Document:

THIS NOTE HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE BE DISPOSED
OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO AIR
INDUSTRIES GROUP, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

	Principal Amount: $300,000	Issue Date: March 17, 2017 

 

7% Subordinated Promissory Note due September
17, 2017

 

FOR VALUE RECEIVED,
AIR INDUSTRIES GROUP, a Nevada corporation (the “Company”) hereby promises to pay to the order of ROBERT TAGLICH or
his assigns (the "Holder"), without demand, the sum of Three Hundred Thousand Dollars ($300,000), together with accrued
interest thereon from the date hereof at the rate of seven percent (7%) per annum, on September 17, 2017 (the “Maturity Date”),
or such earlier date as the same may become due as provided in Section 3 hereof.

 

This Note may be prepaid
in whole or in part at any time. All payments made pursuant to this Note shall be applied first to reimbursable expenses, interest
accrued, if any, and then principal.

 

The following is a
statement of rights of the Holder and the conditions to which this Note is subject, and to which the Holder, by acceptance of this
Note, agrees:

 

1.    
Subordination. (a)    This Note will be subordinate and inferior to the Company’s Senior Indebtedness
(as hereinafter defined). The Company for itself, its successors and assigns, covenants and agrees and the Holder of this Note,
for himself, his successors and assigns, by his acceptance of this Note likewise covenants and agrees that, to the extent provided
below, the payment of all amounts due pursuant to this Note is hereby expressly subordinated and junior in right of payment to
the extent and in the manner hereinafter set forth, to the Company’s Senior Indebtedness. As used herein, the term “Senior
Indebtedness” shall mean the principal of, and interest and premium, if any, on any and all, (i) indebtedness of the Company
for borrowed money or obligations with respect to which the Company is a guarantor, to banks, insurance companies, or other financial
institutions or entities regularly engaged in the business of lending money, in each case as in effect as of the date hereof, or
as may be borrowed hereafter, including without limitation, indebtedness incurred by one or more of the Company’s subsidiaries
under the Amended and Restated Revolving Credit, Term Loan, Equipment Line and Security Agreement, dated as of June 27, 2013 among
Air Industries Machining, Corp., Welding Metallurgy, Inc., Nassau Tool Works, Inc., Woodbine Products Inc., Eur-Pac Corporation,
Electronic Connection Corporation, The Sterling Engineering Corporation, and PNC Bank, National Association, as agent for the various
lenders named therein, as amended as of the date hereof, the payment of which has been guaranteed by the Company and Air Realty
Group, LLC (the “Guarantors”), (ii) any such indebtedness or any debentures, notes or other evidence of indebtedness
issued in exchange for or to refinance such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior
Indebtedness by a Guarantor, provided that such indebtedness issued in exchange for or to refinance Senior Indebtedness or arising
from the satisfaction of Senior Indebtedness by a Guarantor is on commercially reasonable terms as of the date of incurrence not
to exceed the principal amount under such Senior Indebtedness and provided further that the Company provides the Holder with prior
written notice of such action.

 

(b)   
Upon the acceleration of any Senior Indebtedness or upon the maturity of all or any portion of the principal amount of any Senior
Indebtedness by lapse of time, acceleration or otherwise, all such Senior Indebtedness which has been so accelerated or matured
shall first indefeasibly be paid in full before any payment is made by the Company or any person acting on behalf of the Company
on account of any obligations evidenced by this Note.

 

(c)   
The Company shall not pay any principal portion of this Note, or interest accrued hereon, if at such time there exists a Blockage
Event (as hereafter defined) and written notice thereof has been given to the Company and the Holder by the holders of the Senior
Indebtedness.

 

(d)   
A “Blockage Event” is deemed to exist for the period of time commencing on the date of receipt by the Holder of written
notice of the occurrence of a Default or an Event of Default (as defined in the instruments evidencing the Senior Indebtedness),
provided that the failure to pay accrued interest on this Note when due shall not give rise to a Blockage Event in the absence
of another Default or Event of Default, which notice shall specify such Default or Event of Default, and ending on:

 

     

     

    

 

(i)   
the date such Default or Event of Default under the Senior Indebtedness, as applicable, is cured or waived, provided that such
Default or Event of Default is in the payment of any amount due thereunder; or

 

(ii)   in
the case of any other Default or Event of Default under the Senior Indebtedness, the earlier of (A) the date on which Holder has
received written notice of such Default or Event of Default shall have been cured or waived and (B) the date that is 365 days after
the occurrence of such Default or Event of Default, provided that a Blockage Event with respect to a single specified Default or
Event of Default may be deemed to occur only once for each twelve-month period, provided, further, that no Default or Event of
Default that existed at the commencement of, or during the pendency of, a Blockage Event shall serve as the basis for the institution
of any subsequent Blockage Event.

 

A Blockage Event shall
not be deemed to have existed during the period of time commencing on the date upon which the holder of this Note accelerates payment
of the principal amount of this Note or such other Notes as a result of any Event of Default hereunder and ending on the 365th
day after written notice of such acceleration given by the holder or such other holders to the Company and the holders of the instruments
evidencing the Senior Indebtedness; provided that in no event shall the Company pay the holder of this Note or the holders of any
other Notes the principal amount so accelerated if a Blockage Event then exists until the Senior Indebtedness has been paid in
full.

 

(e)    At
any time there exists a Blockage Event, (i) the Company shall not, directly or indirectly, make any payment of any part of this
Note, (ii) the Holder shall not demand or accept from the Company or any other person any such payment or cancel, set-off or otherwise
discharge any part of the indebtedness represented by this Note, and (iii) neither the Company nor the Holder shall otherwise take
or permit any action prejudicial to or inconsistent with the priority position of any holder of Senior Indebtedness over the Holder
of this Note.

 

(f)    No
right of any holder of Senior Indebtedness to enforce the subordination provisions of this obligation shall be impaired by any
act or failure to act by the Company or the Holder or by their failure to comply with this Note or any other agreement or document
evidencing, related to or securing the obligations hereunder. Without in any way limiting the generality of the preceding sentence,
the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holder, without
incurring responsibility to the Holder and without impairing or releasing the subordination provided in this Note or the obligations
of the Holder to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms
of payment of any Senior Indebtedness provided that such change does not materially impact Holder in an adverse manner; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing any Senior Indebtedness; (iii) release
any person or entity liable in any manner for the collection of any Senior Indebtedness; and (iv) exercise or refrain from exercising
any rights against the Company or any other person or entity.

 

(g)   In
the event that the Company shall make any payment or prepayment to the Holder on account of the obligations under this Note which
is prohibited by this Section, such payment shall be held by the Holder, in trust for the benefit of, and shall be paid forthwith
over and delivered to, the holders of Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts
and priorities of Senior Indebtedness held by them) to the extent necessary to pay all Senior Indebtedness due to such holders
of Senior Indebtedness in full in accordance with its terms (whether or not such Senior Indebtedness is due and owing), after giving
effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness.

 

(h)   After
all Senior Indebtedness indefeasibly is paid in full and until the obligations under the Note are paid in full, the Holder shall
be subrogated to the rights of holders of Senior Indebtedness to the extent that distributions otherwise payable to the Holder
have been applied to the payment of Senior Indebtedness. For purposes of such subrogation, no payments or distributions to holders
of such Senior Indebtedness of any cash, property or securities to which the Holder would be entitled except for the provisions
of this Section and no payment over pursuant to the provisions of this Section to holders of such Senior Indebtedness by the Holder,
shall, as between the Company, its creditors other than holders of such Senior Indebtedness, and the Holder, be deemed to be a
payment by the Company to or on account of such Senior Indebtedness, it being understood that the provisions of this Section are
solely for the purpose of defining the relative rights of the holders of such Senior Indebtedness, on the one hand and the Holder,
on the other hand.

 

    2 

     

    

 

(i)    In
any insolvency, receivership, bankruptcy, dissolution, liquidation or reorganization proceeding, or in any other proceeding, whether
voluntary or involuntary, by or against the Company under any bankruptcy or insolvency law or laws relating to relief of debtors,
to compositions, extensions or readjustments of indebtedness:

 

(i)   the
claims of any holders of Senior Indebtedness against the Company shall be paid indefeasibly in full in cash or such payment shall
have been provided for in a manner acceptable to the holders of at least a majority of the then outstanding principal amount of
the Senior Indebtedness before any payment is made to the Holder;

 

(ii)  until all
Senior Indebtedness is indefeasibly paid in full in cash or such payment shall have been provided for in a manner acceptable to
the holders of at least a majority of the then outstanding principal amount of the Senior Indebtedness before any payment is made
to the Holder, any distribution to which the Holder would be entitled but for this Section shall be made to holders of Senior Indebtedness,
except for distribution of securities issued by the Company which are subordinate and junior in right of payment to the Senior
Indebtedness; and

 

(iii)  the
holders of Senior Indebtedness shall have the right to enforce, collect and receive every such payment or distribution and give
acquittance therefor. If, in or as a result of any action case or proceeding under Title 11 of the United States Code, as amended
from time to time, or any comparable statute, relating to the Company, the holders of the Senior Indebtedness return, refund or
repay to the Company, or any trustee or committee appointed in such case or proceeding receive any payment or proceeds of any collateral
in connection with such action, case or proceeding alleging that the receipt of such payments or proceeds by the holders of the
Senior Indebtedness was a transfer voidable under state or federal law, then the holders of the Senior Indebtedness shall not be
deemed ever to have received such payments or proceeds for purposes of this Note in determining whether and when all Senior Indebtedness
has been paid in full and the Company shall pay or cause to be paid, and the Holder shall be entitled to receive any such funds,
proceeds or collateral to satisfy all amounts due hereunder. In the event the holders of Senior Indebtedness receive amounts in
excess of payment in full (cash) of amounts outstanding in respect of Senior Indebtedness (without giving effect to whether claims
in respect of the Senior Indebtedness are allowed in any insolvency proceeding), the holders of Senior Indebtedness shall pay such
excess amounts to the Holder.

 

(k)    By
its acceptance of this Note, the Holder agrees to execute and deliver such documents as may be reasonably requested from time to
time by the Company or the holder of any Senior Indebtedness in order to implement the foregoing provisions of this Section.

 

2. Conversion At
the Option of the Holder or Lender. (a) The Holder shall have the option at any time while this Note remains outstanding to
convert the unpaid principal amount and accrued interest thereon into shares of common stock or other securities of the Company
which the Company may offer and sell in a public or private financing on the same terms and conditions as are offered to purchasers
in such offering (a “Financing”), or, if more favorable to the Company, on such other terms as may be required under
the rules of the NYSE MKT. The Holder shall notify the Company of its election to convert in accordance with the provisions of
Section 4(b).

 

(b) Should the Company
complete a Financing prior to satisfaction of this Note, for a period of three business days commencing the business day immediately
after completion of such Financing, the Company shall have the right to convert the unpaid principal amount of this Note and accrued
interest thereon into the shares of common stock or other securities of the Company sold in the Financing on the same terms and
conditions as are offered to purchasers in the Financing, or, if more favorable to the Company, such other terms as may be required
under the rules of the NYSE MKT. The Company promptly shall notify the Holder of its election to convert this Note in accordance
with the provisions of Section 4(b).

 

    3 

     

    

 

3.    Events
of Default. The occurrence of any of the following events of default ("Event of Default") shall, at the option of
the Holder hereof and subject to the provisions of section 1 (a) hereof, make all sums of principal and interest then remaining
unpaid hereon and all other amounts payable hereunder immediately due and payable, upon demand, without presentment, or grace period,
all of which hereby are expressly waived, except as set forth below:

 

(a)    Failure
to Pay Principal or Interest. The Company fails to pay any installment of principal, interest or other sum due under this Note
when due.

 

(b)    Receiver
or Trustee. The Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of
a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise
be appointed without the consent of the Company is not dismissed within sixty (60) days of appointment.

 

(c)    Bankruptcy.
Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any
law, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Company
and if instituted against Company are not dismissed within sixty (60) days of initiation.

 

The holder of this Note shall give the
Company and the holders of the Senior Indebtedness written notice of any Event of Default hereunder.

 

4.   
Miscellaneous.

 

(a)    Waiver.
No failure or delay on the part of Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise
thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive
of, any rights or remedies otherwise available.

 

(b)   Notices.
All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served or (ii) delivered by reputable air courier service with
charges prepaid, addressed as set forth below or to such other address as such party shall have specified most recently by written
notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon receipt
if personally served or (b) on the second business day following the date of deposit with a reputable air courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be: (i) if to the Company to: Air Industries Group, 360 Motor Parkway, Suite 100, Hauppauge, New York 11788,
Attn: Michael E. Recca, Chief Financial Officer, e-mail: mrecca@airindustriesgroup.com, with, in the case of notices to the Company,
a copy by e-mail only to: Eaton & Van Winkle LLP, Three Park Avenue, 16th floor, New York, NY 10016, Attn: Vincent
J. McGill, Esq., e-mail: vmcgill@evw.com, and (ii) if to the Holder, to c/o Taglich Brothers, Inc., 790 New York Avenue, Huntington,
NY 11743, with a copy to c/o Taglich Brothers, Inc., 790 New York Avenue, Huntington, NY 11743, Attn: Mr. Richard Oh, e-mail: roh@taglichbrothers.com.

 

(c)    Terms.
The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or supplemented.

 

(d)    Successors
and Assigns. This Note shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of
the Holder and its successors and assigns.

 

(e)    Expenses.
The Company shall reimburse Holder for all reasonable costs and expenses, including without limitation, reasonable attorneys’
fees and expenses, incurred in connection with (i) drafting, negotiating, executing and delivering any amendment, modification
or waiver of, or consent with respect to, any matter relating to the rights of Holder hereunder and (ii) enforcing any provisions
of this Note and/or collecting any amounts due under this Note.

 

(f)   Governing
Law. This Note shall be governed by and construed in accordance with the laws of the State of New York. Any action brought
by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the civil
or state courts of New York or in the federal courts located in the State and county of New York. Both parties and the individual
signing this Agreement on behalf of the Company agree to submit to the jurisdiction of such courts. The prevailing party shall
be entitled to recover from the other party its reasonable attorney's fees and costs.

 

    4 

     

    

 

(g)   Savings
Clause. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges
in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges
hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed
by the Company to the Holder and thus refunded to the Company.

 

IN WITNESS WHEREOF,
Company has caused this Note to be signed in its name by an authorized officer as of the date set forth above.

 

	 	AIR INDUSTRIES GROUP
	 	 
	       	 
	 	By: /s/ Michael Recca
	 	           Michael Recca
	 	   Chief Financial Officer

 

Accepted as of the date set forth above

 

/s/ Robert Taglich

      Robert Taglich 

 

 

5Exhibit

2017 PARAGON OFFSHORE PLC
SHORT TERM INCENTIVE PLAN 

1.Purpose. The purpose of this Paragon Offshore plc Short Term Incentive Plan (the “Plan”) is to set forth the terms and conditions of the annual cash incentive program of Paragon Offshore plc (the “Company”) as it applies to the eligible employees participating herein and to assist the Company and its affiliates in attracting, retaining, motivating and rewarding employees of the Company and its affiliates by providing for awards that will incentivize performance by employees who contribute to the success of the Company and its affiliates.  The Plan authorizes annual cash incentive awards that are intended to qualify as “performance-based compensation” that is tax deductible without limitation under section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) (“Performance-Based Compensation”); provided, however, that awards that are not Performance-Based Compensation may also be awarded hereunder.  To the extent that any Bonus Awards granted hereunder are intended to constitute Performance-Based Compensation, such Bonus Awards shall be considered to be Cash Awards granted pursuant to the Paragon Offshore plc 2014 Employee Omnibus Incentive Plan, as may be amended from time to time (the “Incentive Plan”), and shall be considered Performance Awards (and, with respect to covered employees, Qualified Performance Awards) under the Incentive Plan.
2.    Definitions. In addition to the terms defined in Section 1 above and elsewhere in the Plan, the following capitalized terms used in the Plan have the following meanings:
(a)    “Board” means the Company’s Board of Directors.
(b)    “Bonus Award” means, with respect to any Participant, for any Performance Year, the amount of the Target Award Opportunity for that Participant for the Performance Year that has been earned and that is payable with respect to the Participant in accordance with the terms of the Plan. 
(c)    “Committee” means the Compensation Committee of the Board (the “Compensation Committee”) or such other committee designated by the Compensation Committee or the Board; provided, however, that with respect to any award under the Plan that is intended to constitute Performance-Based Compensation, the Committee shall consist solely of two or more “outside directors” within the meaning of Section 162(m) of the Code.  The Committee shall have the same authorities and duties with respect to this Plan as it has with respect to the Incentive Plan.
(d)    “Committee Determination Date” means the date the Committee makes the determination of the Bonus Award pursuant to Section 3(d). 

Page | 1

(e)    “Covered Employee” means an employee who is a “covered employee,” within the meaning of section 162 of the Code (e.g. the chief executive officer of the Company and the three highest compensated officers of the Company for the taxable year other than the chief executive officer).  
(f)    “Participant” means an employee of the Company or any of its affiliates who has been granted a Target Award Opportunity or Bonus Award under the Plan which remains outstanding.  
(g)    “Performance Goals” has the meaning specified in the Incentive Plan.
(h)    “Performance Year” means the Company’s fiscal year or such other period of twelve months which is the measurement period for determining the Target Award Opportunity.
(i)    “Target Award Opportunity” means, with respect to any Participant, the amount of a Bonus Award that the Participant potentially may earn in respect of a specified Performance Year determined by the Committee and, for any Bonus Award that is Performance-Based Compensation, determined in accordance with Section 162(m) of the Code.  A Target Award Opportunity constitutes a conditional right to receive a Bonus Award.
3.    Granting of Target Award Opportunities and Earning of Bonus Awards.
(a)    Granting of Target Award Opportunities.  The Committee shall select the employees of the Company and its affiliates who will be eligible to participate in the Plan for each Performance Year.  The intent is that, for each Performance Year, the Company’s Chief Executive Officer, any other executive employee of the Company who is reasonably expected to be or become a Covered Employee for the Performance Year and any other employee of the Company who the Committee selects for participation in the Plan for the Performance Year will participate in the Plan for such Performance Year.  No later than the date which is the earlier of (i) ninety (90) days after the beginning of the applicable Performance Year or (ii) the time twenty-five percent (25%) of such Performance Year has elapsed (as scheduled in good faith at the time the Target Award Opportunity is established), and in any event provided that the outcome is substantially uncertain at the time the Target Award Opportunity is established, the Committee will specify, for each Participant, the Participant’s Target Award Opportunity.  Target Award Opportunities will be denominated in cash and Bonus Awards will be payable in cash.  
(b)    Additional Participants and Granting of Target Award Opportunity During a Performance Year. At any time during a Performance Year, the Committee may select a new employee or a newly promoted employee to participate in the Plan for that Performance Year and/or grant to any such Participant a Target Award Opportunity (or additional Target Award Opportunity) for such Performance Year or a future Performance Year.  In determining the amount of the Target Award Opportunity for such Participant under this subsection 3(b), the Committee, in its sole and 

Page | 2

absolute discretion, may take into account the portion of the Performance Year already elapsed, the performance achieved during such elapsed portion of the Performance Year, and such other considerations as the Committee may deem relevant.
(c)Applicable Performance Goals.  Target Award Opportunities granted to Participants will be subject to the performance metrics outlined in Exhibit A attached hereto.
(d)Determination of Bonus Award. During the year following a Performance Year, within a reasonable time after the end of such Performance Year and after financial results for the Performance Year have become available (but not later than March 15th of the year following the Performance Year for any portion of a Bonus Award for which the substantial risk of forfeiture lapsed during the Performance Year), the Committee will determine the extent to which each Participant’s Target Award Opportunity for the Performance Year has been earned and the amount of the Bonus Award payable with respect to such Participant related to the Target Award Opportunity for such Performance Year.  The Committee may, in its sole and absolute discretion, reduce or increase the amount of a Bonus Award or cancel a Bonus Award, but may not exercise discretion to increase any such amount payable to (i) a Participant that is not a Covered Employee if such increase is more than twenty percent or (ii) a Covered Employee; provided, however, that the Committee may not exercise discretion to increase any Bonus Award that is Performance-Based Compensation if such an increase would affect the tax deductibility of such award under section 162(m) of the Code.  Unless otherwise specifically determined by the Committee (or as otherwise specifically provided under a separate agreement, plan or policy conferring rights on the Participant), the Bonus Award shall be deemed earned and vested on the Committee Determination Date, so long as a Participant remains employed by the Company or any of its affiliates through the Committee Determination Date. No Participant has a legal right to receive a Bonus Award until the Committee Determination Date.
(e)Written Determinations. Determinations by the Committee under this Section 3, including Target Award Opportunities and the amount of any Bonus Award earned shall be recorded in writing. With regard to Bonus Awards to Covered Employees, the Committee will certify, in a manner conforming to applicable regulations and other applicable guidance under section 162(m) of the Code, prior to payment of each such Bonus Award granted to a Covered Employee, that the Bonus Award (and any related Target Award Opportunity) has been earned and other material terms upon which earning of the Bonus Award was conditioned, including the applicable Performance Goals and performance targets have been satisfied.
(f)Other Terms of Target Award Opportunities and Bonus Awards. Subject to the terms of this Plan, the Committee may specify the circumstances under which Target Award Opportunities and Bonus Awards shall be paid or forfeited in the event of a change in control, termination of employment or other event prior to the end of a Performance Year or payment of a 

Page | 3

Bonus Award, taking into account the requirements of section 162(m) of the Code, if applicable.  Without limiting the generality of the foregoing, to the extent that a Bonus Award under the Plan is treated as a Cash Award under the Incentive Plan, the Plan (including any separate agreement, plan or policy conferring rights on the Participant) terms shall govern the treatment of Bonus Awards in the event of a change in control, termination of employment, or other event that occurs prior to the end of a Performance Period and payment of a Bonus Award for such Performance Year and the Committee’s determination for such purposes under the Plan (or as otherwise specifically provided for under a separate agreement, plan or policy conferring rights on the Participant) shall supersede any provisions of the Incentive Plan with respect thereto.  All Bonus Awards under the Plan are subject to the Company’s recoupment or clawback policies as in effect from time to time.
(g)Adjustments.  The Committee, in its sole and absolute discretion,  may include or exclude any of the following events that occur during a Performance Period: (i) asset write-downs, (ii) litigation or claim judgments or settlements, (iii) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (iv) any reorganization and restructuring programs, (v) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to shareholders for the applicable year, (vi) acquisitions or divestitures, (vii) foreign exchange gains and losses, (ix) unrealized gains and losses on energy derivatives, (x) settlement of hedging activities, and (xi) gains and losses from asset sales and emission and exchange allowance sales.  
4.    Payment of Bonus Awards.
(a)    Payment of Bonus Award. Any Bonus Award shall be paid by the Company or its applicable affiliate promptly after the date of determination by the Committee under subsection 3(d) hereof but in no event later than March 15th of the year following the Performance Year to which the Bonus Award relates, except that, in the case of any Bonus Award or portion thereof subject to a substantial risk of forfeiture extending into that following year, the Bonus Award may be paid at any time during such following year.  Any payment or other event which would change the time of payment of such Bonus Award from that originally specified shall be implemented in a manner such that the Bonus Award does not, solely for that reason, fail to qualify as Performance-Based Compensation.
(b)    Tax Withholding. The Company and its affiliates shall deduct from any payment of a Participant’s Bonus Award or from any other payment to the Participant, including wages, any Federal, state, or local withholding or other tax or charge which is then required to be deducted under applicable law with respect to the Bonus Award.  
(c)    Non-Transferability. A Target Award Opportunity, any resulting Bonus Award, and any other right hereunder shall be non-assignable and nontransferable, and shall not be 

Page | 4

pledged, encumbered, or hypothecated to or in favor of any party or subject to any lien, obligation or liability of the Participant to any party other than the Company or an affiliate of the Company.
5.    General Provisions.
(a)Amendment and Termination. The Committee may at any time amend, alter, suspend, discontinue or terminate this Plan, and such action shall not be subject to the approval of the Company’s stockholders or Participants; provided, however, that (i) any amendment to the Plan beyond the scope of the Committee’s authority shall be subject to the approval of the Board; (ii) any amendment to the Plan shall be subject to stockholder approval if and to the extent required so that Target Award Opportunities and Bonus Awards under Section 3 can continue to qualify as Performance-Based Compensation; and (iii) without the consent of the Participant, no such action shall materially impair the rights of a Participant with respect to a Bonus Award as to which the Committee no longer retains a right to exercise downward (negative) discretion to eliminate the payment of the Bonus Award.
(b)Section 162(m). Unless otherwise determined by the Committee, the provisions of this Plan shall be administered and interpreted in accordance with the applicable requirements of section 162(m) of the Code so as to provide for the deductibility by the Company of payments of Bonus Awards to Covered Employees.
(c)Nonexclusivity of the Plan. The adoption of this Plan shall not be construed as creating any limitations on the power of the Company, the Board, the Committee or any affiliate of the Company to adopt such other compensation arrangements as it may deem desirable for any Participant or employee, including authorization of annual incentives under other plans and arrangements.
(d)No Right to Continued Employment. Neither the Plan, its adoption, its operation, nor any action taken under the Plan shall be construed as giving any employee the right to be retained or continued in the employ of the Company or any of its affiliates, nor shall it interfere in any way with the right and power of the Company or any of its affiliates to dismiss or discharge any employee or take any action that has the effect of terminating any employee’s employment at any time.
(e)Severability. The invalidity of any provision of the Plan or a document hereunder shall not be deemed to render the remainder of this Plan or such document invalid.
(f)Successors. The Plan shall be binding and inure to the benefit of any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise, and whether or not the corporate existence of the Company continues) to the Company or to the successor to all or substantially all of the business and/or assets of the Company.

Page | 5

(g)Governing Law. The validity, construction, and effect of the Plan and any rules and regulations or document hereunder, to the extent not otherwise governed by the Code or the laws of the United States, shall be determined in accordance with the laws of the State of Texas, without giving effect to conflict of law principles.
Effective Date of Plan. The Plan is effective as of January 1, 2017

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