Document:

Exhibit 10.1

 

EXECUTION COPY

 

DUANE
READE INC.

 

PHANTOM
STOCK PLAN

 

SECTION 1.                                General

 

(a)                    Purpose.  The purpose of this Duane Reade Inc. Phantom
Stock Plan (the “Plan”) is to motivate, compensate and retain the senior
vice presidents of Duane Reade Inc. (the “Company”) who are primarily
responsible for the long-term performance of the Company and to align their
interests with those of the stockholders of the Company.

 

SECTION 2.                                Definitions.

 

As used in this Plan, the
following terms shall have the meanings set forth below:

 

(a)                    Affiliate.  With respect to any person or entity, any
other person or entity that directly or indirectly controls, is controlled by
or is under common control with, such first person or entity.  For the purposes of this definition,
“control” (including, with correlative meanings, the terms “controlling,”
“controlled by” and “under common control with”), as applied to any person or
entity, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of that person or entity,
whether through the ownership of voting securities, by contract or otherwise.

 

(b)                   Account.  An unfunded bookkeeping account established
to record a Participant’s interest under the Plan, the terms and conditions of
which are set forth in the Plan and in each Participant’s Award Agreement.

 

(c)                    Appraiser’s
Determination.  Has the meaning set
forth in Section 8(e) hereof.

 

(d)                   Award.  A grant of Phantom Stock under the Plan.

 

(e)                    Award
Agreement.  The written agreement
evidencing an Award, which shall be executed or otherwise acknowledged in
writing by each Participant and whose terms and conditions, other than the
number of shares of Phantom Stock awarded thereby shall be identical for all
the Participants.

 

(f)                      Board.  The Board of Directors of the Company.

 

(g)                   Beneficiary.  The individual identified in writing by the
Participant to receive benefits hereunder in the event of the Participant’s
death.  A Participant may at any time
change his beneficiary designation without notice to, or consent of, any
previously designated beneficiary, by giving prior written notice to the
Company, such notice to be effective on the date it is received by the
Company.  In the event a Participant has
not designated a beneficiary at the time of his death, his estate shall be
deemed his Beneficiary.

 

 

(h)                   Cause.  Has the meaning set forth in the
Participant’s employment agreement with the Company in effect on the Effective
Date regardless of whether or not such agreement is in effect on the applicable
date.

 

(i)                       Common
Stock.  Common stock, par value $0.01
per share, of Holdings and any other stock into which such common stock shall
thereafter be changed by reason of a recapitalization, merger, consolidation,
stock split, combination, exchange of stock or units or the like.

 

(j)                       Change
in Control.  The first of any of the
following events to occur after the Effective Date:

 

(i)                                     any
independent third party (which shall exclude, without limitation, the OH
Affiliates, the Parent and any Subsidiary of the Parent) (x) by merger or
otherwise is or becomes the beneficial owner directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company’s then outstanding securities, and (y) has the right to appoint
a majority of the members of the Board in each case other than by a merger or
other transaction in which the shareholders of the Company immediately prior to
the merger own a majority of the surviving entity or its parent;

 

(ii)                                  any
stockholder of the Company (other than the Parent or any Subsidiary of the
Parent) (x) acquires a greater voting interest in the Company’s outstanding
Common Stock than the OH Investor Group and (y) has the authority to appoint a
majority of the members of the Board;

 

(iii)                               the
Company adopts a plan of complete liquidation (other than a liquidation into
Parent or any Subsidiary of the Parent) of the Company or consummates an
agreement for the sale or disposition by the Company of all or substantially all
of the Company’s assets to an independent third party;

 

(iv)                              at
any time prior to the IPO, the failure by OH to designate one or more OH
related persons to serve as its directors (it being understood that if the
Company is required to appoint independent directors by law or inter-dealer
quotation system or exchange rules, or OH’s designee is otherwise prevented
from serving, OH may designate non-OH related persons to serve as such); or

 

(v)                                 at
any time prior to the IPO, the failure of OH to retain and utilize its power to
appoint more than 51% of the directors appointable by the OH Investor Group
(for example, if the OH Investor Group has the right to appoint five directors,
OH shall appoint at least three directors, and such directors shall be OH related
persons or if necessary, independent directors).

 

(k)                    Death
Payment Date.  Has the meaning set
forth in Section 8(a)(ii) hereof.

 

(l)                       Distribution
Event.  Each of a Drag-Along Event,
Tag-Along Event or the IPO.

 

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(m)                 Disability.  Has the meaning set forth in Duane Reade
Inc.’s disability insurance plan whether or not the Participant participates in
such plan.

 

(n)                   Drag-Along
CIC Portion.  Has the meaning set
forth in Section 6(a)(i) hereof.

 

(o)                   Drag-Along
Portion.  Has the meaning set forth
in Section 6(a)(ii) hereof.

 

(p)                   Drag-Along
Event.  A Drag-Along Sale as such
term is defined in the Stockholders Agreement.

 

(q)                   Effective
Date.  The consummation of the
transaction contemplated by the Merger Agreement.

 

(r)                      Equity
Securities.  Has the meaning ascribed
to such term in Rule 405 promulgated under the Securities Act of 1933, as
amended (the “Securities Act”), as in effect on the date hereof, and in
any event includes any common stock, any limited partnership interest, any
limited liability company interest and any other interest or security having
the attendant right to vote for directors or similar representatives.

 

(s)                    Fair Market
Value.  On any date of determination,
the fair market value of a share of Common Stock (i) if the Common Stock is
listed on an internationally recognized securities exchange or inter-dealer
quotation system, the closing price reported on the day immediately prior to
such date and (ii) if the Common Stock is not so listed, subject to each
Participant’s right to bring a Valuation Challenge in accordance with
Section 8(e) hereof, the amount determined by the Board to be fair market
value based upon a good faith attempt to value the Common Stock accurately
based on the value of Holdings as a whole, on a fully diluted basis, without
any control premium, and without any discount for lack of transferability or
minority position.

 

(t)                      Fees.  Has the meaning set forth in
Section 8(e) hereof.

 

(u)                   Good Reason.  Has the meaning set forth in the
Participant’s employment agreement with the Company in effect on the Effective
Date regardless of whether or not such agreement is in effect on the applicable
date.

 

(v)                   Holdings.  Duane Reade Holdings, Inc., a Delaware
Corporation.

 

(w)                 IPO.  An underwritten Public Sale of Equity
Securities of an IPO Entity pursuant to an effective registration statement
under the Securities Act that (a) results in the listing for trading on an
internationally recognized securities exchange or inter-dealer quotation system
and (b) either involves (alone or in combination with any prior such
offerings) either (i) a Public Sale of at least twenty percent (20%) of
such Equity Securities or (ii) an offering of Equity Securities which
generates gross proceeds of at least $100 million.

 

(x)                     IPO Entity.   Has the meaning set forth in the
Stockholders Agreement.

 

(y)                   Merger
Agreement.  The Merger Agreement
dated as of December 22, 2003, by and among Parent, Duane Reade
Acquisition Corp., a Delaware corporation (formerly

 

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known as Rex Corner Acquisition Corp.), and the
Company, as amended on June 10, 2004, June 13, 2004 and June 18,
2004.

 

(z)                     OH.
Oak Hill Capital Partners, L.P. and/or, as the case may be, Oak Hill Capital
Management Partners, L.P.

 

(aa)              OH Affiliates.  OH, any related OH partnership or any other
member of the OH Investor Group that is an Affiliate of OH or Oak Hill Capital
Management, Inc., but excluding Anthony J. Cuti and the Participants.  For the avoidance of doubt, as of the
Effective Date, the term OH Affiliate includes OHCP MGP, LLC.

 

(bb)            OH Investor Group.  Oak Hill Capital Partners, L.P., related Oak
Hill partnerships and their respective limited partners and Affiliates and the
other initial investors (such other investors, “co-investors”) in the
transaction contemplated by the Merger Agreement, including those that
participate within 90 days following the Effective Date, but excluding Anthony
J. Cuti and the Participants.

 

(cc)              Parent.  Duane Reade Shareholders, LLC, a Delaware
limited liability company (formerly known as Rex Corner Holdings, LLC).

 

(dd)            Parent Stockholder.  Has the meaning set forth in the Stockholders
Agreement.

 

(ee)              Parent Transfer
Percentage Interest.  Has the meaning
set forth in the Stockholders Agreement.

 

(ff)                  Parent
Transfer Units.  Has the meaning set
forth in the Stockholders Agreement.

 

(gg)            Participant.  Each of Timothy LaBeau, Gary Charboneau, John
K. Henry and Jerry Ray.  No other
individual shall participate in the Plan.

 

(hh)            Percentage Interest.  Has the meaning set forth in the Stockholders
Agreement.

 

(ii)                    Piggyback
Right.  Has the meaning set forth in
Section 6(c)(ii) hereof.

 

(jj)                    Phantom
Stock.  A share of Phantom Stock is a
share of phantom stock representing a share of Common Stock that is credited to
a Participant’s Account under the Plan.

 

(kk)              Plan.  This Duane Reade Inc. Phantom Stock Plan.

 

(ll)                    Public Sale.
Any sale of Equity Securities to the public (a) pursuant to an offering
registered under the Securities Act or (b) through a broker, dealer or market
maker pursuant to the provisions of Rule 144 (or any similar provision then in
effect) adopted under the Securities Act, other than Rule 144(k) or any similar
provision then in effect.

 

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(mm)        Stockholders Agreement.  The Stockholders and Registration Rights
Agreement, dated July 30, 2004, by and among the Company, Holdings, Parent
and certain members of the Company’s management, as it may be amended from time
to time.

 

(nn)            Subsidiary.  A Subsidiary of any person shall mean any
entity of which:

 

(i)                                     if
a corporation, a majority of the total voting power of shares of stock entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time of determination
owned or controlled, directly or indirectly, collectively or individually, by
such person or by one or more Subsidiaries of such person; and

 

(ii)                                  if
a partnership, association, limited liability company or other entity, (A) the
general partner or similar managing entity and (B) a majority of the
partnership, membership or other similar ownership interest thereof is at the
time of determination beneficially owned or controlled, directly or indirectly,
collectively or individually, by such person or by one or more Subsidiaries of
such person.

 

For purposes of the Plan,
the Company and its Subsidiaries shall be deemed to own a majority ownership
interest in any partnership, association, limited liability company or other
entity if the Company and its subsidiary shall control the general partner or
managing member or managing director of any such entity.

 

(oo)            Tag-Along Portion.  Has the meaning set forth in
Section 6(b)(ii) hereof.

 

(pp)            Tag-Along CIC
Portion.  Has the meaning set forth
in Section 6(b)(i) hereof.

 

(qq)            Tag-Along Event.  A Tag-Along Sale as such term is defined in
the Stockholders Agreement.

 

(rr)                  Valuation
Challenge.  Has the meaning set forth
in Section 8(e) hereof.

 

SECTION 3.                                Administration.

 

(a)                    This Plan
shall be administered by the Board or a committee thereof.  Subject to the provisions of this Plan and
applicable law and subject to the rights of each Participant under his
respective outstanding Award Agreements, the Board shall have the power and
sole discretion, in addition to other express powers and authorizations
conferred on the Board by this Plan, to: 
(i) determine, in a manner consistent with the terms of this Plan and any
Award Agreements entered into pursuant to this Plan, payments and how other
matters are to be calculated in connection with Awards and Accounts; (ii)
determine the terms and conditions of Awards; (iii) determine whether, to what
extent, and under what circumstances Awards and amounts payable pursuant to an
Account shall be deferred at the election of the holder thereof or of the
Board; (iv) interpret, administer, reconcile any inconsistency, correct any
defect and/or supply any omission in this Plan and any instrument or agreement
relating to this Plan, or Awards under this Plan; (v) establish, amend,
suspend, or waive such rules and regulations and appoint such agents as it
shall deem appropriate for the proper administration of this Plan; and (vi)
make any other determination and take any other action that the Board deems
necessary or desirable for

 

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the administration of this Plan.  Whenever in this Agreement the Board, or a
committee thereof is permitted or required to make a decision in its “good
faith” or under another express standard, the Board, or a committee thereof
shall act under such express standard and shall not be subject to any other or
different standard imposed by any other agreement to which the Company may be a
party or any other applicable law.  The
decisions of the Board shall be final, conclusive, and binding upon all
parties, including, without limitation, the Company, any Participant, any
holder or Beneficiary of any Account and any stockholder of the Company.

 

(b)                   No member of
the Board or a committee thereof shall be liable for any loss, damage or claim
incurred by reason of any act or omission performed or omitted by the Board or
a committee thereof in good faith on behalf of the Company, with respect to the
Plan, any Award or any Account.

 

SECTION 4.                                Eligibility.  The Participants are the only individuals
eligible to participate in the Plan.

 

SECTION 5.                                Phantom
Stock Awards.

 

(a)                    General.  The Board shall determine the number of
shares of Phantom Stock to be granted to each Participant and such number shall
be designated in the applicable Award Agreement.  An Account shall be established on the books
and records of the Company to which the number of shares of Phantom Stock so
granted shall be credited.

 

(b)                   Vesting.  Contingent upon a Participant’s continued
employment with the Company or a Subsidiary and subject to acceleration
pursuant to each of Section 6(a) (Drag-Along Event) and Section 6(b)
(Tag-Along Event), each Participant’s Award shall vest and become nonforfeitable
ratably over 24 months in 24 equal monthly installments such that on the second
anniversary of the Effective Date, the Award shall be 100% vested and
nonforfeitable.

 

(c)                    Dividends.  To the extent that dividends or distributions
are declared and paid to holders of Common Stock, each Participant will receive
the amount that would have been distributed to the Participant as if the
Phantom Stock credited to the Participant’s Account (solely to the extent
vested) was issued and outstanding Common Stock and such dividend or
distribution shall be paid at the same time and in the same manner as dividends
or distributions are paid to holders of Common Stock.  The payment of a dividend with respect to any
Award shall not be considered a payment of any portion of a Participant’s
Account for purposes of Section 6 or Section 8 hereof.

 

SECTION 6.                                Payment
of Accounts.

 

(a)                    Drag-Along
Event.

 

(i)                                     Vesting.  Except as provided in Section 8
(relating to terminations of employment before a Distribution Event),
immediately prior to a Drag-Along Event which constitutes a Change in Control,
a Participant’s Account shall vest (in addition to the portion that has vested
as of such date pursuant to Section 5(b) hereof) in an additional amount
such that after giving effect to such acceleration, the Participant’s Account
shall be vested as to a portion of the Account equal to the Parent Transfer
Percentage Interest proposed to be transferred pursuant to such Drag-Along
Event (the

 

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“Drag-Along CIC
Portion”) (i.e., the Participant will be vested to the extent
necessary for the Participant to participate in the Drag-Along Event).

 

(ii)                                  Payment.  Immediately prior to the closing of a
Drag-Along Event, each Account (A) in the case of a Drag-Along Event that is a
Change in Control, to the extent of the Drag-Along CIC Portion or (B) in the
case of a Drag-Along Event that is not a Change in Control, to the extent
vested but in no event in a greater percent of the Account than the Parent Percentage
Interest proposed to be transferred pursuant to such Drag-Along Event (the “Drag-Along
Portion”), shall be credited with one share of Common Stock for each share
of Phantom Stock which makes up the Drag-Along CIC Portion or Drag-Along
Portion, as applicable.  Such portion
shall be distributed to each Participant in Common Stock immediately prior to
the Drag-Along Event such that the Participant shall participate in the
Drag-Along Event pursuant to Sections 2.3 and 2.6 of the Stockholders
Agreement.  That portion of a
Participant’s Account (e.g., the Drag-Along Portion or Drag-Along CIC Portion)
paid to him pursuant to this Section 6(a)(ii) shall be cancelled without
any payment or other consideration being owed or paid to the Participant immediately
following such payment.

 

(b)                   Tag-Along
Event.

 

(i)                                     Vesting.  Except as provided in Section 8
(relating to termination of employment prior to a Distribution Event),
immediately prior to a Tag-Along Event which constitutes a Change in Control, a
Participant’s Account shall vest (in addition to the portion that has vested as
of such date pursuant to Section 5(b) hereof) in an additional amount such
that after giving effect to such acceleration, the Participant’s Account shall
be vested as to the excess, if any, of (A) (x) the number of shares
of Phantom Stock equal to the Percentage Interest represented by the
Participant’s Account multiplied by (y) the number of shares of Common
Stock to be transferred by the Parent Stockholder (or Parent Transfer Units)
over (B) the number of shares of Phantom Stock comprising the vested
portion of the Participant’s Account as of such date (the “Tag-Along CIC
Portion”) (i.e. the Participant will be vested to the extent
necessary for the Participant to participate in the Tag-Along Event).

 

(ii)                                  Payment.  Immediately prior to the closing of a
Tag-Along Event, each Account, (A) in the case of a Tag-Along Event that is a
Change in Control, to the extent of the Tag-Along CIC Portion or (B) in the
case of a Tag-Along Event that is not a Change in Control, to the extent vested
but in no event in a greater percentage of the Account than the number of
shares of Phantom Stock equal to the Percentage Interest represented by the
Participant’s Account multiplied by the number of shares of Common Stock of the
Parent Stockholder (or Parent Transfer Units) proposed to be transferred
pursuant to such Tag-Along Event (the “Tag-Along Portion”), shall be
credited with one share of Common Stock for each share of Phantom Stock which
makes up the Tag-Along CIC Portion or the Tag-Along Portion, as applicable, and
such portion shall be distributed to each Participant in Common Stock
immediately prior to the Tag-Along Event such that the Participant may
participate in the Tag-Along Event pursuant to Section 2.4 of the
Stockholders Agreement.  That portion of
a Participant’s Account paid to him pursuant to this Section 6(b)(ii)
shall be cancelled without any payment or other consideration being owed or
paid to the Participant immediately following such payment.

 

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(c)                    IPO.

 

(i)                                     Generally.  Except as provided in Section 8
(relating to termination of employment prior to a Distribution Event), in the
event the Participant has not exercised his Piggyback Rights, the Company shall
pay the vested portion of a Participant’s Account not later than 180 days
following the IPO or such shorter period as applicable to the OH Affiliates,
pursuant to any holdback agreement entered into in connection with such IPO,
except that upon notice to the Company the Participant may be permitted to
further defer receipt of such payment to one or more future dates, provided the
election shall be in writing, irrevocable when made and comply with such other
requirements as the Board may reasonably impose.  Payment with respect to the vested portion of
the Account pursuant to this Section 6(c) shall be made in Common Stock as
if one share of Phantom Stock were one share of Common Stock; provided, however,
that following an IPO (other than with respect to Holdings) payment will be
made in the Equity Securities of the IPO Entity that would have been received
by the Participant had the Participant held the same number of shares of Common
Stock represented by the vested portion of his Account prior to such IPO.  Additional payments with respect to the Award
shall be made as and when additional portions of the Account vest in accordance
with Section 5(b).  The Board maintains
discretion to pay all of the vested portion of the Account in shares of Common
Stock immediately prior to the IPO so that the Participant may participate in
the IPO.  The portion of a Participant’s
Account paid to him pursuant to this Section 6(c)(i) shall be cancelled
without any payment or other consideration being owed or paid to the
Participant immediately following such payment.

 

(ii)                                  Piggyback.  Following the IPO to the extent the Account
is credited with shares of Common Stock, each Participant shall have the rights
set forth in Article III of the Stockholders Agreement (collectively,
the “Piggyback Rights”).

 

SECTION 7.                                Compliance
with Debt Instruments and Legal Requirements.

 

(a)                    Legal
Requirements.  The grant of Awards
and the payment of the value of a Participant’s Account (including a partial
distribution of a Participant’s Account, if applicable), and the other
obligations of the Company under this Plan shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
regulatory or governmental agency including without limitation rules and
regulations of the Securities and Exchange Commission or the applicable rules
and regulations of any securities exchange or inter-deal quotation system on
which securities of the Company, Parent or Holdings are listed or traded as may
be required.

 

(b)                   Credit
Agreement Limitations.  The Company may delay any cash payment with
respect to all or a portion of any Account that would cause or reasonably
likely to cause, a default or an event of default of the Company, Parent or
Holdings under any guarantee or other agreement under which the Company, Parent
or Holdings has borrowed money or guarantee on any such loan, or if such cash
payment would constitute or is reasonably likely to constitute a breach, or
result in a default or an event of default of the Company, Parent or Holdings
under such agreement, until such time
as the payment can be made without such breach or default.

 

8

 

(c)                    Postponement.  The Board, in its sole discretion, may
postpone the issuance or delivery of any securities in respect of an Award as
the Board may consider appropriate and may require a Participant to make such
representations and furnish such information as it may consider appropriate in
connection with the issuance or delivery of any such securities in compliance
with applicable laws, rules and regulations.

 

SECTION 8.                                Termination
of Employment.

 

(a)                    Death.

 

(i)                                     Vesting.  In the event that a Participant’s employment
with the Company or its Subsidiaries terminates due to the Participant’s death
and he has not received full payment with respect to his Account, the Account
shall be deemed 100% vested as of the date of such Participant’s death and
shall be paid to his Beneficiary pursuant to this Section 8(a).

 

(ii)                                  Prior
to the IPO.   If the Participant’s
employment with the Company or its Subsidiaries terminates due to the
Participant’s death prior to the IPO, 
then payment of the Account shall be made to his Beneficiary upon the
later of the 5th anniversary of the Effective Date or 180 days following such
termination on account of death (the “Death Payment Date”) in cash (or
cash equivalents), with the value of each share of Phantom Stock credited to
the Account determined by reference to the Fair Market Value of one share of
Common Stock as of either (x) the date of the Participant’s death, if the
Participant’s Beneficiary makes an irrevocable election in writing no later
than 120 days following such death to have Fair Market Value determined as of
the date of death or (y) if no such election is made, as of the Death
Payment Date.

 

If a Tag-Along Event,
Drag-Along Event or IPO occurs prior to the Death Payment Date, but
after the Participant’s death, then the unpaid portion of his Account will be
paid in accordance with Section 6(a), 6(b) or 6(c) hereof, as applicable.

 

(iii)                               After
the IPO.  If the Participant’s
employment with the Company or its Subsidiaries terminates due to the
Participant’s death at any time after the IPO, then payment of the Account (to
the extent not previously paid in accordance with Section 6 hereof) shall
be paid as soon as reasonably practicable following the Participant’s
termination on account of death, but in no event earlier than 180 days
following the IPO (or such shorter period as is applicable to the OH
Affiliates, pursuant to any holdback agreement entered into in connection with
the IPO) in Common Stock as if each share of Phantom Stock credited to the
Account were one share of Common Stock.

 

(iv)                              Notwithstanding
anything herein to the contrary, the provisions of Section 8(a) shall not
apply in the event the Participant’s employment with the Company or its
Subsidiaries is terminated for any reason prior to death.

 

(b)                   Termination
without Cause or for Good Reason.

 

(i)                                     Prior
to the IPO.  Upon a termination of
the Participant’s employment with the Company or its Subsidiaries without Cause
or by the Participant for Good Reason, at any time prior to the IPO, the
Account to the extent vested (and not yet

 

9

 

paid in accordance
with Section 6 hereof) shall be paid upon the later of: (x) the
second anniversary of the Effective Date or (y) 90 days following such
termination.  Such payment shall be made
in cash or cash equivalents with the value of each share of Phantom Stock
credited to the Account determined by reference to the Fair Market Value of a
share of Common Stock determined as of the date of such termination; provided,
however, that the Participant may elect no later than 15 days following
such termination to receive all or part of his distribution (in 25% increments)
in shares of Common Stock rather than cash. 
To the extent a Participant so elects to receive shares of Common Stock
in lieu of cash (or cash equivalents), he shall receive such shares of Common
Stock 90 days following such termination of employment; provided, further,
however, that if the Participant elects to receive a distribution of
shares of Common Stock, the Participant may at the same time he makes the
election to receive shares of Common Stock in lieu of cash (or cash
equivalents), make a one-time irrevocable election to defer receipt of such
Common Stock until the earlier of (1) a Distribution Event or (2) a specified
payment date that is at least 12 months following the date such shares of
Common Stock would otherwise be distributed to the Participant pursuant to this
Section 8(b)(i).  In the event that
the vested portion of the Account is not fully distributed in connection with
any one Distribution Event, it shall be distributed (to the extent applicable)
on the next Distribution Event and on each subsequent Distribution Event until
the vested portion of the Account has been fully distributed.  Payment on each such Distribution Event shall
be at the time and in the form proscribed under each of Section 6(a), (b)
or (c) or Section 8(d) (Sunset), as applicable.

 

(ii)                                  After
the IPO.  Upon termination of a
Participant’s employment with the Company or its Subsidiaries without Cause or
for Good Reason, at any time after the IPO, the Account to the extent vested
(and to the extent not previously paid in accordance with Section 6
hereof) shall be paid 90 days following such termination in Common Stock with
each share of Phantom Stock credited to his Account treated as one share of
Common Stock.

 

(iii)                               Notwithstanding
any other provision herein to the contrary, upon the termination of a
Participant’s employment pursuant to this Section 8(b), the portion of the
Account which is not vested on the date of such termination shall be forfeited without
any payment or other consideration being owed or paid to the Participant.

 

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(c)                    Termination
for Cause or without Good Reason.

 

(i)                                     Timing
of Payment.  Upon termination of a
Participant’s employment with the Company or its subsidiaries for Cause or by
the Participant without Good Reason, a Participant’s Account, to the extent
vested on the date of such termination, shall remain so vested and will be
distributed on the earlier of: (A) a Distribution Event or (B) on or after the
fifth anniversary of the Effective Date; provided, however, that
a Participant may elect to defer receipt of such payment beyond the fifth
anniversary of the Effective Date provided such Participant’s election is made
in writing, is irrevocable when made and is made at least twelve months prior
to the payment date so elected pursuant to this Section 8(c)(i).  The form and timing of payment made pursuant
to clause A shall be in accordance with Section 6 hereof.  Payment made pursuant to clause B of the
prior sentence shall be in the form of Common Stock.

 

(ii)                                  In
the event that the vested portion
of the Account is not fully distributed in connection with any one Distribution
Event pursuant to this Section 8(c), it shall be distributed (to the
extent applicable) on the next Distribution Event and on each subsequent
Distribution Event until the vested portion of the Account has been fully
distributed.  Payment on each
Distribution Event shall be at the time and in the form proscribed under each
of Section 6(a), (b) or (c), or Section 8(d) (Sunset), as applicable.

 

(iii)                               Notwithstanding
any other provision herein to the contrary, upon the termination of a
Participant’s employment pursuant to this Section 8(c), the portion of the
Account which is not vested on the date of such termination shall be forfeited
without further consideration to the Participant.

 

(d)                   Sunset.  The Participants shall have the right to
receive on or after the fifth anniversary of the Effective Date, payment of the
Account (to the extent not yet paid) in the form of Common Stock; provided,
however, that each Participant may elect to defer receipt of such
payment beyond the fifth anniversary of the Effective Date provided such
election is made in writing, is irrevocable when made and is made at least
twelve months prior to the selected payment date.

 

(e)                    Valuation
Challenge.  Each Participant (or his
Beneficiary, as applicable) shall have the right by written notice to the
Company, within 30 days following a cash payment pursuant to an Award which is
made on the basis of Fair Market Value (pursuant to Section 8(a) or 8(b)
hereof), to challenge the Board’s determination of Fair Market Value (a “Valuation
Challenge”).  In the event one or
more Participants or Beneficiaries, as applicable, submits a Valuation
Challenge, the Company shall retain the services of an independent third party appraiser, who shall (i) certify to each Participant that submits a Valuation
Challenge such appraiser’s independence and (ii) determine the fair
market value of the Common Stock (the “Appraiser’s Determination”).  The Appraiser’s Determination shall be
submitted in writing to the Board and shall be binding upon the Company, the
Participants and Beneficiaries and enforceable by a court of competent
jurisdiction.  Accordingly, if the
Appraiser’s Determination exceeds the Board’s determination, the affected
Participants and/or Beneficiaries, as applicable, shall receive an additional
payment equal to the excess, if any, of the amount such Participant or
Beneficiary would have received with respect to such Participant’s Account had
the Appraiser’s Determination of Fair Market Value been applied over the amount
such Participant (or

 

11

 

Beneficiary) previously
received pursuant to Section 8(a) or (b). 
Such additional payment shall be made as soon as practicable following
the date the Appraiser’s Determination is submitted to the Board.  If the Appraiser’s Determination is lower
than the Board’s determination, the affected Participants and Beneficiaries, as
applicable, shall repay to the Company an amount equal to the excess of the
amount such Participant (or Beneficiary) previously received pursuant to
Section 8(a) or (b) hereof over the amount such Participant would have
received with respect to such Participants’ Accounts had the Appraiser’s
Determination of the Fair Market Value been applied.

 

In addition, if the Appraiser’s Determination exceeds the
Board’s determination by more than 10%, the Company shall pay 100% of the fees
and expenses associated with securing the Appraiser’s Determination (the “Fees”).  In all other events, the Participant or
Beneficiary (or Participants if more than one Participant brings a Valuation
Challenge) shall pay the lesser of (x)
15% of the Fair Market Value of the aggregate vested portion of the Accounts
distributed or (y) the Fee, and the Company shall pay the balance.

 

(f)                      Disability.  If a Participant’s employment with the
Company or its Subsidiaries terminates on account of Disability, and such
Participant has not as of the date of such termination received full payment
with respect to his Account, the Account shall be deemed 100% vested as of the
date of such Participant’s termination of employment on account of
Disability.  The Account shall be paid in
the manner and time described in Section 8(b) without regard to
Section 8(b)(iii).

 

SECTION 9.                                Dilution
Adjustments.  In the event of a
reclassification, recapitalization, stock split, stock or other dividend, combination
of units, or other similar or extraordinary event, the number and kind of
Awards, in the aggregate, reserved for issuance or with respect to which Awards
may be made under this Plan shall be adjusted to reflect such event in the same
manner in which Common Stock is adjusted to reflect such event, and the Board
shall make such adjustments as it deems appropriate and equitable in the
number, kind credited to outstanding Accounts, and in any other matters which
relate to Awards or Accounts and which are affected by the events referred to
above.

 

SECTION 10.                          Amendment
and Termination.

 

(a)                    Amendments
to the Plan.  The Board may amend,
alter, suspend, discontinue, or terminate this Plan or any portion thereof at
any time; provided, however, that any such amendment, alteration,
suspension, discontinuance, or termination that would materially adversely
affect the rights of any Participant or Beneficiary under this Plan shall not
be effective without the written consent of the affected Participant or Beneficiary.

 

(b)                   Amendments
to Awards.  The Board may waive any
conditions or rights under, amend any terms of, or alter, suspend, discontinue,
cancel or terminate, any Account, prospectively or retroactively; provided,
however, that any such waiver, amendment, alteration, suspension,
discontinuance, cancellation or termination not expressly contemplated by this
Plan that would materially adversely affect the rights of any Participant or
Beneficiary shall not be effective without the written consent of the affected
Participant or Beneficiary.

 

12

 

SECTION 11.                          General
Provisions.

 

(a)                    Nontransferability.  Participants may not directly or indirectly
transfer, sell, assign, pledge, lease, hypothetically mortgage, gift or create
a security interest or trust (voting or otherwise) or other disposition of an
Account or any shares of Phantom Stock credited thereunder except that the
designation of a Beneficiary or the transfer to a Beneficiary following a
Participant’s death shall not constitute a transfer, sale, assignment, pledge,
lease, hypothetical mortgage, gift, creation of a security interest or trust,
or other disposition.  Common Stock
distributed to Participants and Beneficiaries in respect of Awards shall be
subject to the transfer restrictions set forth in Article II of the
Stockholders Agreement.

 

(b)                   Stockholders
Agreement and Preemptive Rights Agreement. 
Common Stock distributed to Participants and Beneficiaries in respect of
Awards shall be subject to all provisions of (i) the Stockholders Agreement and
(ii) the Preemptive Rights Agreement, dated as of July 30, 2004, by and
among OH, Parent, Holdings, Anthony J. Cuti and certain other members of the
management of the Company (the “Preemptive Rights Agreement”).  Solely for purposes of Section 2.5 of
the Preemptive Rights Agreement, only vested shares of Phantom Stock credited
to a Participant’s Account shall be deemed to be shares of Common Stock for
purposes of determining the extent of a Participant’s “Percentage Interest” in
applying such section.

 

(c)                    Securities
Law.  The
obligation of the Company to settle Awards in Common Stock, or otherwise, shall
be subject to all applicable laws, rules, and regulations, and to such
approvals by governmental agencies as may be required.  Notwithstanding any terms or conditions of
any Award to the contrary, the Company shall be under no obligation to offer to
sell or to sell and shall be prohibited from offering to sell or selling any
shares of Common Stock pursuant to an Award unless such shares have been
properly registered for sale pursuant to the Securities Act with the Securities
and Exchange Commission or unless the Company has received an opinion of
counsel, satisfactory to the Company, that such shares may be offered or sold
without such registration pursuant to an available exemption therefrom and the
terms and conditions of such exemption have been fully complied with.  To
the extent the Company pays any portion of the Account in Common Stock, at the
time of the IPO, Holdings or the Company will use commercially reasonable
efforts to register a number of shares of Common Stock sufficient to cover such
payment on Form S-8; unless in the reasonable judgment of the Board (or of the
managing underwriter in the IPO) such a registration could reasonable be
expected to have an adverse effect on the market for the securities being
registered in the IPO; provided, further, that the resale of any
shares of Common Stock distributed pursuant to an Award shall be restricted as
if the volume and manner of sale restrictions of Rule 144 (without regard to
Rule 144 (k)) were applicable.

 

(d)                   Tax
Withholding and Representations.  All
payments or benefits made pursuant to any Award under the Plan are subject to
withholding and deduction for Federal, state or local taxes as the Company
shall determine to be required to comply with applicable law or regulation and
each Participant shall agree in the applicable Award Agreement that, to the
extent necessary to satisfy such withholding obligation, the Company may
withhold such amounts from payments or benefits due with respect to the Award
or any other compensation due the Participant.

 

13

 

(e)                    Other
Compensation Arrangements.

 

(i)                                     Nothing
contained in this Plan shall prevent the Company or any Subsidiary or other
Affiliate from adopting or continuing in effect other compensation
arrangements, which may, but need not, provide for the grant of options,
securities and other types of awards, and such arrangements may be either
generally applicable or applicable only in specific cases.

 

(ii)                                  Neither
the grant of Awards hereunder nor the payment of any amounts in respect of any
Account shall be taken into account in determining a Participant’s right to receive
any additional benefits or compensation under any other plan or arrangement.

 

(f)                      No Right
to Service or Employment.  The grant
of an Award hereunder shall not be construed as giving a Participant the right
to be retained in the employ or service of the Company or any Subsidiary.  Further, the Company or its Subsidiaries may
at any time terminate a Participant from any employment or other service
relationship or discontinue such relationship, free from any liability or any
claim under this Plan, unless otherwise expressly provided in this Plan or in
the Participant’s Award Agreement.

 

(g)                   Awards as an
Unsecured Promise.

 

(i)                                     Awards
granted under this Plan do not constitute an equity interest in the Company or
its Subsidiaries.  A Participant shall not
share in the voting rights of the Company or its Subsidiaries as a result of an
Award unless and until payment with respect to such an award is received in the
form of Common Stock.

 

(ii)                                  The
Company shall not be required to, and shall not, segregate any funds
representing awards of Phantom Stock granted hereunder, and nothing in the Plan
or any Award Agreement shall be construed as providing for such segregation.

 

(iii)                               Nothing
in this Plan or any Award Agreement, and no action taken pursuant to their respective
terms, shall create or be construed to create a trust or escrow account of any
kind, or a fiduciary relationship between the Company or its Subsidiaries, on
the one hand, and any Participant, or any other person, on the other hand.

 

(iv)                              The
Participants and their Beneficiaries shall rely solely on the unsecured promise
of the Company to make the payments required under the terms of any Award, but
shall have the right to enforce such a claim in the same manner as any
unsecured general creditor of the Company. 
The Participants shall not have any preferred claim on, or any
beneficial ownership in, any assets of the Company.  Any rights created under this Plan or any
Award Agreement shall be mere unsecured contractual rights of the Participants
against the Company.

 

(h)                   Termination
with Subsidiaries.  For purposes of
this Plan, a Participant’s employment will be deemed terminated when he or she
is no longer employed by the Parent, Holdings, the Company or any of their
respective direct or indirect Subsidiaries.

 

14

 

(i)                       Conflicts.  In the event of a conflict between the terms
of this Plan and any Award Agreement, the terms of this Plan shall prevail.

 

(j)                       Governing
Law.  Unless otherwise provided in
the applicable Award Agreement, the validity, construction, and effect of this
Plan and any rules and regulations relating to this Plan and any Award
Agreement shall be determined in accordance with the laws of the State of New
York applicable to agreements made and to be performed entirely within such
state.

 

(k)                    Headings.  Headings are given to the sections and
subsections of this Plan solely as a convenience to facilitate reference.  Such headings shall not be deemed in any way
material or relevant to the construction or interpretation of this Plan or any
provision thereof.

 

15Exhibit 10.2

 

EXECUTION COPY

 

DUANE READE HOLDINGS, INC.

 

MANAGEMENT STOCK OPTION PLAN

 

(Effective as of July 30, 2004)

 

1.                          Purpose

 

The purpose of the Plan
is to provide a means through which the Company and its Affiliates may attract
able persons to enter and remain in the employ of the Company and Affiliates
and to provide a means whereby employees, directors and consultants of the
Company and its Affiliates can acquire and maintain Common Stock ownership,
thereby strengthening their commitment to the welfare of the Company and
Affiliates and promoting an identity of interest between stockholders and these
employees.

 

The Plan provides for
granting Incentive Stock Options and Nonqualified Stock Options.

 

2.                          Definitions

 

The following definitions
shall be applicable throughout the Plan:

 

(a)                                  “Affiliate”
means (i) any entity that directly or indirectly is controlled by, or is under
common control with the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee.

 

(b)                                 “Board”
means the board of directors of the Company.

 

(c)                                  “Cause”
means (unless otherwise set forth in a Stock Option Agreement), in the case of
a Participant who has an employment agreement with the Company in effect at the
time of his termination of employment, the definition of “Cause” set forth in
such employment agreement.  Otherwise,
“Cause” means the Company or an Affiliate having “cause” to terminate a
Participant’s employment or service, as defined in any existing employment,
consulting or any other agreement between the Participant and the Company or an
Affiliate, or, in the absence of such an employment, consulting or other
agreement, upon (i) the determination by the Committee that the
Participant has ceased to perform his duties to the Company or an Affiliate
(other than as a result of his incapacity due to physical or mental illness or
injury), which failure amounts to an intentional and extended neglect of his
duties to such party, (ii) the Committee’s determination that the
Participant has engaged or is about to engage in conduct materially injurious
to the Company or an Affiliate, (iii) the Participant having been
convicted of, or plead guilty or no contest to, a felony or (iv) the failure of
the Participant to follow the lawful instructions of the Board or his direct
superiors.

 

(d)                                 “Change
in Control” means, in the case of a Participant who has an employment agreement
with the Company in effect at the time of his termination of employment, the
definition of “Change in Control” set forth in such employment agreement.  Otherwise, “Change in Control” shall have
meaning set forth in the applicable Stock Option Agreement.

 

 

(e)                                  “Code”
means the Internal Revenue Code of 1986, as amended.  Reference in the Plan to any section of
the Code shall be deemed to include any amendments or successor provisions to
such section and any regulations under such section.

 

(f)                                    “Committee”
means the compensation committee of the Board established under the By-Laws of
the Company, or if no such committee has yet been established, the Board.  The Committee shall consist of at least two
directors as the Board may appoint to administer the Plan or, if no such
committee has been appointed by the Board, the Board.  On and after the time that the Company
becomes subject to the Exchange Act, unless the Board is acting as the
Committee or the Board specifically determines otherwise, each member of the
Committee shall, at the time he takes any action with respect to an Option
under the Plan, be an Eligible Director; provided that the mere fact that a
Committee member shall fail to qualify as an Eligible Director shall not
invalidate any Option granted by the Committee which Option is otherwise
validly made under the Plan.

 

(g)                                 “Common
Stock” means the common stock, par value $0.01 per share, of the Company.

 

(h)                                 “Company”
means Duane Reade Holdings, Inc.

 

(i)                                     “Disability”
means, in the case of a Participant who has an employment agreement with the
Company in effect at the time of his termination of employment, the definition
of “Disability” set forth in such employment agreement.  Otherwise, “Disability” means, unless in the
case of a particular Option, the applicable Stock Option Agreement states
otherwise, a condition entitling a person to receive benefits under the
long-term disability plan of the Company or an Affiliate, as may be applicable
to the Participant in question, or, in the absence of such a plan, the complete
and permanent inability by reason of illness or accident to perform the duties
of the occupation at which a Participant was employed or served when such
disability commenced or, as determined by the Committee based upon medical
evidence acceptable to it.

 

(j)                                     “DRS,
LLC” means Duane Reade Shareholders, LLC.

 

(k)                                  “Effective
Date” means July 30, 2004.

 

(l)                                     “Eligible
Director” means a person who is (i) a “non-employee director” within the
meaning of Rule 16b-3 under the Exchange Act, or a person meeting any similar
requirement under any successor rule or regulation and (ii) an “outside
director” within the meaning of Section 162(m) of the Code, and the
Treasury Regulations promulgated thereunder; provided, however,
that clause (ii) shall apply only on and after the 162(m) Effective Date.

 

(m)                               “Eligible
Person” means any (i) individual regularly employed by the Company or an
Affiliate who satisfies all of the requirements of Section 6, (ii)
director of the Company or an Affiliate or (iii) consultant or advisor to the
Company or an Affiliate who is entitled to participate in an “employee benefit
plan” within the meaning of 17 CFR § 230.405 (which, as of the Effective
Date, includes those who (A) are natural persons and (B) provide bona  fide
services to the Company other than in connection with the offer or sale of
securities in

 

2

 

a capital-raising transaction, and do not directly or
indirectly promote or maintain a market for the Company’s securities).

 

(n)                                 “Equity
Securities” has the meaning ascribed to such term in Rule 405 promulgated under
the Securities Act as in effect on the Effective Date, and in any event
includes any common stock, any limited partnership interest, any limited
liability company interest and any other interest or security having the
attendant right to vote for directors or similar representatives.

 

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

 

(p)                                 “Fair
Market Value” on a given date means, except to the extent otherwise provided in
an applicable Stock Option Agreement, (i) if the Stock is listed on a national
securities exchange, the mean between the highest and lowest sale prices
reported as having occurred on the primary exchange with which the Stock is
listed and traded on the date prior to such date, or, if there is no such sale
on that date, then on the last preceding date on which such a sale was
reported; (ii) if the Stock is not listed on any national securities exchange
but is quoted in the National Market System of the National Association of
Securities Dealers Automated Quotation System (“NASDAQ”) on a last sale basis,
the average between the high bid price and low ask price reported on the date
prior to such date, or, if there is no such sale on that date, then on the last
preceding date on which a sale was reported; or (iii) if the Stock is not
listed on a national securities exchange nor quoted in the NASDAQ on a last
sale basis, the amount determined by the Committee to be the fair market value
based upon a good faith attempt to value the Stock accurately.

 

(q)                                 “Grant
Date” means the date on which the granting of an Option is authorized, or such
other date as may be specified in such authorization or, if there is no such
date, the date indicated on the applicable Stock Option Agreement.

 

(r)                                    “Incentive
Stock Option” means an Option granted by the Committee to a Participant under
the Plan which is designated by the Committee as an incentive stock option as
described in Section 422 of the Code.

 

(s)                                  “IPO”
means an underwritten Public Sale of Equity Securities of an IPO Entity pursuant
to an effective registration statement under the Securities Act that (y)
results in the listing for trading on an internationally recognized securities
exchange or inter-dealer quotation system and (z) either involves (alone or in
combination with any prior such offerings) either (I) a Public Sale of at
least 20% of such Equity Securities or (II) an offering of Equity
Securities which generates gross proceeds of at least $100 million.

 

(t)                                    “IPO
Entity” means any of DRS, LLC, the Company, any Subsidiary of the Company,
including Duane Reade Inc., or any of their respective successors.

 

(u)                                 “Nonqualified
Stock Option” means an Option granted by the Committee to a Participant under
the Plan which is not designated by the Committee as an Incentive Stock Option.

 

3

 

(v)                                 “OH”
means Oak Hill Capital Partners, L.P. and/or, as the case may be, Oak Hill
Capital Management Partners, L.P.

 

(w)                               “OH
Affiliates” means OH, any related OH partnership or any other member of the OH
Investor Group that is an Affiliate of OH or Oak Hill Capital Management, Inc.,
but excluding Anthony J. Cuti and the Participants.  For the avoidance of doubt, as of the
Effective Date, the term OH Affiliate includes OHCP MGP, LLC.

 

(x)                                   “OH
Investor Group” means Oak Hill Capital Partners, L.P., related Oak Hill
partnerships and their respective limited partners and Affiliates and other
initial investors (such other investors, “co-investors”) in DRS, LLC direct or
indirect including those that participate with 90 days following the Effective
Date, but excluding, Anthony J. Cuti.

 

(y)                                 “162(m)
Effective Date” means the first date on which Options granted under the Plan do
not qualify for an exemption from the deduction limitations of
Section 162(m) of the Code on account of an exemption, or a transition or
grandfather rule.

 

(z)                                   “Option”
means an option granted under Section 7.

 

(aa)                            “Option
Period” means the period described in Section 7(c).

 

(bb)                          “Option
Price” means the exercise price for an Option as described in
Section 7(a).

 

(cc)                            “Participant”
means an Eligible Person who has been selected by the Committee to participate
in the Plan and to receive an Option pursuant to Section 6.

 

(dd)                          “Plan”
means this Duane Reade Holdings, Inc. Management Stock Option Plan.

 

(ee)                            “Public
Sale” means any sale of Equity Securities to the public (i) pursuant to an
offering registered under the Securities Act or (ii) through a broker,
dealer or market maker pursuant to the provisions of Rule 144 (or any similar
provision then in effect) adopted under the Securities Act, other than Rule
144(k) or any similar provision then in effect.

 

(ff)                                “Securities
Act” means the Securities Act of 1933, as amended.

 

(gg)                          “Stock”
means the Common Stock or such other authorized shares of stock of the Company
as the Committee may from time to time authorize for use under the Plan.

 

(hh)                          “Stock
Option Agreement” means the agreement between the Company and a Participant who
has been granted an Option pursuant to Section 7 which defines the rights
and obligations of the parties as required in Section 7(d)

 

(ii)                                  “Stockholders
Agreement” means the Stockholders and Registration Rights Agreement, dated
July 30, 2004, by and among the Company, DRS, LLC and certain members of
the management of the Company, as it may be amended from time to time.

 

4

 

(jj)                                  “Subsidiary”
means, with respect to any person, any entity of which:

 

(i)                                     if
a corporation, a majority of the total voting power of shares of stock entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time of determination
owned or controlled, directly or indirectly, collectively or individually, by
such person or by one or more Subsidiaries of such person; and

 

(ii)                                  if
a partnership, association, limited liability company or other entity, (x) the
general partner or similar managing entity or (y) a majority of the
partnership, membership or other similar ownership interest thereof is at the
time of determination owned or controlled, directly or indirectly, collectively
or individually, by such person or by one or more Subsidiaries of such person.

 

Each of the Company, DRS,
LLC and their respective Subsidiaries shall be deemed to own a majority
ownership interest in a partnership, association, limited liability company or
other entity if it controls the general partner or managing member or managing
director of such entity.

 

3.                          Effective
Date, Duration and Shareholder Approval

 

The Plan is effective as
of the Effective Date.  The validity and
exercisability of any Options granted pursuant to the Plan on and after the
162(m) Effective Date is contingent upon approval of the Plan by the shareholders
of the Company in a manner intended to comply with the shareholder approval
requirements of Section 162(m) of the Code.  No Option shall be treated as an Incentive
Stock Option unless the Plan has been approved by the shareholders of the
Company in a manner intended to comply with the shareholder approval
requirements of Section 422(b)(1) of the Code; provided that any Option
intended to be an Incentive Stock Option shall not fail to be effective solely
on account of a failure to obtain such approval, but rather such Option shall
be treated as a Nonqualified Stock Option unless and until such approval is
obtained.

 

The expiration date of
the Plan, on and after which no Options may be granted hereunder, shall be the
tenth anniversary of the Effective Date; provided, however, that
the administration of the Plan shall continue in effect until all matters
relating to the payment of Options previously granted have been settled.

 

4.                          Administration

 

The Committee shall
administer the Plan.  The majority of the
members of the Committee shall constitute a quorum.  The acts of a majority of the members of the
Committee present at any meeting at which a quorum is present or acts approved
in writing by a majority of the Committee shall be deemed the acts of the
Committee.

 

(a)                                  Subject
to the provisions of the Plan and applicable law, the Committee shall have the
power, in addition to other express powers and authorizations conferred on the
Committee by the Plan, to:  (i) designate
Participants; (ii) determine the type or types of Options

 

5

 

to be granted to a Participant; (iii) determine the
number of shares of Common Stock to be covered by, or with respect to which
payments, rights, or other matters are to be calculated in connection with
Options; (iv) determine the terms and conditions of any Options; (v) determine
whether, to what extent, and under what circumstances Options may be settled or
exercised in cash, shares of Common Stock, other securities, other options, or
other property, or canceled, forfeited, or suspended and the method or methods
by which Options may be settled, exercised, canceled, forfeited, or suspended;
(vi) determine whether, to what extent, and under what circumstances cash,
shares of Common Stock, other securities, other options, other property, and
other amounts payable with respect to an Option shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret, administer reconcile any inconsistency, correct any default
and/or supply any omission in the Plan and any instrument or agreement relating
to, or Option granted under the Plan; (viii) establish, amend, suspend, or
waive such rules and regulations and appoint such agents as it shall deem
appropriate for the proper administration of the Plan; and (ix) make any other
determination and take any other action that the Committee deems necessary or
desirable for the administration of the Plan.

 

(b)                                 Unless
otherwise expressly provided in the Plan, all designations, determinations,
interpretations, and other decisions under or with respect to the Plan or any
Option or any documents evidencing any and all Options shall be within the sole
discretion of the Committee, may be made at any time granted pursuant to the
Plan and shall be final, conclusive, and binding upon all parties, including,
without limitation, the Company, an Affiliate, any Participant, any holder or
beneficiary of any Option, and any shareholder.

 

(c)                                  No
member of the Committee shall be liable for any action or determination made in
good faith with respect to the Plan or any Stock Option Agreement hereunder.

 

5.                          Grant of
Options; Shares Subject to the Plan

 

The Committee may, from
time to time, grant Options to one or more Eligible Persons; provided, however,
that:

 

(a)                                  Subject
to Section 9, the aggregate number of shares of Stock in respect of which
Options may be granted under the Plan is 244,930 shares;

 

(b)                                 Shares
of Stock shall be deemed to have been used in payment of Options whether they
are actually delivered or the Fair Market Value equivalent of such shares is
paid in cash; provided, however that shares of Stock delivered
(either directly or by means of attestation) in full or partial payment of the
Option Price in accordance with Section 7(b) shall be deducted from the
number of shares of Stock delivered to the Participant pursuant to such Option
for purposes of determining the number of shares of Stock acquired pursuant to
the Plan.  In accordance with (and without
limitation upon) the preceding sentence, if and to the extent any Option shall
be surrendered, terminate, expire, or be forfeited, the number of shares of
Stock no longer subject thereto shall thereupon be released and shall
thereafter be available for new grants under the Plan;

 

6

 

(c)                                  Stock
delivered by the Company in settlement of Options granted under the Plan may be
authorized and unissued Stock or Stock held in the treasury of the Company or
may be purchased on the open market or by private purchase; and

 

(d)                                 Subject
to Section 9, on and after the 162(m) Effective Date, no person may be
granted Options under the Plan during any calendar year with respect to more
than 150,000 shares of Stock; provided that such number shall be adjusted pursuant
to Section 9, and shares otherwise counted against such number, only in a
manner which will not cause the Options granted under the Plan to fail to
qualify as “performance-based compensation” for purposes of Section 162(m)
of the Code.

 

6.                          Eligibility

 

Participation shall be
limited to Eligible Persons who have received written notification from the
Committee, or from a person designated by the Committee, that they have been
selected to participate in the Plan.

 

7.                          Terms of
Options

 

The Committee is authorized
to grant one or more Incentive Stock Options or Nonqualified Stock Options to
any Eligible Person; provided, however, that no Incentive Stock
Options shall be granted to any Eligible Person who is not an employee of the
Company or a “parent” or “subsidiary” of the Company, as such terms are used in
Section 422(a)(2) of the Code.  Each
Option so granted shall be subject to the following conditions, or to such
other conditions as may be reflected in the applicable Stock Option
Agreement.  In all events, the provisions
in the applicable Stock Option Agreement shall control the terms of the Option
issued pursuant thereto.  If there shall
be a conflict between the provisions of the Plan and such Stock Option Agreement,
the provisions of such Stock Option Agreement shall control.

 

(a)                                  Option
Price.  The
Option Price per share of Stock for each Option shall be set by the Committee
at the time of grant but shall not be less than (i) in the case of an
Incentive Stock Option, and subject to Section 7(e), the Fair Market Value
of a share of Stock at the Grant Date, and (ii) in the case of a
Non-Qualified Stock Option, the par value of a share of Stock; provided,
however, that all Options granted on and after the 162(m) Effective Date
which are intended to qualify as “performance-based compensation” under
Section 162(m) of the Code shall have an Option Price per share of Stock
no less than the Fair Market Value of a share of Stock on the Grant Date.

 

(b)                                 Manner
of Exercise and Form of Payment.   No shares of Stock shall be delivered pursuant
to any exercise of an Option until payment in full of the aggregate Option
Price therefor is received by the Company. 
Options which have become exercisable may be exercised by delivery of written
notice of exercise to the Committee accompanied by payment of the Option
Price.  The Option Price shall be payable
in cash and/or shares of Stock valued at the Fair Market Value at the time the
Option is exercised (including by means of attestation of ownership of a
sufficient number of shares of Stock in lieu of actual delivery of such shares
to the Company); provided, however, that such shares are not
subject to any pledge or other security interest and have either been held by
the Participant for six months, previously acquired

 

7

 

by the Participant on the open market or meet such
other requirements as the Committee may determine necessary in order to avoid
an accounting earnings charge in respect of the Option) or, in the discretion
of the Committee, either (i) in other property having a fair market value on
the date of exercise equal to the Option Price, (ii) if there shall be a public
market for the Stock, by delivering to the Committee a copy of irrevocable
instructions to a stockbroker to deliver promptly to the Company an amount of
loan proceeds, or proceeds of the sale of the Stock subject to the Option,
sufficient to pay the Option Price or (iii) by such other method as the
Committee may allow.  Notwithstanding the
foregoing, in no event shall a Participant be permitted to exercise an Option
in the manner described in clause (ii) of the preceding sentences if the
Committee determines that exercising an Option in such manner would violate the
Sarbanes-Oxley Act of 2002.

 

(c)                                  Stock
Option Agreement -Terms and Conditions.   Each Option granted under the Plan shall be
evidenced by a Stock Option Agreement, which shall contain such provisions as
may be determined by the Committee and, except as may be specifically stated
otherwise in such Stock Option Agreement, which shall be subject to the
following terms and conditions:

 

(i)                                     Each
Option or portion thereof that is exercisable shall be exercisable for the full
amount or for any part thereof.

 

(ii)                                  Each
share of Stock purchased through the exercise of an Option shall be paid for in
full at the time of the exercise.  Each
Option shall cease to be exercisable, as to any share of Stock, when the
Participant purchases the share or when the Option expires.

 

(iii)                               Subject
to Section 8(h), Options shall not be transferable by the Participant
except by will or the laws of descent and distribution and shall be exercisable
during the Participant’s lifetime only by him.

 

(iv)                              Each
Option shall vest and become exercisable by the Participant in accordance with
the vesting schedule established by the Committee and set forth in the
Stock Option Agreement evidencing such Option. 
Options shall vest and become exercisable in such manner determined by
the Committee and as set forth in the applicable Option Agreement and shall
expire after such period, not to exceed ten years, as may be determined by the
Committee (the “Option Period”); provided, however, that
notwithstanding any vesting dates set by the Committee, the Committee may in
its sole discretion accelerate the exercisability of any Option, which
acceleration shall not affect the terms and conditions of any such Option other
than with respect to exercisability.  If
an Option is exercisable in installments, such installments or portions thereof
which become exercisable shall remain exercisable until the Option expires.

 

(v)                                 Each
Stock Option Agreement may contain a provision that, upon demand by the
Committee for such a representation, the Participant shall deliver to the
Committee at the time of any exercise of an Option a written representation
that the shares to be acquired upon such exercise are to be acquired for
investment and not for resale or with a view to the distribution thereof, and
any other representations deemed

 

8

 

necessary by the
Committee to ensure compliance with all applicable federal and state securities
laws.  Upon such demand, delivery of such
representation prior to the delivery of any shares issued upon exercise of an
Option shall be a condition precedent to the right of the Participant or such
other person to purchase any shares.  In
the event certificates for Stock are delivered under the Plan with respect to
which such investment representation has been obtained, the Committee may cause
a legend or legends to be placed on such certificates to make appropriate
reference to such representation and to restrict transfer in the absence of
compliance with applicable federal or state securities laws.

 

(vi)                              Each
Stock Option Agreement representing an Incentive Stock Option shall contain a
provision requiring the Participant to notify the Company in writing
immediately after the Participant makes a disqualifying disposition of any
Stock acquired pursuant to the exercise of such Incentive Stock Option.  A disqualifying disposition is any
disposition (including any sale) of such Stock before the later of (a) two
years after the Grant Date of the Incentive Stock Option or (b) one year after
the date the Participant acquired the Stock by exercising the Incentive Stock
Option.

 

(vii)                           A Stock
Option Agreement may, but need not, include a provision whereby a Participant
may elect, at any time before the termination of the Participant’s employment
with the Company, to exercise the Option as to any part or all of the shares of
Stock subject to the Option prior to the full vesting of the Option.  Any unvested shares of Stock so purchased may
be subject to a share repurchase option in favor of the Company or to any other
restriction the Committee determines to be appropriate.  The Company shall not exercise its repurchase
option until at least six (6) months (or such longer or shorter period of time
required to avoid a charge to earnings for financial accounting purposes) have
elapsed following the exercise of the Option unless the Committee otherwise
specifically provides in the Stock Option Agreement.

 

(d)                                 Incentive
Stock Option Grants to 10% Stockholders.  Notwithstanding anything to the contrary in
this Section 7, if an Incentive Stock Option is granted to a Participant
who owns stock representing more than ten percent of the voting power of all
classes of stock of the Company, the Option Period shall not exceed five years
from the Grant Date of such Option and the Option Price shall be at least 110
percent of the Fair Market Value (on the Grant Date) of the Stock subject to
the Option.

 

(e)                                  $100,000
Per Year Limitation for Incentive Stock Options.  To the extent the aggregate Fair Market Value
(determined as of Grant Date) of Stock for which Incentive Stock Options are
exercisable for the first time by any Participant during any calendar year
(under all plans of the Company) exceeds $100,000, such excess Incentive Stock
Options shall be treated as Nonqualified Stock Options.

 

(f)                                    Voluntary
Surrender.  The
Committee may permit the voluntary surrender of all or any portion of any
Nonqualified Stock Option, if any, granted under the Plan to be conditioned
upon the granting to the Participant of a new Option for the same or a
different number of shares as the Option surrendered or require such voluntary
surrender as a condition precedent to a grant of a new Option to such
Participant.  Such new Option shall be
exercisable

 

9

 

at an Option Price, during an Option Period, and in
accordance with any other terms or conditions specified by the Committee at the
time the new Option is granted, all determined in accordance with the
provisions of the Plan without regard to the Option Price, Option Period, or
any other terms and conditions of the Nonqualified Stock Option surrendered.

 

8.                          General

 

(a)                                  Additional
Provisions of an Option.  Options granted to a Participant
under the Plan also may be subject to such other provisions (whether or not
applicable to Options granted to any other Participant) as the Committee
determines appropriate including, without limitation, provisions to assist the
Participant in financing the purchase of Stock upon the exercise of Options,
provisions for the forfeiture of or restrictions on resale or other disposition
of shares of Stock acquired under any Option, provisions giving the Company the
right to repurchase shares of Stock acquired under any Option in the event the
Participant elects to dispose of such shares on termination of employment, provisions
allowing the Participant to elect to defer the receipt of payment in respect of
Options for a specified period or until a specified event and provisions to
comply with federal and state securities laws and federal and state tax
withholding requirements.  Any such
provisions shall be reflected in the applicable Stock Option Agreement.

 

(b)                                 Privileges
of Stock Ownership.  Except as otherwise specifically
provided in the Plan, no person shall be entitled to the privileges of
ownership in respect of shares of Stock which are subject to Options hereunder
until such shares have been issued to that person.

 

(c)                                  Government
and Other Regulations.  The obligation of the Company to
make payment of Options in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by governmental agencies as
may be required.  Notwithstanding any
terms or conditions of any Option to the contrary, the Company shall be under
no obligation to offer to sell or to sell and shall be prohibited from offering
to sell or selling any shares of Stock pursuant to an Option unless such shares
have been properly registered for sale pursuant to the Securities Act with the
Securities and Exchange Commission or unless the Company has received an opinion
of counsel, satisfactory to the Company, that such shares may be offered or
sold without such registration pursuant to an available exemption therefrom and
the terms and conditions of such exemption have been fully complied with.  The Company shall be under no obligation to
register for sale under the Securities Act any of the shares of Stock to be
offered or sold under the Plan.  If the
shares of Stock offered for sale or sold under the Plan are offered or sold
pursuant to an exemption from registration under the Securities Act, the
Company may restrict the transfer of such shares and may legend the Stock
certificates representing such shares in such manner as it deems advisable to
ensure the availability of any such exemption.

 

(d)                                 Tax
Withholding.

 

(i)                                     A
Participant may be required to pay to the Company or any Affiliate and the
Company or any Affiliate shall have the right and is hereby authorized to
withhold from any Shares or other property deliverable under any Option or from
any compensation or other amounts owing to a Participant the amount (in cash,
Stock or other

 

10

 

property) of any
required tax withholding and payroll taxes in respect of an Option, its
exercise, or any payment or transfer under an Option or under the Plan and to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes.

 

(ii)                                  Without
limiting the generality of clause (i) above, if so provided in an Stock Option
Agreement, a Participant may satisfy, in whole or in part, the foregoing
withholding liability (but no more than the minimum required withholding
liability) by delivery of shares of Stock owned by the Participant with a Fair
Market Value equal to such withholding liability (provided that such shares are
not subject to any pledge or other security interest and have either been held
by the Participant for six months, previously acquired by the Participant on
the open market or meet such other requirements as the Committee may determine
necessary in order to avoid an accounting earnings charge), or on or after the
IPO by having the Company withhold from the number of shares of Stock otherwise
issuable pursuant to the exercise or settlement of the Option a number of
shares with a Fair Market Value equal to such withholding liability.

 

(e)                                  Claim
to Options and Employment Rights.  No employee of the Company or an
Affiliate, or other person, shall have any claim or right to be granted an
Option under the Plan or, having been selected for the grant of an Option, to
be selected for a grant of any other Option. 
Neither the Plan nor any action taken hereunder shall be construed as
giving any Participant any right to be retained in the employ or service of the
Company or an Affiliate.

 

(f)                                    No
Liability of Committee Members.  No member of the Committee shall
be personally liable by reason of any contract or other instrument executed by
such member or on his behalf in his capacity as a member of the Committee nor
for any mistake of judgment made in good faith, and the Company shall indemnify
and hold harmless each member of the Committee and each other employee, officer
or director of the Company to whom any duty or power relating to the
administration or interpretation of the Plan may be allocated or delegated,
against any cost or expense (including counsel fees) or liability (including
any sum paid in settlement of a claim) arising out of any act or omission to
act in connection with the Plan unless arising out of such person’s own fraud
or willful bad faith; provided, however, that approval of the
Board shall be required for the payment of any amount in settlement of a claim
against any such person.  The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company’s
Certificate of Incorporation or By-Laws, as a matter of law, or otherwise, or
any power that the Company may have to indemnify them or hold them harmless.

 

(g)                                 Governing
Law.  The
Plan shall be governed by and construed in accordance with the internal laws of
the State of New York.

 

(h)                                 Nontransferability.

 

(i)                                     Each
Option shall be exercisable only by the Participant during the Participant’s
lifetime, or, if permissible under applicable law, by the Participant’s legal
guardian or representative.  No Option
may be assigned, alienated, pledged, attached, sold or otherwise transferred or
encumbered by a Participant otherwise than by will or by

 

11

 

the laws of
descent and distribution and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable
against the Company or an Affiliate; provided that the designation of a
beneficiary shall not constitute an assignment, alienation, pledge, attachment,
sale, transfer or encumbrance.

 

(ii)                                  Notwithstanding
the foregoing, the Committee may in the Stock Option Agreement or at any time
after the Grant Date in an amendment to a Stock Option Agreement provide that
Options which are not intended to qualify as Incentive Stock Options may be
transferred by a Participant without consideration, subject to such rules as
the Committee may adopt consistent with any applicable Stock Option Agreement
to preserve the purposes of the Plan, to:

 

(A)                              any
person who is a “family member” of the Participant, as such term is used in the
instructions to Form S-8 (collectively, the “Immediate Family Members”);

 

(B)                                a
trust solely for the benefit of the Participant and his or her Immediate Family
Members;

 

(C)                                a
partnership or limited liability company whose only partners or shareholders
are the Participant and his or her Immediate Family Members; or

 

(D)                               any
other transferee as may be approved either (a) by the Board or the
Committee in its sole discretion, or (b) as provided in the applicable
Stock Option Agreement;

 

(each transferee
described in clauses (A), (B), (C) and (D) above is hereinafter referred to as
a “Permitted Transferee”); provided that the Participant gives the
Committee advance written notice describing the terms and conditions of the
proposed transfer and the Committee notifies the Participant in writing that
such a transfer would comply with the requirements of the Plan and any applicable
Stock Option Agreement.

 

(iii)                               The
terms of any Option transferred in accordance with the immediately preceding
sentence shall apply to the Permitted Transferee and any reference in the Plan
or in a Stock Option Agreement to a Participant shall be deemed to refer to the
Permitted Transferee, except that (a) Permitted Transferees shall not be
entitled to transfer any Options, other than by will or the laws of descent and
distribution; (b) Permitted Transferees shall not be entitled to exercise any transferred
Options unless there shall be in effect a registration statement on an
appropriate form covering the shares (i) to be acquired pursuant to the
exercise of such Option or (ii) the Committee determines that an exemption from
registration is available, (c) the Committee or the Company shall not be
required to provide any notice to a Permitted Transferee, whether or not such
notice is or would otherwise have been required to be given to the Participant
under the Plan or otherwise but shall continue to provide the Participant with
all notices hereunder, and (d) the consequences of termination of the
Participant’s employment by, or services to, the Company or an Affiliate under
the terms of the Plan and the applicable

 

12

 

Stock Option
Agreement shall continue to be applied with respect to the Participant,
following which the Options shall be exercisable by the Permitted Transferee
only to the extent, and for the periods, specified in the Plan and the applicable
Stock Option Agreement.

 

(i)                                     Reliance
on Reports.  Each
member of the Committee and each member of the Board shall be fully justified
in relying, acting or failing to act, and shall not be liable for having so
relied, acted or failed to act in good faith, upon any report made by the
independent public accountant of the Company and Affiliates and upon any other
information furnished in connection with the Plan by any person or persons
other than himself.

 

(j)                                     Relationship
to Other Benefits.  No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
profit sharing, group insurance or other benefit plan of the Company or any
Affiliate except as otherwise specifically provided in such other plan.

 

(k)                                  Expenses.  The expenses of
administering the Plan shall be borne by the Company and Affiliates.

 

(l)                                     Pronouns.  Masculine pronouns
and other words of masculine gender shall refer to both men and women.

 

(m)                               Titles
and Headings.  The
titles and headings of the sections in the Plan are for convenience of
reference only, and in the event of any conflict, the text of the Plan, rather
than such titles or headings shall control.

 

(n)                                 Termination
of Employment.  For all purposes herein, a person
who transfers from employment or service with the Company to employment or
service with an Affiliate or vice versa shall not be deemed to have terminated
employment or service with the Company or an Affiliate.

 

(o)                                 Severability.  If any provision of the Plan or any Stock Option
Agreement is or becomes or is deemed to be invalid, illegal, or unenforceable
in any jurisdiction or as to any person or Option, or would disqualify the Plan
or any Option under any law deemed applicable by the Committee, such provision
shall be construed or deemed amended to conform to the applicable laws, or if
it cannot be construed or deemed amended without, in the determination of the
Committee, materially altering the intent of the Plan or the Option, such
provision shall be stricken as to such jurisdiction, person or Option and the
remainder of the Plan and any such Option shall remain in full force and
effect.

 

9.                          Changes
in Capital Structure

 

Options granted under the
Plan and any agreements evidencing such awards, the maximum number of shares of
Stock subject to all Options stated in Section 5(a) and the maximum number
of shares of Stock with respect to which any one person may be granted Options
during any period stated in Section 5(d) shall be subject to adjustment or
substitution, as determined by the Committee in its sole discretion, as to the
number, price or kind of a share of Stock or other consideration subject to
such Options or as otherwise determined by the

 

13

 

Committee to be equitable
in the event of changes in the outstanding Stock or in the capital structure of
the Company by reason of stock or extraordinary cash dividends, stock splits,
reverse stock splits, recapitalization, reorganizations, mergers,
consolidations, combinations, exchanges, or other relevant changes in
capitalization occurring after the Grant Date of any such Option.  Any adjustment in Incentive Stock Options
under this Section 9 shall be made only to the extent not constituting a
“modification” within the meaning of Section 424(h)(3) of the Code, and
any adjustments under this Section 9 shall be made in a manner which does
not adversely affect the exemption provided pursuant to Rule 16b-3 under
the Exchange Act.  Further, with respect
to Options granted on and after the 162(m) Effective Date which are intended to
qualify as “performance-based compensation” under Section 162(m) of the
Code, such adjustments or substitutions shall be made only to the extent that
the Committee determines that such adjustments or substitutions may be made
without causing Options granted under the Plan to fail to qualify as such
“performance-based compensation.”  The
Company shall give each Participant notice of an adjustment hereunder and, upon
notice, such adjustment shall be conclusive and binding for all purposes.

 

Notwithstanding the
above, in the event of any of the following:

 

A.                                   The
Company is merged or consolidated with another corporation or entity and, in
connection therewith, consideration is received by shareholders of the Company
in a form other than stock or other equity interests of the surviving entity;

 

B.                                     All
or substantially all of the assets of the Company are acquired by another
person;

 

C.                                     All
of the issued and outstanding shares of Stock are acquired by another person;

 

D.                                    A
sale (by merger or otherwise) of all the interests of the OH Investor Group in
DRS, LLC or of all or substantially all of the assets of DRS, LLC;

 

E.                                      The
reorganization or liquidation of the Company; or

 

F.                                      The
Company shall enter into a written agreement to undergo an event described in
clauses A, B, C, D or E above;

 

then the Committee may,
in its discretion and upon at least 10 days advance notice to the affected
persons, cancel any outstanding Options and, if applicable, cause the holders
thereof to be paid, in cash or stock or property, or any combination thereof,
the value of such Options based upon the price per share of Stock received or
to be received by other shareholders of the Company in the event.  The terms of this Section 9 may be varied
by the Committee in any particular Stock Option Agreement.

 

14

 

10.                   Effect of
Change in Control

 

A Participant’s Option
Agreement may include specific provisions relating to the effect of a Change in
Control including, without limitation, provisions that accelerate the
exercisability of an award in connection with a Change in Control.

 

11.                   Nonexclusivity
of the Plan

 

Neither the adoption of
this Plan by the Board nor the submission of this Plan to the stockholders of
the Company for approval shall be construed as creating any limitations on the
power of the Board to adopt such other incentive arrangements as it may deem
desirable, including, without limitation, the granting of stock options
otherwise than under this Plan, and such arrangements may be either applicable
generally or only in specific cases.

 

12.                   Amendments and
Termination

 

(a)                                  Amendment
and Termination of the Plan.  The
Board may amend, alter, suspend, discontinue, or terminate the Plan or any
portion thereof at any time; provided that no such amendment,
alteration, suspension, discontinuation or termination shall be made without
shareholder approval if such approval is necessary to comply with any tax or
regulatory requirement applicable to the Plan (including as necessary to
prevent Options granted under the Plan on and after the 162(m) Effective Date
from failing to qualify as “performance-based compensation” for purposes of
Section 162(m) of the Code); and provided  further that any
such amendment, alteration, suspension, discontinuance or termination that
would impair the rights of any Participant or any holder or beneficiary of any
Option theretofore granted shall not to that extent be effective without the
consent of the affected Participant, holder or beneficiary.

 

(b)                                 Amendment
of Stock Option Agreements.  The
Committee may, to the extent consistent with the terms of any applicable Stock
Option Agreement, waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any Option theretofore
granted, prospectively or retroactively; provided that any such waiver,
amendment, alteration, suspension, discontinuance, cancellation or termination
that would impair the rights of any Participant in respect of any Option
theretofore granted shall not to that extent be effective without the consent
of the affected Participant.

 

As adopted by the Board of Directors of

Duane Reade Holdings,
Inc. on July 30, 2004.

 

15

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