1998 Stock Option Plan For Directors & Contractors

HOME INTERIORS & GIFTS, INC. 1998 STOCK OPTION PLAN
FOR UNIT DIRECTORS, BRANCH DIRECTORS AND CERTAIN OTHER
INDEPENDENT CONTRACTORS


1. Purpose.


Home Interiors & Gifts, Inc., a Texas corporation (herein, together with its successors, referred to as the "Company"), by means of this 1998 Stock Option Plan (the "Plan"), desires to afford certain unit directors, branch directors and certain other independent contractors of the Company (the "Participants") an opportunity to acquire a proprietary interest in the Company and thus to create in such persons an increased interest in and a greater concern for the welfare of the Company.


The award of Units (as hereinafter defined) described in Section 4, the grant of Options (as hereinafter defined) described in Section 5, and the shares of Common Stock (as hereinafter defined) acquired pursuant to the exercise of Options are a matter of separate inducement and are not in lieu of any other compensation for services. Stock options granted initially under the Plan shall be granted to the Home Interiors & Gifts, Inc. 1998 Stock Option Trust (the "Trust") for the benefit of the Participants.


2. Administration.


The Plan shall be administered by the Option Committee, or any successor thereto, of the Board of Directors of the Company (the "Board of Directors"), or by any other committee appointed by the Board of Directors to administer the Plan (the "Committee"); provided, the entire Board of Directors may act as the Committee if it chooses to do so. The number of individuals that shall constitute the Committee shall be determined from time to time by a majority of all the members of the Board of Directors, and, unless that majority of the Board of Directors determines otherwise, shall be no less than two individuals. The Chairman of the Board of Directors of the Company shall be a member of the Committee at all times. A majority of the Committee shall constitute a quorum (or if the Committee consists of only two members, then both members shall constitute a quorum), and subject to the provisions of Section 7, the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all members of the Committee, shall be the acts of the Committee.


The members of the Committee shall serve at the pleasure of the Board of Directors, which shall have the power, at any time and from time to time, to remove members from or add members to the Committee. Removal from the Committee may be with or without


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cause. Any individual serving as a member of the Committee shall have the right to resign from membership on the Committee by written notice to the Board of Directors. The Board of Directors, and not the remaining members of the Committee, shall have the power and authority to fill vacancies on the Committee, however caused. The Board of Directors shall promptly fill any vacancy that causes the number of members of the Committee to be less than two.


3. Shares Available.


Subject to the adjustments provided in Section 8, the maximum aggregate number of shares of common stock, par value $0.10 per share ("Common Stock"), of the Company in respect of which Options may be granted for all purposes under the Plan shall be 338,481 shares. If, for any reason, any shares as to which Options have been granted cease to be subject to purchase thereunder, including the expiration of such Option, the termination of such Option prior to exercise, or the forfeiture of such Option, such shares shall thereafter no longer be available for grants under the Plan. Options granted under the Plan may be fulfilled in accordance with the terms of the Plan with (i) authorized and unissued shares of the Common Stock and (ii) issued shares of Common Stock held in the Company's treasury. Notwithstanding anything to the contrary contained herein, no Options shall be granted under the Plan, and no Units shall be awarded to Participants, after the consummation of an Initial Public Offering (as hereinafter defined).


4. Award of Units.


The Committee may, from time to time, award one or more units of participation to a Participant, each of which entitles the Participant to receive a Participant Option (as hereinafter defined) (each individual unit of participation, a "Unit"). Upon the adoption of this Plan, the Committee shall award Units to the Participants listed, and in the amounts set forth beside such Participants' names, on Exhibit II to the Trust. The corresponding Trust Options (as hereinafter defined) granted to the Trust in connection with the awards of Units in accordance with such Exhibit II shall have an exercise price equal to $18.05451 per share, subject to adjustment as provided herein. All corresponding Trust Options granted to the Trust in connection with subsequent awards of Units to Participants shall have an exercise price equal to the greater of (i) the Fair Market Value per share of Common Stock on the date of the award, or (ii) $18.05451 per share.


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5. Grant of Options.


For each Unit awarded under this Plan, a corresponding Option shall be granted to the Trust to purchase one share of Common Stock for each outstanding Unit at the exercise price specified in Section 4 (a "Trust Option", or collectively, the "Trust Options"). Trust Options shall not be exercisable by the Trust but shall be divisible and transferable to Participants by the trustee of the Trust (the "Trustee") as described herein. Any Trust Option which is allocable to a Unit that has been forfeited shall be terminated and cancelled as of the date of such forfeiture. Upon the termination and liquidation of the Trust, each Trust Option shall be transferred to a Participant such that each Participant receives an option to purchase one share of Common Stock for each outstanding Unit, subject to adjustment as provided in Section 8 and subject to the other terms and conditions of this Plan (which, when received by the Participant, shall be a "Participant Option"). Collectively, the Participant Options and Trust Options are referred to as the "Options".


Except with respect to the award of Units specified in Exhibit II to the Trust, the adoption of this Plan shall not be deemed to give any person or entity of any nature whatsoever, specifically including an individual, a firm, a company, a corporation, a partnership, a trust, or other entity (collectively, a "Person"), a right to receive an award, grant, distribution or transfer of any Units or Options.


6. Exercise, Forfeitures and Cash-Out Events.


(i) Vesting. Subject to the provisions hereof (including, without limitation, the other provisions of this Section 6), unless otherwise determined by the Committee at the time of award, Units, and the corresponding Options issued in respect thereof, shall vest in five equal installments in accordance with the vesting schedule set forth below:


(A) one-fifth shall become vested on the first
anniversary of the date of award and shall, subject to the
terms and conditions contained herein, remain vested until the
termination of the Unit and any corresponding Option;


(B) an additional one-fifth shall become vested
on the second anniversary of the date of award and shall,
subject to the terms and conditions contained


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herein, remain vested until the termination of the Unit and
any corresponding Option;


(C) an additional one-fifth shall become vested
on the third anniversary of the date of award and shall,
subject to the terms and conditions contained herein, remain
vested until the termination of the Unit and any corresponding
Option;


(D) an additional one-fifth shall become vested
on the fourth anniversary of the date of award and shall,
subject to the terms and conditions contained herein, remain
vested until the termination of the Unit and any corresponding
Option; and


(E) the remaining one-fifth shall become vested
on the fifth anniversary of the date of award and shall,
subject to the terms and conditions contained herein, remain
vested until the termination of the Unit and any corresponding
Option.


(ii) Additional Vesting Provisions. Notwithstanding the provisions of this Section 6, all outstanding Units, and corresponding Options issued in respect thereof, shall also become fully vested upon an Initial Public Offering prior to the expiration of ten years following the date of the award of the Unit. In its sole discretion, the Committee may also fully vest all or a portion of any outstanding awards of Units, and their corresponding Options, in the event of a Change in Control or upon such other events determined by the Committee.


(iii) Forfeitures of Units Prior to Distribution of Participant Options. Prior to the distribution of Participant Options from the Trust, each Participant's rights under a Unit, whether vested or unvested, and any corresponding Options issued in respect thereof, shall be terminated, forfeited and cancelled upon the earlier of:


(A) ten years following the date of the award of
the Unit; or


(B) a Business Termination (as hereinafter
defined) by the Company for Good Cause.


In addition, upon a Business Termination for any reason (whether as a result of death, Disability, retirement or otherwise) prior to the distribution of Participant Options, all of the affected Participant's rights under any unvested Unit, and any Trust


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Option in respect thereof, shall be terminated, forfeited and cancelled.


(iv) Exercisability of Participant Options. Participant Options shall become exercisable after they have been distributed from the Trust and upon the first to occur of (i) the 90th day following an Initial Public Offering, or (ii) the eighth anniversary of the date of award of the Units with respect to which such Participant Options were granted, and shall, subject to the terms and conditions contained herein, remain exercisable until the tenth anniversary of the date of award of the Units with respect to which the Participant Options were granted. In its sole discretion, the Committee may accelerate the exercisability of Participant Options in the event of a Change in Control or upon such other events determined by the Committee. The price per share of Common Stock with respect to each Participant Option exercised shall be payable in cash or by other means acceptable to the Committee. Any Participant Options not exercised prior to the tenth anniversary of the date of the award of the Unit for which the Participant Option was issued shall be terminated, forfeited and cancelled.


(v) Forfeitures and Exercise of Participant Options After Distribution of Participant Options. The following provisions shall apply to the Participant Options:


(A) Death. Upon a Business Termination due to
the death of such Participant, the estate of such Participant,
or a Person who acquired the right to exercise such
Participant Option by bequest or inheritance or by reason of
the death of the Participant, shall have the right to exercise
such Participant Option in accordance with its terms at any
time and from time to time within 180 days after the date of
death (but in no event after the expiration date of such
Option) or, if such death occurs prior to the time such
Participant Option becomes exercisable in accordance with
Section 6(iv) hereof, within 180 days after the date such
Participant Option becomes exercisable (but in no ...