Severance Protection Agreement

SEVERANCE PROTECTION AGREEMENT


THIS AGREEMENT made as of the 11th day of March, 1999, by and between Aldila, Inc. (the "Company") and Michael J. Rossi (the "Executive").


WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the threat or the occurrence of a Change in Control can result in significant distraction of the Company's key management personnel because of the uncertainties inherent in such a situation;


WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders, for the Company to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure the Executive's continued dedication and efforts in such event without undue concern for the Executive's personal financial and employment security; and


WHEREAS, in order to induce the Executive to remain in the employ of the Company and/or one of its Affiliates (the entity or entities employing the Executive, the "Employing Affiliate"), particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits in the event the Executive's employment is terminated as a result of, or in connection with, a Change in Control.


NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows:


1. TERM OF AGREEMENT. This Agreement shall commence as of March 11, 1999, and shall continue in effect until March 11, 2002 (the "Term"); PROVIDED, HOWEVER, that on January 1, 2000, and on each January 1 thereafter, the Term shall automatically be extended for one (1) year unless either the Executive or the Company shall have given written notice to the other at least ninety (90) days prior thereto that the Term shall not be so extended; PROVIDED, FURTHER, HOWEVER, that following the occurrence of a Change in Control, the Term shall not expire prior to the expiration of thirty-six (36) months after such occurrence.


2. TERMINATION OF EMPLOYMENT. If, during the Term, the Executive's employment with the Company or an Employing Affiliate shall be terminated within thirty-six (36) months following a Change in Control, the Executive shall be entitled to the following compensation and benefits:


(a) If the Executive's employment with the Company or an Employing Affiliate shall be terminated (1) by the Company for Cause or Disability, (2)


by reason of the Executive's death, or (3) by the Executive other than for Good Reason, the Company shall pay to the Executive his Accrued Compensation.


(b) If the Executive's employment with the Company or an Employing Affiliate shall be terminated for any reason other than as specified in Section 2(a), the Executive shall be entitled to the following:


(1) the Company shall pay the Executive all Accrued Compensation and a Pro Rata Bonus;


(2) the Company shall pay the Executive as severance pay an amount equal to two (2) times the sum of (A) the Executive's Base Amount and (B) the Executive's Bonus Amount;


(3) for twenty-four (24) months following the Termination Date (the "Continuation Period"), the Company shall continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental, prescription drug and hospitalization coverages and benefits provided to the Executive immediately prior to the Change in Control or, if greater, the coverages and benefits provided at any time thereafter. The coverages and benefits (including deductibles and costs to the Executive) provided in this Section 2(b)(3) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries than the most favorable of such coverages and benefits referred to above. The Company's obligation hereunder with respect to the foregoing coverages and benefits shall be reduced to the extent that the Executive obtains any such coverages and benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce any of the coverages or benefits it is required to provide the Executive hereunder so long as the aggregate coverages and benefits (including deductibles and costs to the Executive) of the combined benefit plans is no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This Section 2(b)(3) shall not be interpreted so as to limit any benefits to which the Executive, his dependents or beneficiaries may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including but not limited to retiree medical and life insurance benefits;


(4) the Company shall pay the Executive a lump sum in cash equal to the present value (determined using a discount rate equal to one hundred twenty percent (120%) of the applicable mid-term Federal rate determined pursuant to Section 1274(d) of the Code, compounded semiannually) of twenty-four (24) monthly payments, each of which payments is equal to the monthly automobile allowance (including automobile financing, insurance and maintenance costs paid directly by the Company) payable by the Company in respect of the Executive immediately prior to the


2


Termination Date. If the Company leases an automobile on behalf of the Executive (or acts as guarantor on lease obligations for an automobile leased by the Executive), (i) the amount owing under this clause (4) shall be computed based on the greater of twenty-four (24) months and the remaining term of such lease, (ii) the Company shall continue to be a party to such lease through its expiration, and (iii) the Executive shall make all lease payments under such lease included in the calculation of the lump sum payment under this clause (4).


(c) The amounts provided for in Sections 2(a) and 2(b)(1), (2), (4) and (5) shall be paid in a single lump sum cash payment within ten (10) days after the Executive's Termination Date (or earlier, if required by applicable law).


(d) The severance pay and benefits provided for in this Section 2 shall be in lieu of any other severance pay to which the Executive may be entitled under any severance or employment agreement with the Company or any other plan, agreement or arrangement of the Company or any other Affiliate of the Company. The Executive's entitlement to any compensation or benefits other than as provided herein shall be determined in accordance with the employee benefit plans of the Company and any of its Affiliates and other applicable agreements, programs and practices as in effect from time to time.


(e) If the Executive's employment is terminated by the Company or an Employing Affiliate without Cause prior to the date of a Change in Control but the Executive reasonably demonstrates that such termination (1) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party") and who effectuates a Change in Control or (2) otherwise arose in connection with, or in anticipation of, a Change in Control which has been threatened or proposed and which actually occurs, such termination shall be deemed to have occurred after a Change in Control, it being agreed that any such action taken following stockholder approval of a transaction which if consummated would constitute a Change in Control, shall be deemed to be in anticipation of a Change in Control provided such transaction is actually consummated.


3. EFFECT OF SECTION 280G OF THE INTERNAL REVENUE CODE.


(a) Except as provided in Section 3(b), notwithstanding any other provision of this Agreement to the contrary, to the extent that the payments and benefits provided under this Agreement and benefits provided to, or for the benefit of, the Executive under any other Company plan or agreement (such payments or benefits are collectively referred to as the "Payments") would be subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Payments shall be reduced (but not below zero) if and to the


3


extent necessary so that no Payment to be made or benefit to be provided to the Executive shall be subject to the Excise Tax. Unless the Executive shall have given prior written notice specifying a different order to the Company to effectuate the foregoing, the Company shall reduce or eliminate the Payments, by first reducing or eliminating the portion of the Payments which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the "Determination" (as defined below). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive's rights and entitlements to any benefits or compensation.


(b) If the reduction of the Payments as provided in Section 3(a) would exceed 5% of the amount owing under Section 2(b)(2), Section 3(a) shall not apply and the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments.


(c) The determination of whether the Payments shall be reduced pursuant to this Agreement and the amount of such reduction, and the determination of whether a Gross-Up Payment is payable, shall be made at the Company's expense, by an accounting firm selected by the Company which is one of the five (5) largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within ten (10) days of the Termination Date, if applicable, or such other time as requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax), and if the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to the Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Payments. The Determination shall be binding, final and conclusive upon the Company and the Executive.


(d) If a Gross-Up Payment is determined to be payable, it shall be paid to the Executive within twenty (20) days after the Determination (and all accompanying calculations and other material supporting the Determination) is delivered to the Company by the Accounting Firm. Any determination by the Accounting Firm shall be binding upon the Company and the Executive, absent manifest error. As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that


4


Gross-Up Payments not made by the Company should have been made ("Underpayment"), or that Gross-Up Payments will have been made by the Company which should not have been made ("Overpayments"). In either such event, the Accounting Firm shall determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment (including any applicable interest and penalties) shall be promptly paid by the Company to or for the benefit of the Executive. In the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow reasonable instructions from, and procedures established by, the Company, and otherwise reasonably cooperate with the Company to correct such Overpayment, PROVIDED, HOWEVER, that (i) the Executive shall not in any event be obligated to return to the Company an amount greater than the net after-tax portion of the Overpayment that he has retained or has recovered as a refund from the applicable taxing authorities and (ii) if a Gross-Up Payment is determined to be payable, this provision shall be interpreted in a manner consistent with an intent to make the Executive whole, on an after-tax basis, from the application of the Excise Tax, it being understood that the correction of an Overpayment may result in the Executive repaying to the Company an amount which is less than the Overpayment. The cost of all such determinations made pursuant to this Section 3 shall be paid by the Company.


4. NOTICE OF TERMINATION. Following a Change in Control, any intended termination of the Executive's employment by the Company or an Employing Affiliate shall be communicated by a Notice of Termination from the Company to the Executive, and any intended termination of the Executive's employment by the Executive for Good Reason shall be communicated by a Notice of Termination from the Executive to the Company.


5. FEES AND EXPENSES. The Company shall pay, as incurred, all legal fees and related expenses (including the costs of experts, evidence and counsel) that the Executive may incur following a Change in Control as a result of or in connection with (a) the Executive's contesting, defending or disputing the basis for the termination of the Executive's employment, (b) the Executive's hearing before the Board of Directors of the Company as contemplated in Section 16.5 of this Agreement or (c) the Executive seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company or one of its Affiliates under which the Executive is or may be entitled to receive benefits.


6. UNAUTHORIZED DISCLOSURE.


(a) The Executive agrees and understands that during the Executive's position with the Company or an Employing Affiliate, the Executive has


5


been and will be exposed to and receive information relating to the affairs of the Company considered by the Company to be confidential and in the nature of trade secrets (including but not limited to procedures, memoranda, notes, records and customer lists, whether such information has been or is made, developed or compiled by the Executive or otherwise has been or is made available to him) (any and all such information, the "Confidential Information"). The Executive agrees that, during the Term and thereafter, he shall keep such Confidential Information confidential and will not disclose such Confidential Information, either directly or indirectly, to any third person or entity without the prior written consent of the Company; PROVIDED, HOWEVER, that (i) the Executive shall have no such obligation to the extent such Confidential ...