Document:

EX-10.2

 

 

    EXHIBIT 10.2

    

    ABERCROMBIE &
    FITCH CO.

    

 

    2007
    LONG-TERM INCENTIVE PLAN

 

    1. Purpose.  The purpose of this 2007
    Long-Term Incentive Plan (the “Plan”) is to aid
    Abercrombie & Fitch Co., a Delaware corporation
    (together with its successors and assigns, the
    “Company”), in attracting, retaining, motivating and
    rewarding certain employees of the Company or its subsidiaries
    or affiliates, to provide for equitable and competitive
    compensation opportunities, to recognize individual
    contributions and reward achievement of Company goals, and
    promote the creation of long-term value for stockholders by
    closely aligning the interests of Participants with those of
    stockholders. The Plan authorizes stock based incentives for
    Participants.

 

    2. Definitions.  In addition to the terms
    defined in Section 1 above and elsewhere in the Plan, the
    following capitalized terms used in the Plan have the respective
    meanings set forth in this Section:

 

    (a) “Annual Limit” shall have the
    meaning specified in Section 5(b).

 

    (b) “Award” means any Option, SAR,
    Restricted Stock, Restricted Stock Unit, or Deferred Stock Award
    together with any related right or interest, granted to a
    Participant under the Plan.

 

    (c) “Beneficiary” means the legal
    representatives of the Participant’s estate entitled by
    will or the laws of descent and distribution to receive the
    benefits under a Participant’s Award upon a
    Participant’s death, provided that, if and to the extent
    authorized by the Committee, a Participant may be permitted to
    designate a Beneficiary, in which case the
    “Beneficiary” instead will be the person, persons,
    trust or trusts (if any are then surviving) which have been
    designated by the Participant in his or her most recent written
    and duly filed beneficiary designation to receive the benefits
    specified under the Participant’s Award upon such
    Participant’s death.

 

    (d) “Board” means the
    Company’s Board of Directors.

 

    (e) “Change of Control” has the
    meanings specified in Section 9.

 

    (f) “Code” means the Internal
    Revenue Code of 1986, as amended. References to any provision of
    the Code or regulation thereunder shall include any successor
    provisions and regulations, and reference to regulations
    includes any applicable guidance or pronouncement of the
    Department of the Treasury and Internal Revenue Service.

 

    (g) “Committee” means the
    Compensation Committee of the Board, the composition and
    governance of which is established in the Committee’s
    Charter as approved from time to time by the Board and subject
    to Section 303A.05 of the Listed Company Manual of the New
    York Stock Exchange, and other corporate governance documents of
    the Company. No action of the Committee shall be void or deemed
    to be without authority due to the failure of any member, at the
    time the action was taken, to meet any qualification standard
    set forth in the Committee Charter or the Plan. The full Board
    may perform any function of the Committee hereunder except to
    the extent limited under Section 303A.05 of the Listed
    Company Manual, in which case the term “Committee”
    shall refer to the Board.

 

    (h) “Covered Employee” means an
    Eligible Person who is a Covered Employee as specified in
    Section 11(j).

 

    (i) “Effective Date” means the
    effective date specified in Section 11(q).

 

    (j) “Eligible Person” has the
    meaning specified in Section 5.

 

    (k) “Exchange Act” means the
    Securities Exchange Act of 1934, as amended. References to any
    provision of the Exchange Act or rule (including a proposed
    rule) thereunder shall include any successor provisions and
    rules.

 

    (l) “Fair Market Value” means the
    fair market value of Stock, Awards or other property as
    determined in good faith by the Committee or under procedures
    established by the Committee. Unless otherwise determined by the
    Committee, the Fair Market Value of Stock shall be the closing
    price per share of Stock reported on a consolidated basis for
    securities listed on the principal stock exchange or market on
    which Stock is traded on the day as of which such value is being
    determined or, if there is no closing price on that day, then
    the closing price on the last previous day on which a closing
    price was reported.

 

    (m) “Incentive Stock Option” or
    “ISO” means any Option designated as an
    incentive stock option within the meaning of Code
    Section 422 and qualifying thereunder.

 

    (n) “Option” means a right, granted
    under the Plan, to purchase Stock.

 

    (o) “Participant” means a person
    who has been granted an Award under the Plan which remains
    outstanding, including a person who is no longer an Eligible
    Person.

 

    (p) “Restricted Stock” means Stock
    granted under the Plan which is subject to certain restrictions
    and to a risk of forfeiture.

 

    (q) “Restricted Stock Unit” or
    “RSU” means a right, granted under the
    Plan, to receive Stock, cash or other Awards or a combination
    thereof at the end of a specified deferral period.

 

    (r) “Retirement” means, unless
    otherwise stated by the Committee (or the Board) in an
    applicable Award agreement, Participant’s voluntary
    termination of employment (with the approval of the Board) after
    achieving 65 years of age.

 

    (s) “Rule 16b-3”
    means
    Rule 16b-3,
    as from time to time in effect and applicable to Participants,
    promulgated by the Securities and Exchange Commission under
    Section 16 of the Exchange Act.

 

    (t) “Stock” means the
    Company’s Common Stock, par value $0.01 per share, and
    any other equity securities of the Company or other issuer that
    may be substituted or resubstituted for Stock pursuant to
    Section 11(c).

 

    (u) “Stock Appreciation Rights” or
    “SAR” means a right granted to a
    Participant under Section 6(c).

 

    3. Administration.

 

    (a) Authority of the Committee.  The Plan
    shall be administered by the Committee, which shall have full
    and final authority, in each case subject to and consistent with
    the provisions of the Plan, to select Eligible Persons to become
    Participants; to grant Awards; to determine the type and number
    of Awards, the dates on which Awards may be exercised and on
    which the risk of forfeiture shall lapse or terminate, the
    acceleration of any such dates, the expiration date of any
    Award, whether, to what extent, and under what circumstances an
    Award may be settled, or the exercise price of an Award may be
    paid, in cash, Stock, other Awards, or other property, and other
    terms and conditions of, and all other matters relating to,
    Awards; to prescribe documents evidencing or setting terms of
    Awards (such Award documents need not be identical for each
    Participant), amendments thereto, and rules and regulations for
    the administration of the Plan and amendments thereto (including
    outstanding Awards); to construe and interpret the Plan
    and Award documents and correct defects,

 

    supply omissions or reconcile inconsistencies therein; and to
    make all other decisions and determinations as the Committee may
    deem necessary or advisable for the administration of the Plan.
    Decisions of the Committee with respect to the administration
    and interpretation of the Plan shall be final, conclusive, and
    binding upon all persons interested in the Plan, including
    Participants, Beneficiaries, transferees under
    Section 11(b) and other persons claiming rights from or
    through a Participant, and stockholders.

 

    (b) Manner of Exercise of Committee
    Authority.  The express grant of any specific
    power to the Committee, and the taking of any action by the
    Committee, shall not be construed as limiting any power or
    authority of the Committee. The Committee may act through
    subcommittees, including for purposes of perfecting exemptions
    under
    Rule 16b-3
    or qualifying Awards under Code Section 162(m) as
    performance-based compensation, in which case the subcommittee
    shall be subject to and have authority under the charter
    applicable to the Committee, and the acts of the subcommittee
    shall be deemed to be acts of the Committee hereunder. The
    Committee may delegate the administration of the Plan to one or
    more officers or employees of the Company, and such
    administrator(s) may have the authority to execute and
    distribute Award agreements or other documents evidencing or
    relating to Awards granted by the Committee under this Plan, to
    maintain records relating to Awards, to process or oversee the
    issuance of Stock under Awards, to interpret and administer the
    terms of Awards and to take such other actions as may be
    necessary or appropriate for the administration of the Plan and
    of Awards under the Plan, provided that in no case shall any
    such administrator be authorized (i) to grant Awards under
    the Plan, (ii) to take any action that would result in the
    loss of an exemption under
    Rule 16b-3
    for Awards granted to or held by Participants who at the time
    are subject to Section 16 of the Exchange Act in respect of
    the Company or that would cause Awards intended to qualify as
    “performance-based compensation” under Code
    Section 162(m) to fail to so qualify, (iii) to take
    any action inconsistent with Section 157 and other
    applicable provisions of the Delaware General Corporation Law,
    or (iv) to make any determination required to be made by
    the Committee under the New York Stock Exchange corporate
    governance standards applicable to listed company compensation
    committees (currently, Rule 303A.05). Any action by any
    such administrator within the scope of its delegation shall be
    deemed for all purposes to have been taken by the Committee and,
    except as otherwise specifically provided, references in this
    Plan to the Committee shall include any such administrator. The
    Committee established pursuant to Section 1.3(a) and, to
    the extent it so provides, any subcommittee, shall have sole
    authority to determine whether to review any actions
    and/or
    interpretations of any such administrator, and if the Committee
    shall decide to conduct such a review, any such actions
    and/or
    interpretations of any such administrator shall be subject to
    approval, disapproval or modification by the Committee.

 

    (c) Limitation of Liability.  The
    Committee and each member thereof, and any person acting
    pursuant to authority delegated by the Committee, shall be
    entitled, in good faith, to rely or act upon any report or other
    information furnished by any executive officer, other officer or
    employee of the Company or a subsidiary or affiliate, the
    Company’s independent auditors, consultants or any other
    agents assisting in the administration of the Plan. Members of
    the Committee, any person acting pursuant to authority delegated
    by the Committee, and any officer or employee of the Company or
    a subsidiary or affiliate acting at the direction or on behalf
    of the Committee or a delegee shall not be personally liable for
    any action or determination taken or made in good faith with
    respect to the Plan, and shall, to the extent permitted by law,
    be fully indemnified and protected by the Company with respect
    to any such action or determination.

 

    4. Stock Subject to Plan.

 

    (a) Overall Number of Shares Available for
    Delivery.  The total number of shares of Stock
    reserved and available for delivery in connection with Awards
    under the Plan shall be 5,000,000. Subject to limitations
    provided in Section 6(b)(iv), any of the 5,000,000
    authorized shares may be granted as ISOs. The total number

 

    of shares available is subject to adjustment as provided in
    Section 11(c). Any shares of Stock delivered under the Plan
    shall consist of authorized and unissued shares or treasury
    shares.

 

    (b) Share Counting Rules.  The Committee
    may adopt reasonable counting procedures to ensure appropriate
    counting, avoid double counting (as, for example, in the case of
    tandem or substitute awards) and make adjustments in accordance
    with this Section 4(b). To the extent that an Award under
    the Plan is canceled, expired, forfeited, settled in cash,
    settled by issuance of fewer shares than the number underlying
    the Award, or otherwise terminated without delivery of shares to
    the Participant, the shares retained by or returned to the
    Company will be available under the Plan; and shares that are
    withheld from such an Award or separately surrendered by the
    Participant in payment of any exercise price or taxes relating
    to such an Award shall be deemed to constitute shares not
    delivered to the Participant and will be available under the
    Plan. In addition, in the case of any Award granted in
    assumption of or in substitution for an award of a company or
    business acquired by the Company or a subsidiary or affiliate or
    with which the Company or a subsidiary or affiliate combines,
    shares issued or issuable in connection with such substitute
    Award shall not be counted against the number of shares reserved
    under the Plan.

 

    5. Eligibility; Per-Person Award Limitations.

 

    (a) Eligibility.  Awards may be granted
    under the Plan only to Eligible Persons. For purposes of the
    Plan, an “Eligible Person” means (i) an employee
    of the Company or any subsidiary or affiliate, including any
    person who has been offered employment by the Company or a
    subsidiary or affiliate, provided that such prospective employee
    may not receive any payment or exercise any right relating to an
    Award until such person has commenced employment with the
    Company or a subsidiary or affiliate. An employee on leave of
    absence may be considered as still in the employ of the Company
    or a subsidiary or affiliate for purposes of eligibility for
    participation in the Plan, if so determined by the Committee.
    For purposes of the Plan, a joint venture in which the Company
    or a subsidiary has a substantial direct or indirect equity
    investment shall be deemed an affiliate, if so determined by the
    Committee. Holders of awards granted by a company or business
    acquired by the Company or a subsidiary or affiliate, or with
    which the Company or a subsidiary or affiliate combines, who
    will become Eligible Persons are eligible for grants of
    substitute awards granted in assumption of or in substitution
    for such outstanding awards previously granted under the Plan in
    connection with such acquisition or combination transaction, if
    so determined by the Committee.

 

    (b) Per-Person Award Limitations.  In each
    calendar year during any part of which the Plan is in effect, an
    Eligible Person may be granted Awards under each of
    Section 6(b), 6(c), 6(d), or 6(e) relating to up to his or
    her Annual Limit (such Annual Limit to apply separately to the
    type of Award authorized under each specified subsection). A
    Participant’s Annual Limit, in any year during any part of
    which the Participant is then eligible under the Plan, shall
    equal two million (2,000,000) shares plus the amount of the
    Participant’s unused Annual Limit relating to the same type
    of Award as of the close of the previous year, subject to
    adjustment as provided in Section 11(c).

 

    6. Specific Terms of Awards.

 

    (a) General.  Awards may be granted on the
    terms and conditions set forth in this Section 6. In
    addition, the Committee may impose on any Award or the exercise
    thereof, at the date of grant or thereafter (subject to
    Sections 11(e) and 11(k)), such additional terms and
    conditions, not inconsistent with the provisions of the Plan, as
    the Committee shall determine, including terms requiring
    forfeiture of Awards in the event of termination of employment
    or service by the Participant and terms permitting a Participant
    to make elections relating to his or her Award. The Committee
    shall retain full power and discretion with respect to any term
    or condition of an Award that is not mandatory under the Plan,
    subject to Section 11(k). The Committee

 

    shall require the payment of lawful consideration for an Award
    to the extent necessary to satisfy the requirements of the
    Delaware General Corporation Law, and may otherwise require
    payment of consideration for an Award except as limited by the
    Plan.

 

    (b) Options.  The Committee is authorized
    to grant Options to Participants on the following terms and
    conditions:

 

    (i) Exercise Price.  The exercise price
    per share of Stock purchasable under an Option (including both
    ISOs and non-qualified Options) shall be determined by the
    Committee, provided that, notwithstanding anything contained
    herein to the contrary such exercise price shall be
    (A) fixed as of the grant date, and (B) not less than
    the Fair Market Value of a share of Stock on the grant date.
    Notwithstanding the foregoing, any substitute award granted in
    assumption of or in substitution for an outstanding award
    granted by a company or business acquired by the Company or a
    subsidiary or affiliate, or with which the Company or a
    subsidiary or affiliate combines, may be granted with an
    exercise price per share of Stock other than as required above.

 

    (ii) No Repricing.  Without the approval
    of stockholders, the Committee will not amend or replace
    previously granted Options in a transaction that constitutes a
    “repricing,” as such term is used in
    Section 303A.08 of the Listed Company Manual of the New
    York Stock Exchange.

 

    (iii) Option Term; Time and Method of
    Exercise.  The Committee shall determine the term
    of each Option, provided that in no event shall the term of any
    Option exceed a period of ten years from the date of grant. The
    Committee shall determine the time or times at which or the
    circumstances under which an Option may be exercised in whole or
    in part, provided that, notwithstanding anything contained
    herein to the contrary, the sole and exclusive basis for
    determining both the vesting and exercisability of an option
    will be the passage of a specific period of time or the
    occurrence or non-occurrence of certain specific performance
    related or non-performance related events (e.g. death,
    disability, termination of employment and Change of Control). In
    addition, the Committee shall determine the methods by which
    such exercise price may be paid or deemed to be paid and the
    form of such payment (subject to Sections 11(k) and 11(l)),
    including, without limitation, cash, Stock (including by
    withholding Stock deliverable upon exercise), other Awards or
    awards granted under other plans of the Company or any
    subsidiary or affiliate, or other property (including through
    broker-assisted “cashless exercise” arrangements, to
    the extent permitted by applicable law), and the methods by or
    forms in which Stock will be delivered or deemed to be delivered
    in satisfaction of Options to Participants.

 

    (iv) ISOs.  Notwithstanding anything to
    the contrary in this Section 6, in the case of the grant of
    an Option intending to qualify as an ISO: (i) if the
    Participant owns stock possessing more than 10 percent of
    the combined voting power of all classes of stock of the Company
    (a “10% Stockholder”), the purchase price of such
    Option must be at least 110 percent of the fair market
    value of the Common Stock on the date of grant and the Option
    must expire within a period of not more than five (5) years
    from the date of grant, and (ii) termination of employment
    will occur when the person to whom an Award was granted ceases
    to be an employee (as determined in accordance with
    Section 3401(c) of the Code and the regulations promulgated
    thereunder) of the Company and its subsidiaries. Notwithstanding
    anything in this Section 6 to the contrary, Options
    designated as ISOs shall not be eligible for treatment under the
    Code as ISOs to the extent that either (iii) the aggregate
    fair market value of shares of Common Stock (determined as of
    the time of grant) with respect to which such Options are
    exercisable for the first time by the Participant during any
    calendar year (under all plans of the Company and any
    Subsidiary) exceeds $100,000, taking Options into account in the
    order in which they were granted, or (iv) such Options

 

    otherwise remain exercisable but are not exercised within three
    (3) months of termination of employment (or such other
    period of time provided in Section 422 of the Code).

 

    (c) Stock Appreciation Rights.  The
    Committee is authorized to grant SARs to Participants on the
    following terms and conditions:

 

    (i) Right to Payment.  An SAR shall confer
    on the Participant to whom it is granted a right to receive,
    upon exercise thereof, shares of Stock having a value equal to
    the excess of (A) the Fair Market Value of one share of
    Stock on the date of exercise (or, in the case of a
    “Limited SAR,” the Fair Market Value determined by
    reference to the Change of Control Price, as defined under the
    applicable award agreement) over (B) the exercise or
    settlement price of the SAR as determined by the Committee.
    Stock Appreciation Rights may be granted to Participants from
    time to time either in tandem with or as a component of other
    Awards granted under the Plan (“tandem SARs”) or not
    in conjunction with other Awards (“freestanding SARs”)
    and may, but need not, relate to a specific Option granted under
    Section 6(b). The per share price for exercise or
    settlement of SARs (including both tandem SARs and freestanding
    SARs) shall be determined by the Committee, but in the case of
    SARs that are granted in tandem to an Option shall not be less
    than the exercise price of the Option and in the case of
    freestanding SARs shall be (A) fixed as of the grant date,
    and (B) not less than the Fair Market Value of a share of
    Stock on the grant date.

 

    (ii) No Repricing.  Without the approval
    of stockholders, the Committee will not amend or replace
    previously granted SARs in a transaction that constitutes a
    “repricing,” as such term is used in
    Section 303A.08 of the Listed Company Manual of the New
    York Stock Exchange.

 

    (iii) Other Terms.  The Committee shall
    determine the term of each SAR, provided that in no event shall
    the term of an SAR exceed a period of ten years from the date of
    grant. The Committee shall determine at the date of grant or
    thereafter, the time or times at which and the circumstances
    under which a SAR may be exercised in whole or in part
    (including based on future service requirements), the method of
    exercise, method of settlement, method by or forms in which
    Stock will be delivered or deemed to be delivered to
    Participants, and whether or not a SAR shall be free-standing or
    in tandem or combination with any other Award. Limited SARs that
    may only be exercised in connection with a Change of Control or
    termination of service following a Change of Control as
    specified by the Committee may be granted on such terms, not
    inconsistent with this Section 6(c), as the Committee may
    determine. The Committee may require that an outstanding Option
    be exchanged for an SAR exercisable for Stock having vesting,
    expiration, and other terms substantially the same as the
    Option, so long as such exchange will not result in additional
    accounting expense to the Company.

 

    (d) Restricted Stock.  The Committee is
    authorized to grant Restricted Stock to Participants on the
    following terms and conditions:

 

    (i) Grant and Restrictions.  Subject to
    Section 6(d)(ii), Restricted Stock shall be subject to such
    restrictions on transferability, risk of forfeiture and other
    restrictions, if any, as the Committee may impose, which
    restrictions may lapse separately or in combination at such
    times, under such circumstances (including based on achievement
    of performance conditions
    and/or
    future service requirements), in such installments or otherwise
    and under such other circumstances as the Committee may
    determine at the date of grant or thereafter. Except to the
    extent restricted under the terms of the Plan and any Award
    document relating to the Restricted Stock, a Participant granted
    Restricted Stock shall have all of the rights of a stockholder,
    including the right to vote the Restricted Stock and the right
    to receive dividends thereon (subject to any mandatory
    reinvestment or other requirement imposed by the Committee).
    Upon

 

    any forfeiture of Restricted Stock a Participant shall cease to
    have any rights of a stockholder and shall return any
    certificates representing such Restricted Stock to the Company.

 

    (ii) Limitation on Vesting.  The grant,
    issuance, retention, vesting
    and/or
    settlement of Restricted Stock shall occur at such time and in
    such installments as determined by the Committee or under
    criteria established by the Committee. Subject to
    Section 10, the Committee shall have the right to make the
    timing of the grant
    and/or the
    issuance, ability to retain, vesting
    and/or
    settlement of Restricted Stock subject to continued employment,
    passage of time
    and/or such
    performance conditions as deemed appropriate by the Committee;
    provided that the grant, issuance, retention, vesting
    and/or
    settlement of a Restricted Stock Award that is based in whole or
    in part on performance conditions
    and/or the
    level of achievement versus such performance conditions shall be
    subject to a performance period of not less than one year, and
    any Award based solely upon continued employment or the passage
    of time shall vest over a period not less than three years from
    the date the Award is made, provided that such vesting may occur
    ratably over the three-year period. The foregoing minimum
    vesting conditions need not apply (A) in the case of the
    death, disability or Retirement of the Participant or
    termination in connection with a Change of Control, and
    (B) with respect to up to an aggregate of 5% of the shares
    of Stock authorized under the Plan, which may be granted (or
    regranted upon forfeiture) as Restricted Stock or RSUs without
    regard to such minimum vesting requirements.

 

    (iii) Certificates for Stock.  Restricted
    Stock granted under the Plan may be evidenced in such manner as
    the Committee shall determine. If certificates representing
    Restricted Stock are registered in the name of the Participant,
    the Committee may require that such certificates bear an
    appropriate legend referring to the terms, conditions and
    restrictions applicable to such Restricted Stock, that the
    Company retain physical possession of the certificates, and that
    the Participant deliver a stock power to the Company, endorsed
    in blank, relating to the Restricted Stock.

 

    (iv) Dividends and Splits.  As a condition
    to the grant of an Award of Restricted Stock, the Committee may
    require that any dividends paid on a share of Restricted Stock
    shall be either (A) paid with respect to such Restricted
    Stock at the dividend payment date in cash, in kind, or in a
    number of shares of unrestricted Stock having a Fair Market
    Value equal to the amount of such dividends, or
    (B) automatically reinvested in additional Restricted Stock
    or held in kind, which shall be subject to the same terms as
    applied to the original Restricted Stock to which it relates.
    Unless otherwise determined by the Committee, Stock distributed
    in connection with a Stock split or Stock dividend, and other
    property distributed as a dividend, shall be subject to
    restrictions and a risk of forfeiture to the same extent as the
    Restricted Stock with respect to which such Stock or other
    property has been distributed.

 

    (e) Restricted Stock Units.  The Committee
    is authorized to grant RSUs to Participants, subject to the
    following terms and conditions:

 

    (i) Award and Restrictions.  Subject to
    Section 6(e)(ii), RSUs shall be subject to such
    restrictions on transferability, risk of forfeiture and other
    restrictions, if any, as the Committee may impose, which
    restrictions may lapse separately or in combination at such
    times, under such circumstances (including based on achievement
    of performance conditions
    and/or
    future service requirements), in such installments or otherwise
    and under such other circumstances as the Committee may
    determine at the date of grant or thereafter. A Participant
    granted RSUs shall not have any of the rights of a stockholder,
    including the right to vote, until Stock shall have been issued
    in the Participant’s name pursuant to the RSUs, except that
    the Committee may provide for dividend equivalents pursuant to
    Section 6(e)(iii) below).

 

    (ii) Limitation on Vesting.  The grant,
    issuance, retention, vesting
    and/or
    settlement of RSUs shall occur at such time and in such
    installments as determined by the Committee or under criteria
    established by the Committee. Subject to Section 10, the
    Committee shall have the right to make the timing of the grant
    and/or the
    issuance, ability to retain, vesting
    and/or
    settlement of RSUs subject to continued employment, passage of
    time and/or
    such performance conditions as deemed appropriate by the
    Committee; provided that the grant, issuance, retention, vesting
    and/or
    settlement of an RSU that is based in whole or in part on
    performance conditions
    and/or the
    level of achievement versus such performance conditions shall be
    subject to a performance period of not less than one year, and
    any Award based solely upon continued employment or the passage
    of time shall vest over a period not less than three years from
    the date the Award is made, provided that such vesting may occur
    ratably over the three-year period. The foregoing minimum
    vesting conditions need not apply (A) in the case of the
    death, disability or Retirement of the Participant or
    termination in connection with a Change of Control, and
    (B) with respect to up to an aggregate of 5% of the shares
    of Stock authorized under the Plan, which may be granted (or
    regranted upon forfeiture) as Restricted Stock or RSUs without
    regard to such minimum vesting requirements.

 

    (iii) Dividend Equivalents.  Unless
    otherwise determined by the Committee, dividend equivalents on
    the specified number of shares of Stock covered by an Award of
    RSUs shall be either (A) paid with respect to such RSUs at
    the dividend payment date in cash or in shares of unrestricted
    Stock having a Fair Market Value equal to the amount of such
    dividends, or (B) deferred with respect to such RSUs,
    either as a cash deferral or with the amount or value thereof
    automatically deemed reinvested in additional RSUs, other Awards
    or other investment vehicles having a Fair Market Value equal to
    the amount of such dividends, as the Committee shall determine
    or permit a Participant to elect.

 

    7. Performance-Based Compensation.

 

    (a) Performance Goals Generally.  If the
    Committee specifies that any Restricted Stock or RSU Award is
    intended to qualify as “performance-based
    compensation” for purposes of Code Section 162(m), the
    grant, issuance, vesting
    and/or
    settlement of such Award shall be contingent upon achievement of
    preestablished performance goals and other terms set forth in
    this Section 7. The performance goal for such Awards shall
    consist of one or more business criteria and the level or levels
    of performance with respect to each of such criteria, as
    specified by the Committee consistent with this Section 7.
    The performance goal shall be an objective business criteria
    enumerated under Section 7(c) and shall otherwise meet the
    requirements of Code Section 162(m) and regulations
    thereunder, including the requirement that the level or levels
    of performance targeted by the Committee result in the
    achievement of performance goals being “substantially
    uncertain”. Performance goals may differ for Awards granted
    to any one Participant or to different Participants.

 

    (b) Timing for Establishing Performance
    Conditions.  A performance goal shall be
    established not later than the earlier of (A) 90 days
    after the beginning of any performance period applicable to such
    performance-based Award or (B) the time 25% of such
    performance period has elapsed.

 

    (c) Business Criteria.  For purposes of
    this Plan, a “performance goal” shall mean any one or
    more of the following business criteria, either individually,
    alternatively or in any combination, applied to either the
    Company as a whole or to a business unit or subsidiary, either
    individually, alternatively or in any combination, and measured
    either annually or cumulatively over a period of years, on an
    absolute basis

 

    or relative to a pre-established target, to previous years’
    results or to a designated comparison group, in each case as
    specified by the Committee:

 

    (1) gross sales, net sales, or comparable store sales;

 

    (2) gross margin, cost of goods sold,
    mark-ups or
    mark-downs;

 

    (3) selling, general and administrative expenses;

 

    (4) operating income, earnings from operations, earnings
    before or after taxes, earnings before or after interest,
    depreciation, amortization, or extraordinary or special items;

 

    (5) net income or net income per common share (basic or
    diluted);

 

    (6) inventory turnover or inventory shrinkage;

 

    (7) return on assets, return on investment, return on
    capital, or return on equity;

 

    (8) cash flow, free cash flow, cash flow return on
    investment, or net cash provided by operations;

 

    (9) economic profit or economic value created;

 

    (10) stock price or total stockholder return; and

 

    (11) market penetration, geographic expansion or new
    concept development; customer satisfaction; staffing; diversity;
    training and development; succession planning; employee
    satisfaction; acquisitions or divestitures of subsidiaries,
    affiliates or joint ventures.

 

    (d) Written
    Determinations.  Determinations by the Committee
    as to the establishment of performance conditions, the amount
    potentially payable in respect of performance-based Awards, the
    level of actual achievement of the specified performance
    conditions relating to such Awards, and the amount of any final
    Award shall be recorded in writing in the case of Awards
    intended to qualify under Section 162(m). Specifically, the
    Committee shall certify in writing, in a manner conforming to
    applicable regulations under Section 162(m), prior to
    settlement of each such Award granted to a Covered Employee,
    that the performance objective relating to the performance-based
    Award and other material terms of the Award upon which
    settlement of the Award was conditioned have been satisfied.

 

    (e) Settlement of performance-based Awards; Other
    Terms.  Settlement of performance-based Awards
    shall be in cash or Stock, in the Committee’s discretion.
    The Committee may, in its discretion, reduce the amount of a
    settlement otherwise to be made in connection with such Awards.
    Any settlement which changes the form of payment from that
    originally specified shall be implemented in a manner such that
    the Award and other related Awards do not, solely for that
    reason, fail to qualify as “performance-based
    compensation” for purposes of Code Section 162(m). The
    Committee shall specify the circumstances in which such Awards
    shall be paid or forfeited in the event of a Participant’s
    death, disability or Retirement, in connection with a Change of
    Control or, subject to the one-year performance condition set
    forth in Sections 6(d)(ii) and (e)(ii), in connection with
    any other termination of employment prior to the end of a
    performance period or settlement of such Awards.

 

    (f) Right of Recapture.  If at any time
    after the date on which a Participant has been granted or
    becomes vested in an Award pursuant to the achievement of a
    performance goal under Section 7(c), the Committee
    determines that the earlier determination as to the achievement
    of the performance goal was based on incorrect data and that in
    fact the performance goal had not been achieved or had been
    achieved to a lesser extent than originally determined and a
    portion of an Award would not have been granted, vested or paid,

 

    given the correct data, then (i) such portion of the Award
    that was granted shall be forfeited and any related shares (or
    if such shares were disposed of the cash equivalent) shall be
    returned to the Company as provided by the Committee,
    (ii) such portion of the Award that became vested shall be
    deemed to be not vested and any related shares (or if such
    shares were disposed of the cash equivalent) shall be returned
    to the Company as provided by the Committee, and (iii) such
    portion of the Award paid to the Participant shall be paid by
    the Participant to the Company upon notice from the Company as
    provided by the Committee.

 

    8. Certain Provisions Applicable to Awards.

 

    (a) Stand-Alone, Additional, and Tandem
    Awards.  Awards granted under the Plan may, in the
    Committee’s discretion, be granted either alone or in
    addition to, in tandem with, or in substitution or exchange for,
    any other Award or any award granted under another plan of the
    Company, any subsidiary or affiliate, or any business entity to
    be acquired by the Company or a subsidiary or affiliate, or any
    other right of a Participant to receive payment from the Company
    or any subsidiary or affiliate. Awards granted in addition to or
    in tandem with other Awards or awards may be granted either as
    of the same time as or a different time from the grant of such
    other Awards or awards.

 

    (b) Term of Awards.  The term of each
    Award shall be for such period as may be determined by the
    Committee, subject to the express limitations set forth in
    Sections 6(b)(iii) and 6(c)(iii) or elsewhere in the Plan.

 

    (c) Form and Timing of Payment under
    Awards.  Subject to the terms of the Plan
    (including Sections 11(k) and (l)) and any applicable Award
    document, payments to be made by the Company or a subsidiary or
    affiliate upon the exercise of an Option or other Award or
    settlement of an Award may be made in such forms as the
    Committee shall determine, including, without limitation, cash,
    Stock, other Awards or other property, and may be made in a
    single payment or transfer, in installments, or on a deferred
    basis. The settlement of any Award may be accelerated, and cash
    paid in lieu of Stock in connection with such settlement, in the
    Committee’s discretion or upon occurrence of one or more
    specified events, subject to Sections 6(b)(iv), 11(k) and
    11(l).

 

    9. Change of Control.

 

    (a) Impact of Event.  Unless the Board or
    Committee provides otherwise (either at the time of grant of an
    Award or thereafter) prior to a Change of Control, this
    Section 9(a) shall govern the treatment of any Option, SAR,
    Restricted Stock or RSU, the exercisability, vesting
    and/or
    settlement of which is based solely upon continued employment or
    passage of time. In the case of an Award subject to this
    Section 9(a) that the acquiring or surviving company in the
    Change of Control assumes upon and maintains following the
    Change of Control (which Award shall be adjusted as to the
    number and kind of shares as may be determined appropriate by
    the Committee prior to the Change of Control), if there occurs
    an involuntary termination without cause of the Participant
    holding such Award (excluding voluntary resignation, death,
    disability or Retirement) within three months prior to or
    eighteen months following the Change of Control such Award shall
    be treated as provided in clause (i) or (ii) of this
    Section 9(a), as applicable. In the case of an Award
    subject to this Section 9(a) that the acquiring or
    surviving company in the Change of Control does not assume upon
    the Change of Control, immediately prior to the Change of
    Control such Award shall be treated as provided in
    clause (i) or (ii) of this Section 9(a), as
    applicable. The treatment provided for under this
    Section 9(a) is as follows:

 

    (i) in the case of an Option or SAR, the Participant shall
    have the ability to exercise such Option or SAR, including any
    portion of the Option or SAR not previously exercisable, until
    the earlier of the

 

    expiration of the Option or SAR under its original term and a
    date that is two years (or such longer post-termination
    exercisability term as may be specified in the Option or SAR)
    following such date of termination of employment; and

 

    (ii) in the case of Restricted Stock or RSUs, the Award
    shall become fully vested and shall be settled in full. The
    Committee may also, through the terms of an Award or otherwise,
    provide for an absolute or conditional exercise, payment or
    lapse of conditions or restrictions on an Award which shall only
    be effective if, upon the announcement of a transaction intended
    to result in a Change of Control, no provision is made in such
    transaction for the assumption and continuation of outstanding
    Awards.

 

    (b) Effect of Change of Control upon performance-based
    Awards.  Unless the Committee specifies otherwise
    in the terms of an Award prior to a Change of Control, this
    Section 9(b) shall control the treatment of any Restricted
    Stock or RSU if at the time of the Change of Control the grant,
    issuance, retention, vesting
    and/or
    settlement of such Award is based in whole or in part on
    performance criteria and level of achievement versus such
    criteria. In the case of an Award subject to this
    Section 9(b) in which fifty percent (50%) or more of the
    performance period applicable to the Award has elapsed as of the
    date of the Change of Control, the Participant shall be entitled
    to payment, vesting or settlement of such Award based upon
    performance through a date occurring within three months prior
    to the date of the Change of Control, as determined by the
    Committee prior to the Change of Control, and pro-rated based
    upon the percentage of the performance period that has elapsed
    between the date such Award was granted and the date of the
    Change of Control. In the case of an Award subject to this
    Section 9(b) in which less than fifty percent (50%) of the
    performance period applicable to the Award has elapsed as of the
    date of the Change of Control, the Participant shall be entitled
    to payment, vesting or settlement of the target amount of such
    Award, as determined by the Committee prior to the Change of
    Control, pro-rated based upon the percentage of the performance
    period that has elapsed between the date such Award was granted
    and the date of the Change of Control. The Committee may
    determine either in advance or at the time of the Change of
    Control the treatment of the pro-rata portion of an Award
    attributable to the portion of the performance period occurring
    after the date of the Change of Control.

 

    Notwithstanding the foregoing, in no event shall the treatment
    specified in Sections 9(a) and (b) apply with respect
    to an Award prior to the earliest to occur of (A) the date
    such amounts would have been distributed in the absence of the
    Change of Control, (B) a Participant’s
    “separation from service” (as defined under
    Section 409A of the Code) with the Company (or six months
    thereafter for “specified employees”), (C) the
    Participant’s death or “disability” (as defined
    in Section 409A(a)(2)(C) of the Code), or (D) a
    “change in the ownership or effective control” of the
    Company or in the “ownership of a substantial portion of
    the assets” of the Company within the meanings ascribed to
    such terms in Treasury Department regulations issued under
    Section 409A of the Code, if and to the extent that the
    Committee determines, in its sole discretion, that the effect of
    such treatment prior to the time specified in this
    Section 9(b)(A), (B), (C) or (D) would be the
    imposition of the additional tax under
    Section 409A(a)(1)(B) of the Code on a Participant holding
    such Award.

 

    (c) Definition of Change of Control.  For
    purposes of the Plan, the term “Change of Control”
    shall mean, unless otherwise defined in an Award agreement, an
    occurrence of a nature that would be required to be reported by
    the Company in response to Item 6(e) of Schedule 14A
    of Regulation 14A issued under the Exchange Act. Without
    limiting the inclusiveness of the definition in the preceding
    sentence, a Change of

 

    Control of the Company shall be deemed to have occurred as of
    the first day that any one or more of the following conditions
    is satisfied:

 

    (i) any person is or becomes the “beneficial
    owner” (as that term is defined in
    Rule 13d-3
    under the Exchange Act), directly or indirectly, of securities
    of the Company representing 20% or more of the combined voting
    power of the Company’s then outstanding securities and such
    person would be deemed an “Acquiring Person” for
    purposes of the Rights Agreement dated as of July 16, 1998,
    as amended, between the Company and National City Bank, as
    successor Rights Agent (the “Rights
    Agreement”); or

 

    (ii) any of the following occur: (A) any merger or
    consolidation of the Company, other than a merger or
    consolidation in which the voting securities of the Company
    immediately prior to the merger or consolidation continue to
    represent (either by remaining outstanding or being converted
    into securities of the surviving entity) 80% or more of the
    combined voting power of the Company or surviving entity
    immediately after the merger or consolidation with another
    entity; (B) any sale, exchange, lease, mortgage, pledge,
    transfer, or other disposition (in a single transaction or a
    series of related transactions) of assets or earning power
    aggregating more than 50% of the assets or earning power of the
    Company on a consolidated basis; (C) any complete
    liquidation or dissolution of the Company; (D) any
    reorganization, reverse stock split or recapitalization of the
    Company that would result in a Change of Control as otherwise
    defined herein; or (E) any transaction or series of related
    transactions having, directly or indirectly, the same effect as
    any of the foregoing.

 

    10. Additional Award Forfeiture Provisions.

 

    (a) Forfeiture of Options and Other Awards and Gains
    Realized Upon Prior Option Exercises or Award
    Settlements.  Unless otherwise determined by the
    Committee, each Award granted shall be subject to the following
    additional forfeiture conditions, to which the Participant, by
    accepting an Award hereunder, agrees. If any of the events
    specified in Section 10(b)(i), (ii), or (iii) occurs
    (a “Forfeiture Event”), all of the following
    forfeitures will result:

 

    (i) The unexercised portion of each Option held by the
    Participant, whether or not vested, and any other Award not then
    settled will be immediately forfeited and canceled upon the
    occurrence of the Forfeiture Event; and

 

    (ii) The Participant will be obligated to repay to the
    Company, in cash, within five business days after demand is made
    therefor by the Company, the total amount of Award Gain (as
    defined herein) realized by the Participant upon each exercise
    of an Option or settlement of an Award that occurred on or after
    (A) the date that is six months prior to the occurrence of
    the Forfeiture Event, if the Forfeiture Event occurred while the
    Participant was employed by the Company or a subsidiary or
    affiliate, or (B) the date that is six months prior to the
    date the Participant’s employment by the Company or a
    subsidiary or affiliate terminated, if the Forfeiture Event
    occurred after the Participant ceased to be so employed. For
    purposes of this Section, the term “Award Gain” shall
    mean (i), in respect of a given Option exercise, the product of
    (X) the Fair Market Value per share of Stock at the date of
    such exercise (without regard to any subsequent change in the
    market price of shares) minus the exercise price times
    (Y) the number of shares as to which the Option was
    exercised at that date, and (ii), in respect of any other
    settlement of an Award granted to the Participant, the Fair
    Market Value of the cash or Stock paid or payable to Participant
    (regardless of any elective deferral) less any cash or the Fair
    Market Value of any Stock or property (other than an Award or
    award which would have itself then been forfeitable hereunder
    and excluding any payment of tax withholding) paid by the
    Participant to the Company as a condition of or in connection
    such settlement.

 

    (b) Events Triggering Forfeiture.  The
    forfeitures specified in Section 10(a) will be triggered
    upon the occurrence of any one of the following Forfeiture
    Events at any time during Participant’s employment by the
    Company or a subsidiary or affiliate, or during the one-year
    period following termination of such employment:

 

    (i) Participant, acting alone or with others, directly or
    indirectly, (A) engages, either as employee, employer,
    consultant, advisor, or director, or as an owner, investor,
    partner, or stockholder unless Participant’s interest is
    insubstantial, in any business in an area or region in which the
    Company conducts business at the date the event occurs, which is
    directly in competition with a business then conducted by the
    Company or a subsidiary or affiliate; (B) induces any
    customer or supplier of the Company or a subsidiary or
    affiliate, with which the Company or a subsidiary or affiliate
    has a business relationship, to curtail, cancel, not renew, or
    not continue his or her or its business with the Company or any
    subsidiary or affiliate; or (C) induces, or attempts to
    influence, any employee of or service provider to the Company or
    a subsidiary or affiliate to terminate such employment or
    service. The Committee shall, in its discretion, determine which
    lines of business the Company conducts on any particular date
    and which third parties may reasonably be deemed to be in
    competition with the Company. For purposes of this
    Section 10(b)(i), a Participant’s interest as a
    stockholder is insubstantial if it represents beneficial
    ownership of less than five percent of the outstanding class of
    stock, and a Participant’s interest as an owner, investor,
    or partner is insubstantial if it represents ownership, as
    determined by the Committee in its discretion, of less than five
    percent of the outstanding equity of the entity;

 

    (ii) Participant discloses, uses, sells, or otherwise
    transfers, except in the course of employment with or other
    service to the Company or any subsidiary or affiliate, any
    confidential or proprietary information of the Company or any
    subsidiary or affiliate, including but not limited to
    information regarding the Company’s current and potential
    customers, organization, employees, finances, and methods of
    operations and investments, so long as such information has not
    otherwise been disclosed to the public or is not otherwise in
    the public domain (other than by Participant’s breach of
    this provision), except as required by law or pursuant to legal
    process, or Participant makes statements or representations, or
    otherwise communicates, directly or indirectly, in writing,
    orally, or otherwise, or takes any other action which may,
    directly or indirectly, disparage or be damaging to the Company
    or any of its subsidiaries or affiliates or their respective
    officers, directors, employees, advisors, businesses or
    reputations, except as required by law or pursuant to legal
    process; or

 

    (iii) Participant fails to cooperate with the Company or
    any subsidiary or affiliate in any way, including, without
    limitation, by making himself or herself available to testify on
    behalf of the Company or such subsidiary or affiliate in any
    action, suit, or proceeding, whether civil, criminal,
    administrative, or investigative, or otherwise fails to assist
    the Company or any subsidiary or affiliate in any way,
    including, without limitation, in connection with any such
    action, suit, or proceeding by providing information and meeting
    and consulting with members of management of, other
    representatives of, or counsel to, the Company or such
    subsidiary or affiliate, as reasonably requested.

 

    (c) Agreement Does Not Prohibit Competition or Other
    Participant Activities.  Although the conditions
    set forth in this Section 10 shall be deemed to be
    incorporated into an Award, a Participant is not thereby
    prohibited from engaging in any activity, including but not
    limited to competition with the Company and its subsidiaries and
    affiliates. Rather, the non-occurrence of the Forfeiture Events
    set forth in Section 10(b) is a condition to the
    Participant’s right to realize and retain value from his or
    her compensatory Options and Awards, and the consequence under
    the Plan if the Participant engages in an activity giving rise
    to any such Forfeiture Event are the forfeitures specified
    herein. The Company and Participant shall not be precluded by

 

    this provision or otherwise from entering into other agreements
    concerning the subject matter of Sections 10(a) and 10(b).

 

    (d) Committee Discretion.  The Committee
    may, in its discretion, waive in whole or in part the
    Company’s right to forfeiture under this Section, but no
    such waiver shall be effective unless evidenced by a writing
    signed by a duly authorized officer of the Company. In addition,
    the Committee may impose additional conditions on Awards, by
    inclusion of appropriate provisions in the document evidencing
    or governing any such Award.

 

    11. General Provisions.

 

    (a) Compliance with Legal and Other
    Requirements.  The Company may, to the extent
    deemed necessary or advisable by the Committee and subject to
    Section 11(k), postpone the issuance or delivery of Stock
    or payment of other benefits under any Award until completion of
    such registration or qualification of such Stock or other
    required action under any federal or state law, rule or
    regulation, listing or other required action with respect to any
    stock exchange or automated quotation system upon which the
    Stock or other securities of the Company are listed or quoted,
    or compliance with any other obligation of the Company, as the
    Committee may consider appropriate, and may require any
    Participant to make such representations, furnish such
    information and comply with or be subject to such other
    conditions as it may consider appropriate in connection with the
    issuance or delivery of Stock or payment of other benefits in
    compliance with applicable laws, rules, and regulations, listing
    requirements, or other obligations. The foregoing
    notwithstanding, in connection with a Change of Control, the
    Company shall take or cause to be taken no action, and shall
    undertake or permit to arise no legal or contractual obligation,
    that results or would result in any postponement of the issuance
    or delivery of Stock or payment of benefits under any Award or
    the imposition of any other conditions on such issuance,
    delivery or payment, to the extent that such postponement or
    other condition would represent a greater burden on a
    Participant than existed on the 90th day preceding the
    Change of Control.

 

    (b) Limits on Transferability;
    Beneficiaries.  No Award or other right or
    interest of a Participant under the Plan shall be pledged,
    hypothecated or otherwise encumbered or subject to any lien,
    obligation or liability of such Participant to any party (other
    than the Company or a subsidiary or affiliate thereof), or
    assigned or transferred by such Participant otherwise than by
    will or the laws of descent and distribution or to a Beneficiary
    upon the death of a Participant, and such Awards or rights that
    may be exercisable shall be exercised during the lifetime of the
    Participant only by the Participant or his or her guardian or
    legal representative, except that Awards and other rights (other
    than ISOs and SARs in tandem therewith) may be transferred to
    one or more transferees during the lifetime of the Participant,
    and may be exercised by such transferees in accordance with the
    terms of such Award, but only if and to the extent such
    transfers are permitted by the Committee, subject to any terms
    and conditions which the Committee may impose thereon (which may
    include limitations the Committee may deem appropriate in order
    that offers and sales under the Plan will meet applicable
    requirements of registration forms under the Securities Act of
    1933 specified by the Securities and Exchange Commission). A
    Beneficiary, transferee, or other person claiming any rights
    under the Plan from or through any Participant shall be subject
    to all terms and conditions of the Plan and any Award document
    applicable to such Participant, except as otherwise determined
    by the Committee, and to any additional terms and conditions
    deemed necessary or appropriate by the Committee.

 

    (c) Adjustments.  In the event that any
    large, special and non-recurring dividend or other distribution
    (whether in the form of cash or property other than Stock),
    recapitalization, forward or reverse split, Stock dividend,
    reorganization, merger, consolidation, spin-off, combination,
    repurchase, share exchange,

 

    liquidation, dissolution or other similar corporate transaction
    or event affects the Stock, then the Committee shall, in an
    equitable manner as determined by the Committee, adjust any or
    all of (i) the number and kind of shares of Stock or other
    securities of the Company or other issuer which are subject to
    the Plan, (ii) the number and kind of shares of Stock or
    other securities of the Company or other issuer by which annual
    per-person Award limitations are measured under Section 5,
    including the share limits applicable to non-employee director
    Awards under Section 5(c), (iii) the number and kind
    of shares of Stock or other securities of the Company or other
    issuer subject to or deliverable in respect of outstanding
    Awards and (iv) the exercise price, settlement price or
    purchase price relating to any Award or, if deemed appropriate,
    the Committee may make provision for a payment of cash or
    property to the holder of an outstanding Option (subject to
    Sections 11(k) and 11(l)) or other Award. In addition, the
    Committee is authorized to make adjustments in the terms and
    conditions of, and the criteria included in, Awards (including
    performance-based Awards and performance goals and any
    hypothetical funding pool relating thereto) in recognition of
    unusual or nonrecurring events (including, without limitation,
    events described in the preceding sentence, as well as
    acquisitions and dispositions of businesses and assets affecting
    any performance conditions), or in response to changes in
    applicable laws, regulations, or accounting principles; provided
    that no such adjustment shall be authorized or made if and to
    the extent that the existence of such authority (i) would
    cause Options, SARs, Restricted Stock or RSUs granted under the
    Plan to Participants designated by the Committee as Covered
    Employees and intended to qualify as “performance-based
    compensation” under Code Section 162(m) and
    regulations thereunder to otherwise fail to qualify as
    “performance-based compensation” under Code
    Section 162(m) and regulations thereunder, or
    (ii) would cause the Committee to be deemed to have
    authority to change the targets, within the meaning of Treasury
    Regulation 1.162-27(e)(4)(vi),
    under the performance goals relating to Options or SARs granted
    to Covered Employees and intended to qualify as
    “performance-based compensation” under Code
    Section 162(m) and regulations thereunder.

 

    (d) Tax Provisions.

 

    (i) Withholding.  The Company and any
    subsidiary or affiliate is authorized to withhold from any Award
    granted, any payment relating to an Award under the Plan,
    including from a distribution of Stock, or any payroll or other
    payment to a Participant, amounts of withholding and other taxes
    due or potentially payable in connection with any transaction or
    event involving an Award, or to require a Participant to remit
    to the Company an amount in cash or other property (including
    Stock) to satisfy such withholding before taking any action with
    respect to an Award, and to take such other action as the
    Committee may deem advisable to enable the Company and
    Participants to satisfy obligations for the payment of
    withholding taxes and other tax obligations relating to any
    Award. This authority shall include authority to withhold or
    receive Stock or other property and to make cash payments in
    respect thereof in satisfaction of a Participant’s
    withholding obligations, either on a mandatory or elective basis
    in the discretion of the Committee, or in satisfaction of other
    tax obligations. The Company can delay the delivery to a
    Participant of Stock under any Award to the extent necessary to
    allow the Company to determine the amount of withholding to be
    collected and to collect and process such withholding.

 

    (ii) Required Consent to and Notification of Code
    Section 83(b) Election.  No election under
    Section 83(b) of the Code (to include in gross income in
    the year of transfer the amounts specified in Code
    Section 83(b)) or under a similar provision of the laws of
    a jurisdiction outside the United States may be made unless
    expressly permitted by the terms of the Award document or by
    action of the Committee in writing prior to the making of such
    election. In any case in which a Participant is permitted to
    make such an election in connection with an Award, the
    Participant shall notify the Company of such election within ten
    days of filing notice of the election with the Internal Revenue
    Service or other governmental authority, in addition to any

 

    filing and notification required pursuant to regulations issued
    under Code Section 83(b) or other applicable provision.

 

    (iii) Requirement of Notification Upon Disqualifying
    Disposition Under Code Section 421(b).  If
    any Participant shall make any disposition of shares of Stock
    delivered pursuant to the exercise of an ISO under the
    circumstances described in Code Section 421(b) (i.e., a
    disqualifying disposition), such Participant shall notify the
    Company of such disposition within ten days thereof.

 

    (e) Changes to the Plan.  The Board may
    amend, suspend or terminate the Plan or the Committee’s
    authority to grant Awards under the Plan without the consent of
    stockholders or Participants; provided, however, that any
    amendment to the Plan shall be submitted to the Company’s
    stockholders for approval not later than the earliest annual
    meeting for which the record date is at or after the date of
    such Board action:

 

    (i) if such stockholder approval is required by any federal
    or state law or regulation or the rules of the New York Stock
    Exchange or any other stock exchange or automated quotation
    system on which the Stock may then be listed or quoted; or

 

    (ii) if such amendment would materially increase the number
    of shares reserved for issuance and delivery under the
    Plan; or

 

    (iii) if such amendment would alter the provisions of the
    Plan restricting the Company’s ability to grant Options or
    SARs with an exercise price that is not less than the Fair
    Market Value of Stock; or

 

    (iv) in connection with any action to amend or replace
    previously granted Options or SARs in a transaction that
    constitutes a “repricing,” as such term is used in
    Section 303A.08 of the Listed Company Manual of the New
    York Stock Exchange. The Board may otherwise, in its discretion,
    determine to submit other amendments to the Plan to stockholders
    for approval; and provided further, that, without the consent of
    an affected Participant, no such Board (or any Committee) action
    may materially and adversely affect the rights of such
    Participant under any outstanding Award (for this purpose,
    actions that alter the timing of federal income taxation of a
    Participant will not be deemed material unless such action
    results in an income tax penalty on the Participant). With
    regard to other terms of Awards, the Committee shall have no
    authority to waive or modify any such Award term after the Award
    has been granted to the extent the waived or modified term would
    be mandatory under the Plan for any Award newly granted at the
    date of the waiver or modification.

 

    (f) Right of Setoff.  The Company or any
    subsidiary or affiliate may, to the extent permitted by
    applicable law, deduct from and set off against any amounts the
    Company or a subsidiary or affiliate may owe to the Participant
    from time to time (including amounts payable in connection with
    any Award, owed as wages, fringe benefits, or other compensation
    owed to the Participant), such amounts as may be owed by the
    Participant to the Company, including but not limited to amounts
    owed under Section 10(a), although the Participant shall
    remain liable for any part of the Participant’s payment
    obligation not satisfied through such deduction and setoff. By
    accepting any Award granted hereunder, the Participant agrees to
    any deduction or setoff under this Section 11(f).

 

    (g) Unfunded Status of Awards; Creation of
    Trusts.  To the extent that any Award is deferred
    compensation, the Plan is intended to constitute an
    “unfunded” plan for deferred compensation with respect
    to such Award. With respect to any payments not yet made to a
    Participant or obligation to deliver Stock pursuant to an Award,
    nothing contained in the Plan or any Award shall give any such
    Participant any rights that are greater than those of a general
    creditor of the Company; provided that the Committee may
    authorize the creation of trusts and deposit therein cash,
    Stock, other Awards or other property, or make other

 

    arrangements to meet the Company’s obligations under the
    Plan. Such trusts or other arrangements shall be consistent with
    the “unfunded” status of the Plan unless the Committee
    otherwise determines with the consent of each affected
    Participant.

 

    (h) Nonexclusivity of the Plan.  Neither
    the adoption of the Plan by the Board nor its submission to the
    stockholders of the Company for approval shall be construed as
    creating any limitations on the power of the Board or a
    committee thereof to adopt such other incentive arrangements,
    apart from the Plan, as it may deem desirable, including
    incentive arrangements and awards which do not qualify under
    Code Section 162(m), and such other arrangements may be
    either applicable generally or only in specific cases.

 

    (i) Payments in the Event of Forfeitures; Fractional
    Shares.  Unless otherwise determined by the
    Committee, in the event of a forfeiture of an Award with respect
    to which a Participant paid cash consideration, the Participant
    shall be repaid the amount of such cash consideration. In
    addition, nothing herein shall prevent the Committee from
    authorizing the payment in cash of any amounts with respect to
    forfeited Awards. No fractional shares of Stock shall be issued
    or delivered pursuant to the Plan or any Award. The Committee
    shall determine whether cash, other Awards or other property
    shall be issued or paid in lieu of such fractional shares or
    whether such fractional shares or any rights thereto shall be
    forfeited or otherwise eliminated.

 

    (j) Compliance with Code
    Section 162(m).  It is the intent of the
    Company that Options and SARs granted to Covered Employees and
    other Awards designated as Awards to Covered Employees subject
    to Section 7 shall constitute qualified
    “performance-based compensation” within the meaning of
    Code Section 162(m) and regulations thereunder, unless
    otherwise determined by the Committee at the time of allocation
    of an Award. Accordingly, the terms of Section 7, including
    the definitions of Covered Employee and other terms used
    therein, shall be interpreted in a manner consistent with Code
    Section 162(m) and regulations thereunder. The foregoing
    notwithstanding, because the Committee cannot determine with
    certainty whether a given Participant will be a Covered Employee
    with respect to a fiscal year that has not yet been completed,
    the term Covered Employee as used herein shall mean only a
    person designated by the Committee as likely to be a Covered
    Employee with respect to a specified fiscal year. If any
    provision of the Plan or any Award document relating to an Award
    that is designated as intended to comply with Code
    Section 162(m) does not comply or is inconsistent with the
    requirements of Code Section 162(m) or regulations
    thereunder, such provision shall be construed or deemed amended
    to the extent necessary to conform to such requirements, and no
    provision shall be deemed to confer upon the Committee or any
    other person discretion to increase the amount of compensation
    otherwise payable in connection with any such Award upon
    attainment of the applicable performance objectives.

 

    (k) Certain Limitations on Awards to Ensure Compliance
    with Code Section 409A.  Notwithstanding
    anything herein to the contrary, any Award that is deferred
    compensation within the meaning of Code Section 409A shall
    be automatically modified and limited to the extent that the
    Committee determines necessary to avoid the imposition of the
    additional tax under Section 409A(a)(1)(B) of the Code on a
    Participant holding such Award.

 

    (l) Certain Limitations Relating to Accounting Treatment
    of Awards.  Other provisions of the Plan
    notwithstanding, the Committee’s authority under the Plan
    (including under Sections 8(c), 11(c) and 11(d)) is limited
    to the extent necessary to ensure that any Option or other Award
    of a type that the Committee has intended to be subject to fixed
    accounting with a measurement date at the date of grant under
    Statement of Financial Accounting Standards No. 123(R)
    shall not become subject to “variable” accounting
    solely due to the existence of such authority, unless the
    Committee specifically determines that the Award shall remain
    outstanding despite such “variable” accounting.

 

    (m) Governing Law.  The validity,
    construction, and effect of the Plan, any rules and regulations
    relating to the Plan and any Award document shall be determined
    in accordance with the laws of the State of Delaware, without
    giving effect to principles of conflicts of laws, and applicable
    provisions of federal law.

 

    (n) Awards to Participants Outside the United
    States.  The Committee may modify the terms of any
    Award under the Plan made to or held by a Participant who is
    then resident or primarily employed outside of the United States
    in any manner deemed by the Committee to be necessary or
    appropriate in order that such Award shall conform to laws,
    regulations, and customs of the country in which the Participant
    is then resident or primarily employed, or so that the value and
    other benefits of the Award to the Participant, as affected by
    foreign tax laws and other restrictions applicable as a result
    of the Participant’s residence or employment abroad shall
    be comparable to the value of such an Award to a Participant who
    is resident or primarily employed in the United States. An Award
    may be modified under this Section 11(n) in a manner that
    is inconsistent with the express terms of the Plan, so long as
    such modifications will not contravene any applicable law or
    regulation or result in actual liability under
    Section 16(b) for the Participant whose Award is modified.

 

    (o) Limitation on Rights Conferred under
    Plan.  Neither the Plan nor any action taken
    thereunder shall be construed as (i) giving any Eligible
    Person or Participant the right to continue as an Eligible
    Person or Participant or in the employ or service of the Company
    or a subsidiary or affiliate, (ii) interfering in any way
    with the right of the Company or a subsidiary or affiliate to
    terminate any Eligible Person’s or Participant’s
    employment or service at any time (subject to the terms and
    provisions of any separate written agreements),
    (iii) giving an Eligible Person or Participant any claim to
    be granted any Award under the Plan or to be treated uniformly
    with other Participants and employees, or (iv) conferring
    on a Participant any of the rights of a stockholder of the
    Company unless and until the Participant is duly issued or
    transferred shares of Stock in accordance with the terms of an
    Award or an Option is duly exercised. Except as expressly
    provided in the Plan and an Award document, neither the Plan nor
    any Award document shall confer on any person other than the
    Company and the Participant any rights or remedies thereunder.

 

    (p) Severability; Entire Agreement.  If
    any of the provisions of the Plan or any Award document is
    finally held to be invalid, illegal or unenforceable (whether in
    whole or in part), such provision shall be deemed modified to
    the extent, but only to the extent, of such invalidity,
    illegality or unenforceability, and
the remaining provisions
    shall not be affected thereby; provided, that, if any of such
    provisions is finally held to be invalid, illegal, or
    unenforceable because it exceeds the maximum scope determined to
    be acceptable to permit such provision to be enforceable, such
    provision shall be deemed to be modified to the minimum extent
    necessary to modify such scope in order to make such provision
    enforceable hereunder. The Plan and any agreements or documents
    designated by the Committee as setting forth the terms of an
    Award contain the entire agreement of the parties with respect
    to the subject matter thereof and supersede all prior
    agreements, promises, covenants, arrangements, communications,
    representations and warranties between them, whether written or
    oral with respect to the subject matter thereof.

 

    (q) Plan Effective Date and
    Termination.  The Plan shall become effective if,
    and at such time as, the stockholders of the Company have
    approved it in accordance with applicable law and stock exchange
    requirements. Unless earlier terminated by action of the Board
    of Directors, the authority of the Committee to make grants
    under the Plan shall terminate on the date that is ten years
    after the latest date upon which stockholders of the Company
    have approved the Plan, and the Plan will remain in effect until
    such time as no Stock remains available for delivery under the
    Plan or as set forth above and the Company has no further rights
    or obligations under the Plan with respect to outstanding Awards
    under the Plan.exv10w2

 

Exhibit 10.2

			
	 	 	 
	
	 	 

 

March 30,
2007

Mr. Gary
V. Klinefelter

8555 South College Lane

Tempe, AZ 85284

Dear Gary:

     The purpose of this letter is set forth a new agreement between you and Zila, Inc. (the
“Company”) with respect to your employment. Accordingly,
your November 16, 2004 letter agreement
is hereby revoked in its entirety and shall be of no further force or effect, and this letter
agreement (the “Agreement”) shall be substituted in its place and stead. The effective date of
this Agreement shall be January 1, 2007.

     1. Title.
You will continue to serve as an Executive Vice President of the Company and as
the Company’s General Counsel.

     2. Reporting
Structure. You will report directly to me in my capacity as CEO of the
Company.

     3. Responsibilities. Your responsibilities will be those consistent with the
above-described position and/or as they may be assigned to you by the Company.

     4. Base
Salary. Your base salary will be paid at the rate of two hundred forty thousand
dollars ($240,000.00) per year, less applicable withholdings as may be required by law, in
accordance with the Company’s regular payroll practices (currently bi-weekly).

     5. Auto
allowance. You will receive an auto allowance of $800 per month, subject to
Internal Revenue Service regulations and paid in accordance with the
Company’s regular payroll
practices.

     6. Eligibility
for Performance Bonuses. You will continue to be eligible to participate
in whatever incentive bonus plan(s) the Company maintains, or
successor plans as may be
applicable. Currently, the Company’s incentive bonus plan
provides you with an opportunity to
receive a cash performance bonus of up to fifty percent (50%) of your
current base salary, less
applicable withholdings as may be required by law.

     7. Stock
Options. Subject to approval of Zila, Inc.’s Board of
Directors or its Compensation Committee, you will continue to be eligible to receive stock option grants
to purchase the Company’s common stock under the Zila, Inc. 1997 Stock Option Award Plan,
as amended and restated September 30, 2004 (the “Stock Option Plan”), or such amended or
restated stock option plan as may then be in effect, based on individual performance and/or as
may be

 

 

Mr. Gary
V. Klinefelter

March 30, 2007

Page 2

commensurate with grants to other executive-level management. All stock option grants shall be
governed in all respects by the Stock Option Plan or such amended or restated stock option plan as
may then be in effect.

     8.  Insurance. You will receive insurance benefits as provided to other executive-level
management. Currently, these consist of medical, dental and vision
coverage for you and your
dependents, life insurance and short-term disability coverage for
you, and directors and officers’
liability insurance.

     9. Paid
Time Off. You will receive paid time off (“PTO”) in accordance with the Company’s
regular PTO policy. You will also receive paid holidays in accordance
with the Company’s regular
holiday policies.

     10. Other Benefits. You will receive other benefits as may be commensurate with those
provided to other executive-level management. Currently, these include participation in a 401(k)
plan, an employee stock purchase plan, a flexible spending program/Section 125, and employee
recognition programs.

     11. Compensation
and Terms of Employment Subject to Change. All terms and conditions of
employment, including all compensation terms, are subject to change
at the Company’s discretion.

     12. At-Will
Employment. Your employment with the Company is at will, meaning that it lawfully
can be terminated at any time by either you or the Company, with or
without cause or notice.
Nothing contained in this Agreement changes the at-will nature of
your employment.

     13. Severance
Benefits. If the Company terminates your employment, you shall be eligible to
receive severance benefits in accordance with the following:

          13.1 Change in Control. If your employment is terminated because of a change in control of
the Company (“Change in Control”), you shall be entitled to receive severance pay in (i) an amount
equivalent to twenty-four (24) months of your annual base salary in effect on the date your
employment is terminated; and (ii) an amount equivalent to the maximum cash bonus(es) (expressed
as a percentage of your annual base salary in effect on the date your employment is terminated)
for which you would have been eligible, during the twenty-four (24) months following termination
of your employment had your employment not terminated and had you stayed in the position you
occupied as of termination of your employment, under any employee incentive bonus plan(s) in
effect on the date your employment is terminated. For purposes of this Agreement, “Change in
Control” shall be defined and governed by the definition of “change in control” contained in the
Stock Option Plan, or such amended or restated stock option plan as may then be in effect or, in
the absence of such plan, in

 

 

Mr. Gary V. Klinefelter

March 30, 2007

Page 3

the last such plan that was in effect. If the Company terminates your employment within eighteen
(18) months of a Change in Control, a presumption shall arise that the termination was because of a
Change in Control. This presumption, however, shall be rebutted if a preponderance of the evidence
shows that the reason for your termination was something other than a Change in Control.

          13.2
Termination Without Cause. If the Company terminates your employment without cause
(“Without Cause”) and for a reason other than a Change in
Control, you shall be entitled to receive
severance pay in an amount equivalent to twenty-four (24) months of your annual base salary in
effect on the date your employment is terminated. For purposes of this Agreement, “Cause” shall
mean (i) your failure to correct a specific conduct or job-performance issue or issues about which
you have been informed in writing and given an opportunity to correct; or (ii) conduct or job
performance that the Company believes is sufficiently willful and/or egregious that providing you
with written notice and an opportunity to correct is an inadvisable business practice; or (iii) your
inability to perform your job (e.g., due to incapacity or death). If your employment terminates for
any other reason (with the exception of a termination because of a Change in Control), such
termination shall be deemed Without Cause and this subpart 13.2 shall apply.

          13.3
Stock Options and Restricted Stock. If your employment is terminated because of a Change
in Control or Without Cause, and upon expiration of any revocation
period contained in the release
required by subpart 13.4 below, (i) any stock options granted
prior to termination of your
employment shall be deemed immediately vested and exercisable
according to their terms; and (ii) all
restrictions applicable to any restricted stock awarded prior to termination shall be deemed
immediately lifted. (Together, the severance pay set forth above and these stock benefits are the
“Severance Benefits”).

          13.4
Release Required. Severance Benefits will be provided and/or take effect only if you
provide the Company and its affiliated entities and persons with a
written release, in a form
acceptable to the Company, from legal liability. In no event will any
Severance Benefits be provided
or take effect until such release is executed and its revocation
period (if any) under applicable
law has expired unexercised. If you fail to execute the release
within thirty (30) days of your
receipt of same, your right to execute the release, and your
corresponding right to Severance Benefits, will be extinguished.

          13.5
No Other Right to Severance Benefits. Severance Benefits will not be provided and/or take
effect if you voluntarily resign from your employment, or your
employment terminates for a reason
other than a Change in Control or Without Cause, or you do not
qualify for Severance Benefits
pursuant to this Agreement for any other reason.

          13.6
Timing of Severance Pay. All sums payable to you pursuant to
subparts 13.1 or 13.2 above
shall be paid in a lump sum within six (6) months plus one (1) business days

 

 

Mr. Gary V. Klinefelter

March 30, 2007

Page 4

after termination of your employment (the “Payment Date”). However, if you are a “Specified
Employee” of the Company for purposes of Internal Revenue Code Section 409A (“Code Section 409A”)
at the time of any event that triggers a payment obligation on the part of the Company pursuant to
subparts 13.1 or 13.2, then the required payment shall be made to you by the Company on the first
day such payment may be made without incurring excise taxes under Code Section 409A (without
regard to whether that shortens, lengthens or does not affect the time period set forth in the
first sentence of this subpart 13.6) (the “409 A Payment Date”). Should this result in a delay of
payments to you beyond the Payment Date, then the Company shall also pay you interest accrued from
the Payment Date to the 409A Payment Date at the rate of interest announced by Bank of America,
Arizona from time to time as its prime rate. For purposes of this provision, the term Specified
Employee shall have the meaning set forth in Section 409A(2)(B)(i) of the Internal Revenue Code of
1986, as amended, or any successor provision and the treasury regulations and rulings issued
thereunder.

          13.7 Termination of Your Right to Severance Benefits. Your right to receive Severance
Benefits shall immediately terminate if (i) you breach any contractual obligation you owe the
Company or violate any other promise or commitment you have made to the Company or duty you owe
the Company; or (ii) you solicit, induce, or attempt to influence any employee of the Company or
its affiliated companies to terminate his or her employment.

     14. Cooperation in Dispute Resolution. During your employment and thereafter (including
following termination of your employment for any reason), you will
make yourself reasonably
available to consult with the Company or any of its affiliated
companies with regard to any
potential or actual dispute the Company or any of its affiliated
companies may have with any third
party concerning matters about which you have personal knowledge, and
to testify about any such
matter should such testimony be required, so long as doing so does
not unreasonably interfere with
your then-current professional activities.

     15. Applicable
Law. You hereby consent to application of Arizona law to this Agreement
without regard to choice-of-law or conflict-of-law rules. However, in
recognition of the fact that
the Severance Benefits set forth above are not items of ordinary
compensation, and as an inducement
for the Company to agree to those provisions, we have specifically
agreed that Arizona Revised
Statute § 23-355 (which provides for the possibility of treble
damages for unpaid wages) shall not
apply to Paragraph 13 of this Agreement (or its subparts), or to
any payment(s) arguably due under
Paragraph 13 of this Agreement (or its subparts), or to any dispute arising under Paragraph 13 of
this Agreement (or its subparts). This does not affect your right to Severance Benefits, but means
that if we have a dispute about whether Severance Benefits are owed, you cannot seek three times the
amount of such Severance Benefits in a legal action.

     16. Severability.
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part, the remaining

 

 

Mr. Gary V. Klinefelter

March 30, 2007

Page 5

provisions of this Agreement shall remain in full force and effect to the fullest extent
permitted by law.

     17. Other agreements. Like all Company employees, you may in the future be required, in
the Company’s reasonable discretion, to execute agreements relating to other Company policies
or substantive matters.

     I look forward to continuing to work together.

Sincerely,

Douglas D. Burkett, Ph.D.

CEO and President

Statement of Acceptance:

     I have read the foregoing Agreement and agree to its terms.

	 	 	 	 	 
	 	 	 
	Dated: 4/12/07 	/s/ Gary V. Klinefelter
 	 
	 	Gary V. Klinefelter

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