
of Section 409A), then no such payment shall be made prior to the date
that is the earlier of (i) six months and one day after the Grantee’s
separation from service, or (ii) the grantee’s death, but only to the
extent such delay is necessary to prevent such payment from being subject to
interest, penalties and/or additional tax imposed pursuant to Section 409A.  Further, the settlement of any such Award may
not be accelerated except to the extent permitted by Section 409A.  The Company shall have no liability to a
Participant, or any other party, if an Award that is intended to be exempt
from, or compliant with, Section 409A is not so exempt or compliant or for
any action taken by the Committee concerning such an Award.

 

14

 

11.                                 Exercise
of Stock Options upon Termination of Employment or Services.  Options granted to Participants other than
Consultants shall be exercisable upon the Participant’s termination of
employment (or cessation of service relationship) with the Company and its
Subsidiaries within the following periods only. 
The definition of termination of employment (or cessation of service
relationship) applicable to Consultants shall be defined and determined by the
Committee in its sole discretion. 
Subject to Section 16. a. 
and subject to Section 10. a., stock options granted to
Participants other than Consultants may permit the exercise of options upon the
Participant’s termination of employment (or cessation of service relationship)
within the following periods, or such shorter periods as determined by the
Committee at the time of grant, or with respect to an Employee, as specified in
the Employee’s employment agreement, if applicable:

 

a.                                       If on account
of death, within twelve (12) months of such event by the person or persons to
whom the Participant’s rights pass by will or the laws of descent or
distribution.

 

b.                                      If on account
of retirement (as defined from time to time by Company policy or in the
Participant’s employment agreement, if applicable), stock options may be
exercised within three (3) months of such termination.

 

c.                                       If on account
of resignation, options may be exercised within one (1) month of such
termination.

 

d.                                      If for Cause
(as defined in the Employee’s employment agreement, or if none, as defined in Section 2),
no unexercised option shall be exercisable to any extent after termination.

 

e.                                       If on account
of Disability or leave of absence for the purpose of serving the government or
the country in which the principal place of employment of the Participant is
located, either in a military or a civilian capacity, or for such other purpose
or reason as the Committee may approve subsequent to the time of grant, a
Participant shall not be deemed during the period of any such absence alone to have
terminated his service, except as the Committee may otherwise expressly
provide.

 

f.                                         If for any
reason other than death, retirement, resignation, Cause, or Disability, options
may be exercised within three (3) months of such termination.

 

12.                                 Transferability
of Awards.

 

a.                                       Transferability.  Transfers of Non-Qualified Stock Options and
Incentive Stock Options are restricted as provided in Sections 7. c. iv. and 8.
f., respectively.  With respect to other
Awards, except as provided in Section 12. b. below, during a 

 

15

 

Grantee’s lifetime, his or her Awards shall be exercisable only by the
Grantee, or by the Grantee’s legal representative or guardian in the event of
the Grantee’s incapacity.  With respect
to all Awards, no Awards shall be sold, assigned, transferred or otherwise
encumbered or disposed of by a Grantee other than by will or by the laws of
descent and distribution.  In addition,
no Awards shall be subject, in whole or in part, to attachment, execution, or
levy of any kind, and any purported transfer in violation hereof shall be null
and void.

 

b.                                      Committee
Action.  Notwithstanding Section 12.
a., the Committee, in its discretion, may provide either in the Award Agreement
regarding a given Award or by subsequent written approval that the Grantee (who
is an Employee or Non-Employee Director) may transfer his or her Awards (other
than any Incentive Stock Options) to his or her immediate family members, to
trusts for the benefit of such family members, or to partnerships in which such
family members are the only partners, provided that the transferee agrees in
writing with the Company to be bound by all of the terms and conditions of this
Plan and the applicable Award.

 

c.                                       Designation
of Beneficiary.  Each
Grantee to whom an Award has been made under the Plan may designate a
beneficiary or beneficiaries to exercise any Award or receive any payment under
any Award payable on or after the Grantee’s death.  Any such designation shall be on a form
provided for that purpose by the Committee and shall not be effective until
received by the Committee.  If no
beneficiary has been designated by a deceased Grantee, or if the designated
beneficiaries have predeceased the Grantee, the beneficiary shall be the
Grantee’s estate.

 

13.                                 Tax
Withholding.

 

a.                                       Payment
by Grantee.  Each
Grantee shall, no later than the date as of which the value of an Award or
other amounts received thereunder first becomes includable in the gross income
of the Grantee for Federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Committee regarding payment of, any Federal,
state, or local taxes of any kind required by law to be withheld by the Company
with respect to such income.  The Company
and its Subsidiaries shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
Grantee.  The Company’s obligation to
deliver evidence of book entry (or stock certificates) to any Grantee is
subject to and conditioned on tax withholding obligations being satisfied by
the Grantee.

 

b.                                      Payment
in Stock.  Subject to
approval by the Committee, a Grantee may elect to have the Company’s minimum
required tax withholding obligation satisfied, in whole or in part, by
authorizing the Company to withhold from shares of Stock to be issued pursuant
to any Award a number of shares with an aggregate Fair Market 

 

16

 

Value (as of the date the withholding is effected) that would satisfy
the withholding amount due.

 

14.                                 Amendments
to the Plan.  The Board may
amend, suspend or terminate the Plan or any portion thereof at any time
provided that (i) to the extent required by Section 162(m) of
the Code, no Award granted to a Participant that is intended to comply with Section 162(m) after
the date of such amendment shall become exercisable, realizable or vested, as
applicable to such Award, unless and until such amendment shall have been
approved by the Company’s stockholders if required by Section 162(m) (including
the vote required under Section 162(m)); and (ii) if, and for so long
as, the Company’s securities are traded on Nasdaq, no amendment that would
require stockholder approval under the rules of Nasdaq may be made
effective unless and until such amendment shall have been approved by the
Company’s stockholders.  In addition, if
at any time the approval of the Company’s stockholders is required as to any
other modification or amendment under Section 422 of the Code or any
successor provision with respect to Incentive Stock Options, the Board may not
effect such modification or amendment without such shareholder approval. Unless
otherwise specified in the amendment, any amendment to the Plan adopted in
accordance with this Section 14 shall apply to, and be binding on the
holders of, all Awards outstanding under the Plan at the time the amendment is
adopted, provided the Board determines that such amendment does not materially
and adversely affect the rights of Participants under the Plan.  No Award shall be made that is conditioned
upon stockholder approval of any amendment to the Plan.

 

15.                                 General
Provisions.

 

a.                                       Shares of Stock
shall not be issued pursuant to the exercise of any Award granted hereunder
unless the exercise of such Award and the issuance and delivery of such shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act and the requirements
of any stock exchange upon which the Stock may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.

 

b.                                      The Committee
may require each person acquiring shares of Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is
acquiring the Stock without a view to distribution thereof.  The certificates for such Stock may include
any legend that the Committee deems appropriate to reflect any restrictions on
transfer.

 

c.                                       All
certificates for shares of Stock delivered under the Plan shall be subject to
such stock-transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Stock is
then listed, and any 

 

17

 

applicable Federal or state securities law, and the Committee may cause
a legend or legends to be placed on any such certificates to make appropriate
reference to such restrictions.

 

d.                                      No provision in
the Plan or any Award or Award Agreement shall be construed to confer upon any
individual the right to remain in the employ or service of the Company or
Parent or Subsidiary or to interfere in any way with any contractual or other
right or authority of the Company either to increase or decrease the
compensation or other payment to any individual at any time, or to terminate
any employment or other relationship between any individual and the
Company.  In addition, notwithstanding
anything contained in the Plan to the contrary, unless otherwise stated in the
applicable Award Agreement, no Award granted under the Plan shall be affected
by any change of duties or positions of the Participant, so long as such
Participant continues to be a Director, officer, Employee, consultant, or other
eligible key person of the Company or Parent or Subsidiary.  The obligation of the Company to pay any
benefits pursuant to this Plan shall be interpreted as a contractual obligation
to pay only those amounts described herein, in the manner and under the
conditions prescribed herein.  The Plan
shall in no way be interpreted to require the Company to transfer any amounts
to a third party trustee or otherwise hold any amount in trust or escrow for
payment to any Participant or beneficiary under the terms of the Plan.

 

e.                                       The adoption of
the Plan shall not be deemed to give any Employee or other individual the right
to be selected as a Participant or to be granted an Award.  There is no obligation for uniformity of
treatment of Participants, or holders or beneficiaries of Awards, and the terms
and conditions of Awards need not be the same with respect to each recipient.

 

f.                                         No Participant
shall have any rights as a shareholder of the Corporation until he or she
acquires an unconditional right under an Award to have shares of Stock issued
to him or her.

 

g.                                      Option
exercises and sales of Stock underlying options, and other Awards under the
Plan, shall be subject to the Company’s insider trading policies and procedures
as in effect from time to time.

 

h.                                      In the event of
any inconsistency or conflict between the terms of the Plan and an Award, the
terms of the Plan shall govern.

 

i.                                          If any
provision of the Plan or any Award is or becomes or is deemed to be invalid,
illegal or unenforceable in any jurisdiction or as to any Participant or Award,
or would disqualify the Plan or any Award under any law deemed applicable by
the Board or the Committee, such provision shall be construed or deemed amended
as 

 

18

 

necessary to conform to the applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Board or the
Committee, materially altering the intent of the Plan or the Award, such
provision shall be stricken as to such jurisdiction, Participant or Award, and
the remainder of the Plan and any such Award shall remain in full force and
effect.

 

j.                                          Neither the
Board, nor the Company nor the Committee makes any commitment or guarantee that
any federal, state or local tax treatment will apply or be available to any
person participating or eligible to participate hereunder.

 

16.                                 Exemptions
from Section 16(b) Liability.  It is the intent of the Company that the
grant of any Awards to or other transaction by a Participant who is subject to Section 16
of the Exchange Act shall be exempt from Section 16(b) of the
Exchange Act pursuant to an applicable exemption (except for transactions
acknowledged by the Participant in writing to be non-exempt).  Accordingly, if any provision of this Plan or
any Award Agreement does not comply with the requirements of Rule 16b-3 as
then applicable to any such transaction, such provision shall be construed or
deemed amended to the extent necessary to conform to the applicable
requirements of Rule 16b-3 so that such Participant shall avoid liability
under Section 16(b) of the Exchange Act.

 

a.                                       With respect to
Participants who are subject to Section 16 of the Exchange Act, at least
six (6) months must elapse from the date of acquisition of any stock
option, SAR or other derivative security (within the meaning used in Rule 16b-3
of the Exchange Act or any successor rule) issued pursuant to the Plan to the
date of disposition of such derivative security (other than upon exercise or
conversion) or its underlying equity security.

 

17.                                 Indemnification.  Neither the Board nor the Committee, nor any
member of either or any delegate thereof, shall be liable for any act,
omission, interpretation, construction or determination made in good faith in
connection with the Plan, and the members of the Board and the Committee (and
any delegate thereof) shall be entitled in all cases to indemnification and
reimbursement by the Company in respect of any claim, loss, damage or expense
(including, without limitation, reasonable attorneys’ fees) arising or
resulting therefrom to the fullest extent permitted by law and/or under the
Company’s articles or bylaws or any directors’ and officers’ liability
insurance coverage which may be in effect from time to time and/or any
indemnification agreement between such individual and the Company.

 

18.                                 Governing
Law.  The Plan and all determinations
made and actions taken thereunder shall be governed by and construed in
accordance with the laws of the State of Colorado, without giving effect to the
conflict of laws principles thereof.

 

19Exhibit 10.1

 

Execution Copy

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT AGREEMENT
(this “Agreement”) is made and entered into as of April [  ], 2008 (the “Effective Date”), by and
between MacroChem Corporation, Inc., a  Delaware  corporation (the “Company”), and
James M. Pachence an individual who resides at 18 Elm Street, Hopewell, New
Jersey, USA (the “Executive”).

 

WHEREAS, the Company
is engaged in the business of acquiring and developing small molecule
pharmaceuticals for oncology indications (the “Business”); and

 

WHEREAS, the Company
desires to employ the Executive, and the Executive desires to be employed by
the Company, on the terms and conditions hereinafter set forth.

 

NOW, THEREFORE, in
consideration of the foregoing and of the respective covenants and agreements
herein set forth, the Company and the Executive agree as follows:

 

1.             Employment.  The
Company will employ the Executive, and the Executive will serve as the Chief
Executive Officer  of the
Company.  The Executive will also be a
member of the Board of Directors of the Company (the “Board”) so long as
he is employed in this capacity and Executive will report directly to the Board.  The Executive will perform such services
customary to that office and such other duties and services as shall from time
to time be reasonably assigned to him by the Board, consistent with such
positions and this Agreement.  It is understood
that Executive may participate on up to three Boards of Directors or Advisory
Boards of other companies and otherwise participate in personal investments, to
the extent such activities (a) were conducted by Executive prior to the
Effective Date, or (b) do not materially interfere with the performance of
his duties with the Company and to the extent that the Executive has obtained
prior written approval of the Board to participate in any such activity.    The
Executive will perform his duties hereunder faithfully and to the best of his
abilities and in furtherance of the business of the Company and its
subsidiaries, and will devote his time and energies to the business and affairs
of the Company and its subsidiaries.

 

2.             Term.  The Executive’s
employment hereunder shall be “at will” and is terminable at any time by either
party, subject to the provisions of Sections 4, 5 and 6 hereof.

 

3.             Compensation and
Other Related Matters.

 

(a)               Salary.  As
compensation for services rendered under this Agreement, the Executive shall
receive an annual salary of not less than $250,000 (as may be increased
pursuant to the immediately succeeding sentence, the “Base Salary”),
which salary shall be paid in accordance with the Company’s then prevailing
payroll practices.  The Executive’s
annual salary is eligible for increase annually in accordance with the Company’s
compensation practices and increases will be evaluated at the discretion of the
Compensation Committee of the Board.

 

 

(b)               Bonus.  During the
term of this Agreement, and at the sole discretion of the Compensation
Committee of the Board, the Executive shall be eligible to receive an annual
bonus up to fifty  percent (50%)  of
the Executive’s Annual Salary at the conclusion of each fiscal year based on
the Executive and the Company successfully achieving targeted annual
performance objectives (the “Annual Bonus” and, together with the Annual
Salary, the “Annual Compensation”).  To
receive such Annual Bonus, the Executive must still be employed with the
Company as of December 31 of the year for which the Annual Bonus is
payable and not be in breach of this Agreement.

 

(c)               Equity Compensation. 
As of the Effective Date, the Executive shall be granted Stock Options
pursuant to the terms and conditions of a Stock Option Award Agreement in the
form approved by the Company’s Board as of the date hereof and subject to
amendment as set forth therein.  These
options will be issued from a valid stock option plan approved by the
stockholders and registered under an S-8 within eighteen months from the date
hereof (the “Grant Date”).  The Stock
Option shall be for the purchase of 2,290,000 shares of the Company’s common
stock, no par value (the “Common Stock”) at a price per share equal to the
closing price on the OTC BB on the Grant Date. 
Of the Stock Options to purchase 2,290,000 shares of the Company’s
Common Stock, stock options to purchase 572,500 shares of Common Stock shall
vest immediately upon execution of this Agreement, and stock options to
purchase 143,124 shares of Common Stock shall vest and become exercisable every
90 days following the Effective Date for the next three years from the Effective
Date and as fully defined in the Stock Option Award Agreement; provided that Executive
is employed by the Company on such vesting date.

 

(d)               Other Benefits.  The
fringe benefits, perquisites and other benefits of employment to be provided to
the Executive shall be equivalent to such benefits and perquisites as are
provided to other executives of the Company having similar rank and seniority
to the Executive, as those benefits are amended from time to time.  In addition, the Executive shall be entitled
to participate in any other executive compensation or employee bonus plans
implemented by the Company on such terms and conditions as shall have been
determined by the Board or the Compensation Committee thereof.  Participation in any such benefit programs
shall be subject to any applicable probationary or similar periods.

 

(e)               Expenses.  The
Executive will be reimbursed for all reasonable out-of-pocket expenses actually
incurred by him in the furtherance of his duties under this Agreement and
consistent with the Company’s policies concerning the reimbursement of such
expenses.  Such expenses shall be
reimbursed upon submission to the Company of invoices containing original
receipts for all such expenditures and upon review by the Company of the
reasonable nature of such expenditures.

 

4.             Termination.

 

All
termination provisions require a 60 day written notice.

 

(a)               Disability.  If, as
a result of the incapacity of the Executive due to physical or mental illness,
the Executive is unable to perform the duties of his or her position of
employment or any substantially similar position

 

2

 

of employment by reason of any
medically determinable physical or mental impairment that can be expected to
result in death or can be expected to last for a continuous period of not less
than six months, the Executive will be deemed to have a Disability.  The Company may terminate the Executive’s
employment for Disability upon written notice to the Executive or the Executive’s
legal representative, and such termination shall not constitute termination
without Cause (as defined below) for purposes of this Agreement.

 

(b)               Death.  The
Executive’s employment shall terminate immediately upon the death of the
Executive.

 

(c)               Termination with Cause.  The Company shall be entitled to terminate the
Executive’s employment for Cause.  “Cause”
shall mean (i) the willful and continued failure by the Executive to
perform substantially his duties hereunder, other than by reasons of
Disability, after demand for substantial performance is delivered by the
Company that identifies the manner in which the Company believes the Executive
has not substantially performed his duties; (ii) the Executive will have
been indicted by any federal, state or local authority in any jurisdiction for,
or will have pleaded guilty or nolo contendere to, an act constituting a
felony, (iii) the Executive will have habitually abused any controlled
substance (such as narcotics or alcohol), or (iv) the Executive will have (A) engaged
in acts of fraud, material dishonesty or gross misconduct in connection with
the business of the Company, or (B) committed a material breach of this
Agreement.

 

(d)               Termination Without Cause. 
The Company shall, in its sole discretion, have the right to terminate
the Executive’s employment without Cause at any time.

 

(e)               Resignation for Good Reason.  The Executive shall have the right to
terminate his employment for “Good Reason,” which shall mean a resignation of
his employment and his Separation from Service (as defined for purposes of
§409A of the Internal Revenue Code) within less than one year following the
initial existence of one or more of the following conditions arising without
his consent:

 

(i) any material reduction in his Base
Salary under Section 3(a), above;

 

(ii) any other material breach by the
Company of any of its obligations to the Executive under this Agreement; or

 

(iii) any relocation of the Executive’s
primary place of employment more than 50 miles;

 

(iv) any failure of the Company to have
any successor to all or substantially all of the business and properties of the
Company assume all of the liabilities and obligations of the Company under this
Agreement (and any stock option or restricted stock agreement referred to
herein, under such awards as have fully vested);

 

3

 

provided, in each case, that a prior written notice specifying the
reasons within ninety (90) after the initial existence of the condition and an
opportunity to cure such condition (if curable) shall be afforded the Company,
and that “Good Reason” shall exist only if the Company shall fail to cure such
condition within 31 days after its receipt of such prior written notice.

 

(f)                Resignation Without Good Reason.  The Executive shall have the right to resign
his employment without “Good Reason” at any time upon thirty (30) days’ prior
written notice to the Board (a “Resignation Notice”) in which case the
Executive’s employment shall terminate upon effectiveness of such Resignation Notice
unless otherwise terminated earlier pursuant to the terms of this Agreement.

 

5.             Compensation Upon
Termination or During Disability.

 

(a)               Disability.  During
any period of Disability, the Executive shall continue to receive his Annual
Salary, less any compensation payable to the Executive under any applicable
disability insurance plan during such period, until this Agreement is
terminated, but in no event longer than 12 months from the date the Disability
began, as determined by the Company. 
Thereafter, the Executive’s benefits shall be determined under the
Company’s insurance and other compensation programs then in effect, and the
Company shall have no further obligation to the Executive under this Agreement,
except that the Company shall pay to the Executive, or the Executive’s legal
representative, as appropriate, (i) any accrued but unpaid base salary and
vacation, (ii) any earned but unpaid bonus from a prior fiscal year
(subject, if applicable, to the terms of any deferred compensation arrangements),
and (iii) reimbursement of business expenses incurred prior to the date of
termination.

 

(b)               Death.  In the event
of the Executive’s death, the Company shall pay the Executive’s estate his
Annual Salary through the date of death. 
Thereafter, the Company shall have no further obligation to the
Executive or the Executive’s beneficiary under this Agreement, except that the
Company shall pay to the Executive’s estate (i) any earned but unpaid
bonus from a prior fiscal year (subject, if applicable, to the terms of any
deferred compensation arrangements), and (ii) reimbursement of business
expenses incurred prior to the date of the Executive’s death.

 

(c)               Cause.  If the
Company terminates the Executive’s employment for “Cause” as defined in
Paragraph 4(c) of this Agreement, the Company shall continue to pay the
Executive his Annual Salary through the date of termination of the Executive’s
employment.   At that time, Stock Options
which have been granted and have vested prior to the date of the termination for
Cause shall remain vested and exercisable for the period of time specified in
Executive’s Option Award Agreement.  At
the effective time of the termination for Cause, all unvested Stock Options
shall immediately be terminated. 
Thereafter, the Company shall have no further obligation to the
Executive under this Agreement.

 

(d)               Termination Without Cause by the Company.  During the term of this Agreement and at
times following the Company’s successfully consummating its first equity  financing of $10 million or more in gross
proceeds following the Effective Date (the “First Financing”), if the Company
terminates the Executive’s employment without Cause

 

4

 

pursuant to Paragraph 4(d) of
this Agreement (a “Termination without Cause”), under circumstances that
constitute a Involuntary Separation from Service with the Company (as defined
for purposes of §409A of the Internal Revenue Code), the Company shall pay the
Executive that ratable amount of Annual Compensation which the Executive would
earn in 12 months based on Executive’s then-current salary and target bonus
level (the “Severance Period”). Executive shall continue to participate in all
other benefit plans during the Severance Period, except to the extent prohibited
by law or any applicable employee benefit plan. 
All Stock Options granted to Executive which have vested prior to the
final day of Executive’s employment under this Agreement (the “Termination Date”)
shall remain vested and exercisable for the exercise period set forth in
Executive’s Option Award Agreement.  The
Company will continue to vest Stock Options and stock awards during the
Severance Period in accordance with the following vesting schedule:

 

(1)           If
a Termination without Cause occurs during the first year of the term of this
Agreement, all unvested Stock Options that would have vested during the
calendar quarter within which the Termination without Cause occurs shall vest
and become exercisable on the Termination Date for the exercise period set
forth in Executive’s Option Award Agreement and, in addition, all unvested
Stock Options that would have vested during the calendar quarter after the
occurrence of the Termination without Cause also shall vest and become
exercisable for the exercise period set forth in Executive’s Option Award
Agreement; and

 

(2)           If
a Termination without Cause occurs during the second year of the term of this
Agreement, all unvested Stock Options that would have vested during the
calendar quarter within which the Termination without Cause occurs shall vest
and become exercisable on the Termination Date for the exercise period set
forth in Executive’s Option Award Agreement and, in addition, all unvested
Stock Options that would have vested during the two (2) calendar quarters
after the occurrence of the Termination without Cause also shall vest and
become exercisable for the exercise period set forth in Executive’s Option
Award Agreement; and

 

(3)           If
a Termination without Cause occurs during the third year of the term of this
Agreement or thereafter, all unvested Stock Options that would have vested
during the calendar quarter within which the Termination without Cause occurs
shall vest and become exercisable on the Termination Date for the exercise
period set forth in Executive’s Option Award Agreement and, in addition, all
unvested Stock Options that would have vested during the three (3) calendar
quarters after the occurrence of the Termination without Cause also shall vest
and become exercisable for the exercise period set forth in Executive’s Option
Award Agreement.

 

Notwithstanding the foregoing provisions of
this Section 5(d), if Executive receives a Termination without Cause prior
to the First Financing, Executive shall receive no severance.  Payment of the Executive’s separation pay
benefit under this Section 5(d), if any, shall be made as follows:

 

(i)  Payment of the separation pay benefit shall commence as of
the 30th day after the Executive’s Separation from Service, and shall continue
in monthly installments thereafter until all 6 payments are made.

 

5

 

(ii)  In the event the value of the separation pay benefit shall
exceed two times the lesser of the Executive’s annualized compensation or the
maximum amount that may be taken into account for qualified plan purposes (in
each case, as determined in accordance with Treas. Reg.
§1.409A-1(b)(9)(iii)(A)), the excess shall not be paid as provided in (i),
above, but instead shall be paid in 6 equal monthly installments commencing as
of the first of the month after the date that is six months after the Executive’s
Separation from Service date.

 

(iii)  In no event shall payments be accelerated, nor shall the
Executive be eligible to defer payments to a later date.

 

(e)               Resignation With Good Reason.  If the Executive resigns his employment for “Good
Reason” pursuant to Paragraph 4(e) of this Agreement after the Company has
consummated the First Financing, then the Company shall pay the Executive that
ratable amount of Executive’s Annual Compensation which the Executive would
earn earn in 12 months based on Executive’s then-current base salary and target
bonus level during the Severance Period (as defined in Section 5(d),
above).  If Executive resigns his
employment for “Good Reason” pursuant to Paragraph 4(e) of this Agreement
prior to the First Financing, Executive shall not receive any severance.  All Stock Options granted to Executive prior
to Executive’s departure for “Good Reason” shall remain vested and exercisable
for the period of time set forth in Executive’s Option Award Agreement.  The Company shall continue to vest options
and stock awards during the Severance Period in accordance with the vesting
schedule set forth in Section 5(d) above (e.g. the same as if
Executive were Terminated for Cause). 
Thereafter, the Company shall have no further obligation to the
Executive under this Agreement.  Payment
of the Executive’s separation pay benefit under this Section 5(e) shall
be made in accordance with the payment provisions of Section 5(d), above.

 

(f)                Resignation Without Good Reason.  If the Executive resigns his employment
without “Good Reason” pursuant to Paragraph 4(f) of this Agreement, the
Company shall continue to pay the Executive his Annual Salary through the
effective date of the Resignation Notice unless the Executive is otherwise
terminated earlier pursuant to the terms of this Agreement.  At that time, Stock Options which have been
granted and have vested prior to the date of the Resignation Notice shall
remain vested and exercisable for the period of time specified in Executive’s
Option Award Agreement.  At the effective
time of the resignation without Good Reason, all unvested Stock Options shall
immediately be terminated.  Thereafter,
the Company shall have no further obligation to the Executive under this
Agreement.

 

(g)               Release of Claims.  As a condition for the payments as provided
in Sections 5(d) and 5(e) above, the Executive must execute a release of all claims (including but not
limited to state, federal and foreign laws) that the Executive has or may have
against the Company, its directors, officers, employees, agents,
representatives, its affiliated companies (incorporated or otherwise) and the
members of its board of directors.  Such
release shall be in such form and include such provisions as the Company may
require in its reasonable discretion. 
The payments provided for in Sections 5(d) and 5(e) shall not
be made until such release is effective and is no longer subject to rescission
under any applicable law.

 

6

 

6.     Change
in Control.

 

(a)               At any time
after successfully completing the First Financing, in the event that the
Executive’s employment hereunder is terminated in anticipation of, or within
six (6) months following, a Change in Control (defined in Appendix A) in a
termination that is governed by Section 5(d) or 5(e) (relating
to terminations without Cause or for Good Reason), then in lieu of the benefits
described in Section 5(d) or 5(e), the Executive shall be entitled to
receive the following benefits, provided, however that for purposes of this Section 6(a),
a termination will be deemed to occur “in anticipation of a Change in Control”
only if it occurs after the date on which a Change in Control is formally
proposed to the Company’s Board of Directors:

 

(i)            any outstanding
Stock Option shall become fully vested and exercisable to the extent that such
Stock Option was then scheduled to become vested or exercisable within one year
following such event and shall remain exercisable for at least the lesser of
one year following such event and the maximum stated term of such Stock Option;

 

(ii)           any outstanding
Restricted Shares shall become fully vested to the extent that such Restricted
Shares were then scheduled to become vested within one year following such
event;

 

(iii)          the Executive shall
be entitled to additional or other benefits (if any) in accordance with the
applicable terms of applicable plans, programs and arrangements of the Company
and its Affiliates.

 

(iv)          the Company shall
pay the Executive that ratable amount of Annual Compensation (based upon
Executive’s then-current base salary and target bonus) which the Executive
would earn in twenty-four (24) months (the “Amended Severance Period”) in lieu
of the severance governed by Section 5(d) or 5(e).

 

(b)               Payment of the Executive’s
separation pay benefit under this Section 6 shall be made as follows:

 

(i)  Payment of the
separation pay benefit shall commence as of the 30th day after the Executive’s
Separation from Service, and shall continue in monthly installments thereafter
until all 18 payments are made.

 

(ii)  In the event the
value of the separation pay benefit shall exceed two times the lesser of the
Executive’s annualized compensation or the maximum amount that may be taken
into account for qualified plan purposes (in each case, as determined in
accordance with Treas. Reg. §1.409A-1(b)(9)(iii)(A)), the excess shall not be
paid as provided in (i), above, but instead shall be paid in 18 equal monthly
installments commencing as of the first of the month after the date that is six
months after the Executive’s Separation from Service date.

 

(iii)  In no event shall
payments be accelerated, nor shall the Executive be eligible to defer payments
to a later date.

 

7

 

(c)           If any portion of the payments which
the Executive has the right to receive from the Company, or any affiliated
entity or successor, hereunder would constitute “excess parachute payments” (as
defined in Section 280G of the Internal Revenue Code) subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code, such
excess parachute payments shall be reduced to the largest amount that will
result in no portion of such excess parachute payments being subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code.

 

7.         Agreement Not to Compete or Solicit

 

(a)               Covenant Not to Compete.  The Employee hereby covenants and agrees that
at no time during the Term of Employment nor for a period of six (6) months
(such period to be eighteen (18) months in the case of a termination resulting
in payments pursuant to Section 6(a)(iv) ) immediately following the
termination of the Employee’s employment will he for himself or on behalf of
any other person, partnership, company or corporation, directly or indirectly,
acquire any financial or beneficial interest in (except as provided in the next
sentence), provide consulting or other services to, be employed by, or own,
manage, operate or control any entity engaged in the Business.  Notwithstanding the preceding sentence, the
Employee will not be prohibited from owning less than five percent (5%) of any
corporation, whether or not such corporation is in competition with the
Company.

 

(b)               Non-Solicitation.  The Employee hereby covenants and agrees
that, at all times during the Term of Employment and for a period of six (6) months
(such period to be one (1) year in the case of a termination resulting in
payments pursuant to Section 6(a)(ii)) immediately following the
termination thereof, the Employee will not directly or indirectly employ or
seek to employ any person or entity employed at that time by the Company or any
of its subsidiaries, or otherwise encourage or entice such person or entity to
leave such employment.

 

(c)               Intellectual Property.  The Executive assigns to the Company, without
additional compensation, all right, title and interest in all creations,
inventions, ideas, designs, copyrightable materials, trademarks, and other
technology and rights (and any related improvements or modifications), whether
or not subject to patent or copyright protection (collectively, “Inventions”),
relating to the Business or any other activities of the Company that are
conceived or developed by the Executive in the course of his employment,
whether alone or with others, and, if based on Confidential Information, after
the termination of this Agreement for any reason.  Such Inventions shall be the sole property of
the Company and, to the maximum extent permitted by applicable law, shall be
deemed “works made for hire” as the term is used in the United States
Copyright Act.   The Executive may list
specific technologies that are to be excluded from Intellectual Property, as
listed in Exhibit A. The Executive shall provide evidence to the Company
of any assignment of any specific Invention as may be requested by the Company
from time to time.

 

8

 

8.         Confidential Information.

 

The Employee agrees to keep
secret and retain in the strictest confidence all confidential matters which
relate to the Company or any affiliate of the Company, including, without
limitation, customer lists, client lists, trade secrets, pricing policies and
other business affairs of the Company and any affiliate of the Company learned
by him from the Company or any such affiliate or otherwise before or after the
date of this Agreement, and not to disclose any such confidential matter to
anyone outside the Company, or any of its affiliates, whether during or after
his period of service with the Company, except as may be required in the course
of a legal or governmental proceeding. 
Upon request by the Company, the Employee agrees to deliver promptly to
the Company upon termination of his services for the Company, or at any time
thereafter as the Company may request, all Company or affiliate memoranda,
notes, records, reports, manuals, drawings, designs, computer files in any
media and other documents (and all copies thereof) relating to the Company’s or
any affiliate’s business and all property of the Company or any affiliate
associated therewith, which he may then possess or have under his control.

 

9.         Remedy.

 

(a)               Should the
Employee engage in or perform, either directly or indirectly, any of the acts
prohibited by Sections 7 or 8 hereof, it is agreed that any and all severance
payments and related benefits hereunder shall immediately terminate and the
Company will also be entitled to full injunctive relief, to be issued by any
competent court of equity, enjoining and restraining the Employee and each and
every other person, firm, organization, association, or corporation concerned
therein, from the continuance of such violative acts. The foregoing remedies
available to the Company will not be deemed to limit or prevent the exercise by
the Company of any or all further rights and remedies which may be available to
the Company hereunder or at law or in equity.

 

(b)               The Employee
acknowledges and agrees that the covenants contained in this Agreement are fair
and reasonable in light of the consideration paid hereunder, and the invalidity
or unenforceability of any particular provision, or part of any provision, of
this Agreement will not affect the other provisions or parts hereof.  If any provision hereof is determined to be
invalid or unenforceable and if any such provision will be so determined to be
invalid or unenforceable by reason of the duration or geographical scope of the
covenants contained therein, such duration or geographical scope, or both, will
be reduced to a duration or geographical scope solely to the extent necessary
to cure such invalidity.

 

10.       Miscellaneous.

 

(a)               Successors; Binding Agreement.  This Agreement and the obligations of the
Company under this Agreement and all rights of the Executive under this
Agreement shall inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns; provided, however,
that the duties of the Executive under this Agreement are personal to the
Executive and may not be delegated or assigned by him.

 

9

 

(b)               Notice. 
All notices of termination and other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered by hand or mailed by United States registered mail, return receipt
requested, addressed as follows:

 

If to the Company:

 

MacroChem Corporation

80 Broad Street, 22nd
Floor

New York, NY 10004

Attn:  General Counsel

Tel: L 212) 514-8094

Fax: (212) 514-8613

 

with a copy to:

 

Luke P. Iovine, III, Esq.

Paul, Hastings, Janofsky &
Walker LLP

75 East 55th Street

New York, NY 10022

Tel: (212) 318-6000

Fax: (212) 319-4090

 

or to such other address as
either party may designate by notice to the other, which notice shall be deemed
to have been given upon receipt.

 

(c)               Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard
to the conflict of law rules thereof.

 

(d)               Waivers.  The waiver of either party hereto of any
right under this Agreement or of any failure to perform or breach by the other
party hereto shall not be deemed a waiver of any other right under this
Agreement or of any other failure or breach by the other party hereto, whether
of the same or a similar nature or otherwise. 
No waiver shall be deemed to have occurred unless set forth in writing
executed by or on behalf of the waiving party. 
No such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such
term or condition for the future or as to any act other than that specifically
waived.

 

(e)               Severability.  The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall otherwise remain in full
force and effect.  Moreover, if any one
or more of the provisions contained in this Agreement is held to be excessively
broad as to duration, scope or activity, such provisions shall be construed by
limiting and reducing them so as to be enforceable to the maximum extent
compatible with applicable law.

 

10

 

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

 

(g)               Entire Agreement.  This Agreement sets forth the entire
agreement and understanding of the parties in respect of the subject matter
contained herein, and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether oral or
written, by any officer, employee or representative of either party in respect
of said subject matter.

 

(h)               Modifications.  This Agreement may only be modified in a
writing signed by both the Company and the Executive.

 

(i)                Headings Descriptive.  The headings of the several paragraphs of
this Agreement are inserted for convenience only and shall not in any way
affect the meaning or construction of any of this Agreement.

 

(j)                Capacity.  The Executive represents and warrants that he
is not a party to any agreement that would prohibit him from entering into this
Agreement or performing fully his obligations under this Agreement.

 

(k)               Survival.  The obligations and rights set forth in
Paragraphs 6, 7 and 8 shall survive the termination of this Agreement for any
reason.

 

[Signature Page Follows]

 

11

 

IN WITNESS WHEREOF, the Company
and the Executive have executed this Agreement as of the date first written
above.

 

The Company:

 

MACROCHEM CORPORATION

 

	
  By:

  	
  /s/ Jeffrey B. Davis

  	
   

  
	
  Name:

  	
   Jeffrey B. Davis

  	
   

  
	
  Title:

  	
   Chairman, Compensation
  Committee

  	
   

  
				

 

 

Executive:

 

 

	
  /s/ James Pachence

  	
   

  
	
   

  
	
  James Pachence

  

 

 

APPENDIX A

 

(1)   “Affiliate” of a Person shall mean any Person that
directly or indirectly controls, is controlled by, or is under common control
with, such Person.

 

(2)   “Agreement” shall mean this Employment Agreement, which
includes for all purposes its Exhibits.

 

(3)   “Base Salary” shall have the meaning set forth in Section 3(a).

 

(4)   “Board shall mean the Board of Directors of the
Company.

 

(5)   “Change in Control” shall mean the occurrence of any of
the following events:

 

a.             any “person,”
as such term is currently used in Section 13(d) of the 1934 Act,
becomes (directly or indirectly) a “beneficial owner,” as such term is
currently used in Rule 13d-3 promulgated under that Act, of a percentage
of the Voting Securities of the Company, measured either by number of Voting
Securities or by number of votes entitled to be cast, that is at least 30 percentage points larger than the
percentage (if any) of the Voting Securities of the Company, measured in either
fashion, that such person beneficially owned (directly or indirectly) on the
Effective Date, unless the acquisition of such Voting Securities is approved by
a majority of Incumbent Directors (as defined below);

 

b.             a majority of the
Board consists of individuals other than “Incumbent Directors,” which
term means the members of the Board on the Effective Date; provided that
any individual becoming a director subsequent to such date whose election or
nomination for election was supported by two-thirds of the directors who then
comprised the Incumbent Directors shall be considered to be an Incumbent
Director; or

 

c.             (x) the
Company combines with another entity and is the surviving entity, or (y) all
or substantially all of the assets or business of the Company is disposed of
pursuant to a sale, merger, consolidation, liquidation or other transaction or
series of transactions, in each of cases (x) or (y), unless the
holders of Voting Securities of the Company immediately prior to such
combination, sale, merger, consolidation, liquidation or other transaction or
series of transactions (collectively, a “Triggering Event”) own, directly or
indirectly and immediately following such Triggering Event, more than fifty
percent (50%) of the Voting Securities (measured both by number of securities
and by voting power) of: (q) in the case of a combination in which the
Company is the surviving entity, the surviving entity and (r) in any other
case, the entity (if any) that succeeds to substantially all of the business
and assets of the Company.

 

13

 

(6)   “Code” shall mean the Internal Revenue Code of 1986, as
amended.  Any reference to a particular
section of the Code shall include any provision that modifies, replaces or
supersedes such section.

 

(7)   “Company” shall have the meaning set forth in the
preamble to this Agreement.

 

(8)   “Effective Date” shall have the meaning specified in the
preamble of this Agreement.

 

(9)   “Executive” shall have the meaning set forth in the
preamble to this Agreement.

 

(10) “Person” shall mean any individual, corporation,
partnership, limited liability company, joint venture, trust, estate, board, committee,
agency, body, employee benefit plan, or other person or entity.

 

(11) “Proceeding” shall mean any actual, threatened or
reasonably anticipated action, suit or proceeding, whether civil, criminal,
administrative, investigative, appellate, formal, informal or other.

 

(12) “Restricted Shares” shall mean any compensatory
restricted securities of the Company or any of its Affiliates; any compensatory
share units, phantom securities or analogous rights granted by or on behalf of
the Company or any of its Affiliates; and any security or right received in
respect of any of the foregoing securities or rights.

 

(13) “Stock Option” shall mean any compensatory option to
acquire securities of the Company or of any of its Affiliates; any compensatory
stock appreciation right, phantom stock option or analogous right granted by or
on behalf of the Company or any of its Affiliates; and any security or right
received in respect of any of the foregoing options or rights.

 

(14) “Term of Employment” shall mean the period specified in
Section 2.

 

(15) “Termination Date” shall mean the date on which the
Executive’s employment hereunder terminates in accordance with this Agreement.

 

(16) “Voting Securities” shall mean issued and outstanding
securities of any class or classes having general voting power, under ordinary
circumstances in the absence of contingencies, to elect one or more members of
the Board of the issuer.

 

14

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00142-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00142-of-00352.parquet"}]]