EXHIBIT 10.1
 
THUNDERBALL ENTERTAINMENT, INC.
 
2005 STOCK OPTION PLAN
 
1.    Purpose. The purpose of the 2005 Stock Option Plan (the “Plan”) of
Thunderball Entertainment, Inc., a Minnesota corporation (the “Company”), is to
increase shareholder value and to advance the interests of the Company by
furnishing a variety of economic incentives (variously referred to hereinafter
as the “Incentives”) designed to attract, retain and motivate employees,
directors and consultants. Incentives may consist of opportunities to purchase
or receive shares of the Company’s common stock, $0.001 par value (the “Common
Stock”), monetary payments, or both, on terms and conditions determined under
this Plan.
 
2.    Administration.
 
2.1    The Plan shall be administered by a committee of the Company’s board of
directors (the “Committee”). The Committee shall consist of not less than two
directors of the Company who shall be appointed from time to time by the
Company’s board of directors. Each member of the Committee shall qualify both as
a “non-employee director” within the meaning of Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (together with the rules and regulations
promulgated thereunder, the “Exchange Act”), and as an “outside director” as
defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the
“Code”). The Committee shall have complete discretion and authority to determine
all provisions of all Incentives awarded under the Plan (consistent with the
terms of the Plan), interpret the Plan, and make any other determination which
it believes necessary and advisable for the proper administration of the Plan.
The Committee’s decisions and matters relating to the Plan shall be final and
conclusive for the Company and its participants. No member of the Committee will
be liable for any action or determination made in good faith with respect to the
Plan or any Incentives granted under the Plan. The Committee will also have the
authority under the Plan to amend or modify the terms of any outstanding
Incentives in any manner; provided, however, that any such amended or modified
terms are permitted by the Plan as then in effect, and any recipient of an
Incentive adversely affected by such amended or modified terms has consented to
such amendment or modification. No amendment or modification to an Incentive,
however, whether pursuant to this Section 2 or any other provisions of the Plan,
will be deemed to be a re-grant of such Incentive for purposes of this Plan. If
at any time there is no Committee, then for purposes of the Plan the term
“Committee” shall mean the Company’s board of directors.
 
2.2    In the event of (i) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, extraordinary dividend or divestiture,
including a spinoff, or any other similar change in corporate structure or
shares, (ii) any purchase, acquisition, sale or disposition of a significant
amount of assets or a significant business, (iii) any change in accounting
principles or practices, or (iv) any other similar change, in each case with
respect to the Company or any other entity whose performance is relevant to the
grant or vesting of an Incentive, the Committee (or, if the Company is not the
surviving corporation in any such transaction, the board of directors of the
surviving corporation) may, without the consent of any affected recipient of an
Incentive, amend or modify the vesting criteria of any outstanding Incentive
based, in whole or in part, on the financial performance of the Company (or any
subsidiary or division thereof) or such other entity so as equitably to reflect
such event, with the desired result that the criteria for evaluating such
financial performance of the Company or such other entity will be substantially
the same (in the sole discretion of the Committee or the board of directors of
the surviving corporation) following such event as prior to such event;
provided, however, that the amended or modified terms are permitted by the Plan
as then in effect.
 
 
 

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3.    Eligible Participants. Employees of the Company or its subsidiaries,
(including officers and employees of the Company or its subsidiaries), directors
and consultants, advisors or other independent contractors who provide services
to the Company or its subsidiaries, including members of any advisory board,
shall become eligible to receive Incentives under the Plan when designated by
the Committee. Participants may be designated individually or by groups or
categories (for example, by pay grade) as the Committee deems appropriate.
Participation by Company officers or its subsidiaries and any performance
objectives relating to such officers must be approved by the Committee.
Participation by others and any performance objectives relating to others may be
approved by groups or categories (for example, by pay grade) and authority to
designate participants who are not officers and to set or modify such
performance objectives may be delegated.
 
4.    Types of Incentives. Incentives under the Plan may be granted in any
combination of the following forms: (a) incentive stock options and
non-statutory stock options under Section 6; (b) stock-appreciation rights
(“SARs”) under Section 7; (c) stock awards under Section 8; (d) restricted stock
under Section 8; and (e) performance shares under Section 9.
 
5.    Shares Subject to the Plan.
 
5.1    Subject to adjustment as provided in Section 10.6, the number of shares
of Common Stock which may be issued under the Plan shall not exceed 1,500,000
shares of Common Stock. Shares of Common Stock issued under the Plan or that are
currently subject to outstanding Incentives will be applied to reduce the
maximum number of shares of Common Stock remaining available for issuance under
the Plan.
 
5.2    To the extent that cash in lieu of shares of Common Stock is delivered
upon the exercise of an SAR pursuant to Section 7.4, the Company shall be
deemed, for purposes of applying the limitation on the number of shares, to have
issued the greater of the number of shares of Common Stock which it was entitled
to issue upon such exercise or upon the exercise of any related option. In the
event that a stock option or SAR granted hereunder expires or is terminated or
canceled unexercised or unvested as to any shares of Common Stock, such shares
may again be issued under the Plan either pursuant to stock options, SARs or
otherwise. In the event that shares of Common Stock are issued hereunder as
restricted stock or pursuant to a stock award and thereafter are forfeited or
reacquired by the Company pursuant to rights reserved upon issuance thereof,
such forfeited and reacquired shares may again be issued under the Plan, either
as restricted stock, pursuant to stock awards or otherwise. The Committee may
also determine to cancel, and agree to the cancellation of, stock options in
order to make a participant eligible for the grant of a stock option at a lower
price than the option to be canceled.
 
6.    Stock Options. A stock option is a right to purchase shares of Common
Stock from the Company. The Committee may designate whether an option is to be
considered an incentive stock option or a non-statutory stock option. To the
extent that any incentive stock option granted under the Plan ceases for any
reason to qualify as an “incentive stock option” for purposes of Section 422 of
the Code, such incentive stock option will continue to be outstanding for
purposes of the Plan but will thereafter be deemed to be a non-statutory stock
option. Each stock option granted by the Committee under this Plan shall be
subject to the following terms and conditions:
 
 
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6.1    Price. The option price per share shall be determined by the Committee,
subject to adjustment under Section 10.6.
 
6.2  Number. The number of shares of Common Stock subject to the option shall be
determined by the Committee, subject to adjustment as provided in Section 10.6.
The number of shares of Common Stock subject to a stock option shall be reduced
in the same proportion that the holder thereof exercises a SAR if any SAR is
granted in conjunction with or related to the stock option. No individual may
receive options to purchase more than 1,000,000 shares in any year.
 
6.3  Term and Time for Exercise. Subject to earlier termination as provided in
Section 10.4, the term of each stock option shall be determined by the Committee
but shall not exceed ten (10) years and one day from the date of grant. Each
stock option shall become exercisable at such time or times during its term as
shall be determined by the Committee at the time of grant. The Committee may in
its discretion accelerate the exercisability of any stock option. Subject to the
foregoing and with the approval of the Committee, all or any part of the shares
of Common Stock with respect to which the right to purchase has accrued may be
purchased by the Company at the time of such accrual or at any time or times
thereafter during the term of the option.
 
6.4  Manner of Exercise. Subject to the conditions contained in this Plan and in
the agreement with the recipient evidencing such option, a stock option may be
exercised, in whole or in part, by giving written notice to the Company,
specifying the number of shares of Common Stock to be purchased and accompanied
by the full purchase price for such shares. The exercise price shall be payable
(a) in United States dollars upon exercise of the option and may be paid by
cash; uncertified or certified check; or bank draft; (b) at the discretion of
the Committee, by delivery of shares of Common Stock already owned by the
participant in payment of all or any part of the exercise price, which shares
shall be valued for this purpose at the Fair Market Value (as defined in Section
10.13 below) on the date such option is exercised; or (c) at the discretion of
the Committee, by instructing the Company to withhold from the shares of Common
Stock issuable upon exercise of the stock option shares of Common Stock in
payment of all or any part of the exercise price and/or any related
withholding-tax obligations, which shares shall be valued for this purpose at
the Fair Market Value or in such other manner as may be authorized from time to
time by the Committee. Any shares of Common Stock delivered by a participant
pursuant to clause (b) above must have been held by the participant for a period
of not less than six (6) months prior to the exercise of the option, unless
otherwise determined by the Committee. Prior to the issuance of shares of Common
Stock upon the exercise of a stock option, a participant shall have no rights as
a shareholder with respect to shares of Common Stock issuable under such stock
option. Except as otherwise provided in the Plan, no adjustment will be made for
dividends or distributions declared as of a record date preceding the date on
which a participant becomes the holder of record of shares of Common Stock
acquired upon exercise of a stock option, except as the Committee may determine
in its sole discretion.
 
6.5    Incentive Stock Options. Notwithstanding anything in the Plan to the
contrary, the following additional provisions shall apply to the grant of stock
options which are intended to qualify as incentive stock options (as such term
is defined in Section 422 of the Code):
 
(a)    The aggregate Fair Market Value (determined as of the time the option is
granted) of the shares of Common Stock with respect to which incentive stock
options are exercisable for the first time by any participant during any
calendar year (under the Plan and any other incentive stock-option plans of the
Company or any subsidiary or parent corporation of the Company) shall not exceed
$100,000. The determination will be made by taking incentive stock options into
account in the order in which they were granted.
 
 
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(b)    Any certificate for an incentive stock option authorized under the Plan
shall contain such other provisions as the Committee shall deem advisable, but
shall in all events be consistent with and contain all provisions required in
order to qualify the options as incentive stock options.
 
(c)    All incentive stock options must be granted within ten (10) years from
the earlier of the date on which this Plan was adopted by board of directors or
the date this Plan was approved by the Company’s shareholders.
 
(d)    Unless sooner exercised, all incentive stock options shall expire no
later than ten (10) years after the date of grant. No incentive stock option may
be exercisable after ten (10) years from its date of grant (or five (5) years
from its date of grant if, at the time of grant, the participant owns, directly
or indirectly, more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any parent or subsidiary corporation of
the Company).
 
(e)    The exercise price for a share of Common Stock under an incentive stock
options shall be not less than one hundred percent (100%) of the Fair Market
Value of one share of Common Stock on the date of grant; provided, however, that
the exercise price shall be one hundred ten percent (110%) of the Fair Market
Value if, at the time the incentive stock option is granted, the participant
owns, directly or indirectly, more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or any parent or subsidiary
corporation of the Company.
 
7.    Stock-Appreciation Rights. An SAR is a right to receive, without payment
to the Company, a number of shares of Common Stock, cash, or any combination
thereof, the amount of which is determined pursuant to the formula set forth in
Section 7.4. An SAR may be granted (a) with respect to any stock option granted
under this Plan, either concurrently with the grant of such stock option or at
such later time as determined by the Committee (as to all or any portion of the
shares of Common Stock subject to the stock option), or (b) alone, without
reference to any related stock option. Each SAR granted by the Committee under
this Plan shall be subject to the following terms and conditions:
 
7.1    Number; Exercise Price. Each SAR granted to any participant shall relate
to such number of shares of Common Stock as shall be determined by the
Committee, subject to adjustment as provided in Section 10.6. In the case of an
SAR granted with respect to a stock option, the number of shares of Common Stock
to which the SAR pertains shall be reduced in the same proportion that the
holder of the option exercises the related stock option. The exercise price of
an SAR will be determined by the Committee, in its discretion, at the date of
grant but may not be less than one hundred percent (100%) of the Fair Market
Value of one share of Common Stock on the date of grant.
 
7.2    Duration. Subject to earlier termination as provided in Section 10.4, the
term of each SAR shall be determined by the Committee but shall not exceed ten
(10) years and one day from the date of grant. Unless otherwise provided by the
Committee, each SAR shall become exercisable at such time or times, to such
extent and upon such conditions as the stock option, if any, to which it relates
is exercisable. The Committee may in its discretion accelerate the
exercisability of any SAR.
 
 
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7.3    Exercise. An SAR may be exercised, in whole or in part, by giving written
notice to the Company, specifying the number of SARs which the holder wishes to
exercise. Upon receipt of such written notice, the Company shall, within ninety
(90) days thereafter, deliver to the exercising holder certificates for the
shares of Common Stock or cash, or both, as determined by the Committee, to
which the holder is entitled pursuant to Section 7.4.
 
7.4    Payment. Subject to the right of the Committee to deliver cash in lieu of
shares of Common Stock (which, as it pertains to Company officers and directors,
shall comply with all requirements of the Exchange Act), the number of shares of
Common Stock which shall be issuable upon the exercise of an SAR shall be
determined by dividing:
 
(a)    the number of shares of Common Stock as to which the SAR is exercised
multiplied by the amount of the appreciation in such shares (i.e., the amount by
which the Fair Market Value of the shares of Common Stock subject to the SAR on
the exercise date exceeds (1) in the case of an SAR related to a stock option,
the exercise price of the shares of Common Stock under the stock option or (2)
in the case of an SAR granted alone and without reference to a related stock
option, an amount which shall be determined by the Committee at the time of
grant, subject to adjustment under Section 10.6); by
 
(b)    the Fair Market Value of a share of Common Stock on the exercise date.
 
In lieu of issuing shares of Common Stock upon the exercise of a SAR, the
Committee may elect to pay the holder of the SAR cash equal to the Fair Market
Value on the exercise date of any or all of the shares which would otherwise be
issuable. No fractional shares of Common Stock shall be issued upon the exercise
of an SAR; instead, the holder of the SAR shall be entitled to receive a cash
adjustment equal to the same fraction of the Fair Market Value of a share of
Common Stock on the exercise date or to purchase the portion necessary to make a
whole share at its Fair Market Value on the date of exercise.
 
8.    Stock Awards and Restricted Stock. A stock award consists of the transfer
by the Company to a participant of shares of Common Stock, without other payment
therefor, as additional compensation for services rendered to the Company. The
participant receiving a stock award will have all voting, dividend, liquidation
and other rights with respect to the shares of Common Stock issued to a
participant as a stock award under this Section 8 upon the participant becoming
the holder of record of such shares. A share of restricted stock consists of
shares of Common Stock which are sold or transferred by the Company to a
participant at a price determined by the Committee (which price shall be at
least equal to the minimum price required by applicable law for the issuance of
a share of Common Stock) and subject to restrictions on their sale or other
transfer by the participant, which restrictions and conditions may be determined
by the Committee as long as such restrictions and conditions are not
inconsistent with the terms of the Plan. The transfer of Common Stock pursuant
to stock awards and the transfer and sale of restricted stock shall be subject
to the following terms and conditions:
 
8.1    Number of Shares. The number of shares to be transferred or sold by the
Company to a participant pursuant to a stock award or as restricted stock shall
be determined by the Committee.
 
8.2    Sale Price. The Committee shall determine the price, if any, at which
shares of restricted stock shall be sold or granted to a participant, which may
vary from time to time and among participants and which may be below the Fair
Market Value of such shares of Common Stock at the date of sale.
 
 
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8.3    Restrictions. All shares of restricted stock transferred or sold
hereunder shall be subject to such restrictions as the Committee may determine,
including without limitation any or all of the following:
 
(a)    a prohibition against the sale, transfer, pledge or other encumbrance of
the shares of restricted stock, such prohibition to lapse at such time or times
as the Committee shall determine (whether in annual or more frequent
installments, at the time of the death, disability or retirement of the holder
of such shares, or otherwise);
 
(b)    a requirement that the holder of shares of restricted stock forfeit, or
(in the case of shares sold to a participant) resell back to the Company at his
or her cost, all or a part of such shares in the event of termination of his or
her employment or consulting engagement during any period in which such shares
are subject to restrictions; or
 
(c)    such other conditions or restrictions as the Committee may deem
advisable.
 
In order to enforce the restrictions imposed by the Committee pursuant to
Section 8.3, the participant receiving restricted stock shall enter into an
agreement with the Company setting forth the conditions of the grant. Shares of
restricted stock shall be registered in the name of the participant and
deposited, together with a stock power endorsed in blank, with the Company
unless otherwise determined by the Committee. Each such certificate shall bear a
legend in substantially the following form:
 
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF COMMON STOCK
REPRESENTED BY IT ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING CONDITIONS
OF FORFEITURE) CONTAINED IN THE 2005 STOCK OPTION PLAN OF THUNDERBALL
ENTERTAINMENT, INC. (THE “COMPANY”), AND AN AGREEMENT ENTERED INTO BETWEEN THE
REGISTERED OWNER AND THE COMPANY. A COPY OF THE 2005 STOCK OPTION PLAN AND THE
AGREEMENT IS AVAILABLE FROM THE COMPANY UPON REQUEST.
 
8.4    End of Restrictions. Subject to Section 10.5, at the end of any time
period during which the shares of restricted stock are subject to forfeiture and
restrictions on transfer, such shares will be delivered free of all restrictions
to the participant or to the participant’s legal representative, beneficiary or
heir.
 
8.5    Shareholder. Subject to the terms and conditions of the Plan, each
participant receiving restricted stock shall have all the rights of a
shareholder with respect to shares of stock during any period in which such
shares are subject to forfeiture and restrictions on transfer, including without
limitation the right to vote such shares. Dividends paid in cash or property
other than Common Stock with respect to shares of restricted stock shall be paid
to the participant currently. Unless the Committee determines otherwise in its
sole discretion, any dividends or distributions (including regular quarterly
cash dividends) paid with respect to shares of Common Stock subject to the
restrictions set forth above will be subject to the same restrictions as the
shares to which such dividends or distributions relate. In the event the
Committee determines not to pay dividends or distributions currently, the
Committee will determine in its sole discretion whether any interest will be
paid on such dividends or distributions. In addition, the Committee in its sole
discretion may require such dividends and distributions to be reinvested (and in
such case the participant consents to such reinvestment) in shares of Common
Stock that will be subject to the same restrictions as the shares to which such
dividends or distributions relate.
 
 
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9.    Performance Shares. A performance share consists of an award which shall
be paid in shares of Common Stock, as described below. The grant of a
performance share shall be subject to such terms and conditions as the Committee
deems appropriate, including the following:
 
9.1    Performance Objectives. Each performance share will be subject to
performance objectives respecting the Company or one of its operating units to
be achieved by the participant before the end of a specified period. The
Committee shall determine the terms and conditions of each grant and the number
of performance shares granted. If the performance objectives are achieved, the
participant will be paid in shares of Common Stock or cash as determined by the
Committee. If such objectives are not met, each grant of performance shares may
provide for lesser payments in accordance with formulas established in the
award.
 
9.2    Not Shareholder. The grant of performance shares to a participant shall
not create any rights in such participant as a shareholder of the Company, until
the payment of shares of Common Stock with respect to an award.
 
9.3    No Adjustments. No adjustment shall be made in performance shares granted
on account of cash dividends which may be paid or other rights which may be
issued to the holders of Common Stock prior to the end of any period for which
performance objectives were established.
 
9.4    Expiration of Performance Share. If any participant’s employment or
consulting engagement with the Company is terminated for any reason other than
normal retirement, death or disability prior to the achievement of the
participant’s stated performance objectives, all the participant’s rights on the
performance shares shall expire and terminate unless otherwise determined by the
Committee. In the event of termination of employment or consulting by reason of
death, disability, or normal retirement, the Committee, in its own discretion
may determine what portions, if any, of the performance shares should be paid to
the participant.
 
10.    General.
 
10.1    Effective Date. The Plan will become effective upon approval by the
Company’s board of directors; and the ability of the Company to make grants of
incentive stock options hereunder will become effective upon approval of the
Company’s shareholders within one year of the date of this Plan’s adoption by
the Board.
 
10.2    Duration. The Plan shall remain in effect until all Incentives granted
under the Plan have either been satisfied by the issuance of shares of Common
Stock or the payment of cash or have been terminated under the terms of the Plan
and all restrictions imposed on shares of Common Stock in connection with their
issuance under the Plan have lapsed. No Incentives may be granted under the Plan
after the tenth anniversary of the date the Plan is approved by the shareholders
of the Company.
 
10.3    Non-Transferability of Incentives. No stock option, SAR, restricted
stock or performance award may be transferred, pledged or assigned by the holder
thereof (except, in the event of the holder’s death, by will or the laws of
descent and distribution to the limited extent provided in the Plan or the
Incentive), or pursuant to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act, or the rules
thereunder, and the Company shall not be required to recognize any attempted
assignment of such rights by any participant. Notwithstanding the preceding
sentence, stock options may be transferred by the holder thereof to Employee’s
spouse, children, grandchildren or parents (collectively, the “Family Members”),
to trusts for the benefit of Family Members, to partnerships or limited
liability companies in which Family Members are the only partners or
shareholders, or to entities exempt from federal income taxation pursuant to
Code Section 501(c)(3). During a participant’s lifetime, a stock option may be
exercised only by him or her, by his or her guardian or legal representative or
by the transferees permitted by the preceding sentence
 
 
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10.4    Effect of Termination or Death. In the event that a participant ceases
to be an employee of or consultant to the Company, or the participant’s other
service with the Company is terminated, for any reason, including death, any
Incentives may be exercised or shall expire at such times as may be determined
by the Committee in its sole discretion in the agreement evidencing an
Incentive. Notwithstanding the other provisions of this Section 10.4, upon a
participant’s termination of employment or other service with the Company and
all subsidiaries, the Committee may, in its sole discretion (which may be
exercised at any time on or after the date of grant, including following such
termination), cause options and SARs (or any part thereof) then held by such
participant to become or continue to become exercisable and/or remain
exercisable following such termination of employment or service and restricted
stock awards, performance shares and stock awards then held by such participant
to vest and/or continue to vest or become free of transfer restrictions, as the
case may be, following such termination of employment or service, in each case
in the manner determined by the Committee; provided, however, that no Incentive
may remain exercisable or continue to vest beyond its expiration date. Any
incentive stock option that remains unexercised more than one (1) year following
termination of employment by reason of death or disability or more than three
(3) months following termination for any reason other than death or disability
will thereafter be deemed to be a non-statutory stock option. 
 
10.5    Additional Conditions. Notwithstanding anything in this Plan to the
contrary: (a) the Company may, if it shall determine it necessary or desirable
for any reason, at the time of award of any Incentive or the issuance of any
shares of Common Stock pursuant to any Incentive, require the recipient of the
Incentive, as a condition to the receipt thereof or to the receipt of shares of
Common Stock issued pursuant thereto, to deliver to the Company a written
representation of present intention to acquire the Incentive or the shares of
Common Stock issued pursuant thereto for his or her own account for investment
and not for distribution; and (b) if at any time the Company further determines,
in its sole discretion, that the listing, registration or qualification (or any
updating of any such document) of any Incentive or the shares of Common Stock
issuable pursuant thereto is necessary on any securities exchange or under any
federal or state securities law, or that the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with the award of any Incentive, the issuance of shares of Common
Stock pursuant thereto, or the removal of any restrictions imposed on such
shares, such Incentive shall not be awarded or such shares of Common Stock shall
not be issued or such restrictions shall not be removed, as the case may be, in
whole or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions
unacceptable to the Company. Notwithstanding any other provision of the Plan or
any agreements entered into pursuant to the Plan, the Company will not be
required to issue any shares of Common Stock under this Plan, and a participant
may not sell, assign, transfer or otherwise dispose of shares of Common Stock
issued pursuant to any Incentives granted under the Plan, unless (a) there is in
effect with respect to such shares a registration statement under the Securities
Act of 1933, as amended (the “Securities Act”), and any applicable state or
foreign securities laws or an exemption from such registration under the
Securities Act and applicable state or foreign securities laws, and (b) there
has been obtained any other consent, approval or permit from any other
regulatory body which the Committee, in its sole discretion, deems necessary or
advisable. The Company may condition such issuance, sale or transfer upon the
receipt of any representations or agreements from the parties involved, and the
placement of any legends on certificates representing shares of Common Stock, as
may be deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.
 
 
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10.6    Adjustment. In the event of any recapitalization, stock dividend, stock
split, combination of shares or other change in the Common Stock, the number of
shares of Common Stock then subject to the Plan, including shares subject to
restrictions, options or achievements of performance shares, shall be adjusted
in proportion to the change in outstanding shares of Common Stock. In the event
of any such adjustments, the purchase price of any option, the performance
objectives of any Incentive, and the shares of Common Stock issuable pursuant to
any Incentive shall be adjusted as and to the extent appropriate, in the
discretion of the Committee, to provide participants with the same relative
rights before and after such adjustment.
 
10.7    Incentive Plans and Agreements. Except in the case of stock awards or
cash awards, the terms of each Incentive shall be stated in a plan or agreement
approved by the Committee. The Committee may also determine to enter into
agreements with holders of options to reclassify or convert certain outstanding
options, within the terms of the Plan, as Incentive Stock Options or as
non-statutory stock options and in order to eliminate SARs with respect to all
or part of such options and any other previously issued options.
 
10.8    Withholding.
 
(a)    The Company shall have the right to (i) withhold and deduct from any
payments made under the Plan or from future wages of the participant (or from
other amounts that may be due and owing to the participant from the Company or a
subsidiary of the Company), or make other arrangements for the collection of,
all legally required amounts necessary to satisfy any and all foreign, federal,
state and local withholding and employment-related tax requirements attributable
to an Incentive, or (ii) require the participant promptly to remit the amount of
such withholding to the Company before taking any action, including issuing any
shares of Common Stock, with respect to an Incentive. At any time when a
participant is required to pay to the Company an amount required to be withheld
under applicable income tax laws in connection with a distribution of Common
Stock or upon exercise of an option or SAR, the participant may satisfy this
obligation in whole or in part by electing (the “Election”) to have the Company
withhold from the distribution shares of Common Stock having a value up to the
amount required to be withheld. The value of the shares to be withheld shall be
based on the Fair Market Value of the Common Stock on the date that the amount
of tax to be withheld shall be determined (the “Tax Date”).
 
(b)  The Committee may disapprove of any Election, may suspend or terminate the
right to make Elections, or may provide with respect to any Incentive that the
right to make Elections shall not apply to such Incentive. An Election is
irrevocable.
 
(c)  If a participant is a Company officer or director within the meaning of
Section 16 of the Exchange Act, then an Election is subject to the following
additional restrictions: (a) no Election shall be effective for a Tax Date which
occurs within six (6) months of the grant or exercise of the award, except that
this limitation shall not apply in the event death or disability of the
participant occurs prior to the expiration of the six-month period; and (b) the
Election must be made either six months prior to the Tax Date or must be made
during a period beginning on the third business day following the date of
release for publication of the Company’s quarterly or annual summary statements
of sales and earnings and ending on the twelfth business day following such
date.
 
 
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10.9    No Continued Employment, Engagement or Right to Corporate Assets. No
participant under the Plan shall have any right, because of his or her
participation, to continue in the employ of the Company for any period of time
or to any right to continue his or her present or any other rate of
compensation. Nothing contained in the Plan shall be construed as giving an
employee, a consultant, such persons’ beneficiaries or any other person any
equity or interests of any kind in the assets of the Company or creating a trust
of any kind or a fiduciary relationship of any kind between the Company and any
such person.
 
10.10    Deferral Permitted. Payment of cash or distribution of any shares of
Common Stock to which a participant is entitled under any Incentive shall be
made as provided in the Incentive. Payment may be deferred at the option of the
participant if provided in the Incentive.
 
10.11    Amendment of the Plan. The Board may amend, suspend or discontinue the
Plan at any time; provided, however, that no amendments to the Plan will be
effective without approval of the shareholders of the Company if shareholder
approval of the amendment is then required pursuant to Section 422 of the Code
or the rules of any stock exchange or Nasdaq or similar regulatory body. No
termination, suspension or amendment of the Plan may adversely affect any
outstanding Incentive without the consent of the affected participant; provided,
however, that this sentence will not impair the right of the Committee to take
whatever action it deems appropriate under Section 10.6 of the Plan.
 
10.12    Merger, Sale, Exchange or Liquidation. Unless otherwise provided in the
agreement for an Incentive, in the event of an acquisition of the Company
through the sale of substantially all of the Company’s assets or through a
merger, exchange, reorganization or liquidation of the Company or a similar
event as determined by the Committee (collectively a “transaction”), the
Committee shall be authorized, in its sole discretion, to take any and all
action it deems equitable under the circumstances, including but not limited to
any one or more of the following:
 
(a)    providing that the Plan and all Incentives shall terminate and the
holders of (i) all outstanding vested options shall receive, in lieu of any
shares of Common Stock they would be entitled to receive under such options,
such stock, securities or assets, including cash, as would have been paid to
such participants if their options had been exercised and such participant had
received Common Stock immediately prior to such transaction (with appropriate
adjustment for the exercise price, if any), (ii) performance shares and/or SARs
that entitle the participant to receive Common Stock shall receive, in lieu of
any shares of Common Stock each participant was entitled to receive as of the
date of the transaction pursuant to the terms of such Incentive, if any, such
stock, securities or assets, including cash, as would have been paid to such
participant if such Common Stock had been issued to and held by the participant
immediately prior to such transaction, and (iii) any Incentive under this
Agreement which does not entitle the participant to receive Common Stock shall
be equitably treated as determined by the Committee;
 
 
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(b)    providing that participants holding outstanding vested Common Stock based
Incentives shall receive, with respect to each share of Common Stock issuable
pursuant to such Incentives as of the effective date of any such transaction, at
the determination of the Committee, cash, securities or other property, or any
combination thereof, in an amount equal to the excess, if any, of the Fair
Market Value of such Common Stock on a date within ten days prior to the
effective date of such transaction over the option price or other amount owed by
a participant, if any, and that such Incentives shall be cancelled, including
the cancellation without consideration of all options that have an exercise
price below the per share value of the consideration received by the Company in
the transaction;
 
(c)    providing that the Plan (or replacement plan) shall continue with respect
to Incentives not cancelled or terminated as of the effective date of such
transaction and provide to participants holding such Incentives the right to
earn their respective Incentives on a substantially equivalent basis (taking
into account the transaction and the number of shares or other equity issued by
such successor entity) with respect to the equity of the entity succeeding the
Company by reason of such transaction; or
 
(d)    providing that all unvested, unearned or restricted Incentives, including
but not limited to restricted stock for which restrictions have not lapsed as of
the effective date of such transaction, shall be void and deemed terminated, or,
in the alternative, for the acceleration or waiver of any vesting, earning or
restrictions on any Incentive.
 
The Board may restrict the rights of participants or the applicability of this
Section 10.12 to the extent necessary to comply with Section 16(b) of the
Securities Exchange Act of 1934, the Code or any other applicable law or
regulation. The grant of an Incentive award pursuant to the Plan shall not limit
in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, exchange or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
 
10.13    Definition of Fair Market Value. For purposes of this Plan, the “Fair
Market Value” of a share of Common Stock at a specified date shall, unless
otherwise expressly provided in this Plan, be the amount which the Committee or
the Company’s board of directors determines in good faith in the exercise of its
reasonable discretion to be one hundred percent (100%) of the fair market value
of such a share as of the date in question; provided, however, that
notwithstanding the foregoing, if such shares are listed on a U.S. securities
exchange or are quoted on the Nasdaq National Market System, Nasdaq SmallCap
Stock Market (“Nasdaq”), or the Over-The-Counter Bulletin Board (“OTCBB”), then
Fair Market Value shall be determined by reference to the last sale price of a
share of Common Stock on such U.S. securities exchange or Nasdaq, or the average
of the bid and ask price on the OTCBB, on the applicable date. If such U.S.
securities exchange or Nasdaq is closed for trading on such date, or if the
Common Stock does not trade on such date, then the last sale price used shall be
the one on the date the Common Stock last traded on such U.S. securities
exchange or Nasdaq.
 
10.14    Breach of Confidentiality, Assignment of Inventions, or Non-Compete
Agreements. Notwithstanding anything in the Plan to the contrary, in the event
that a participant materially breaches the terms of any confidentiality,
assignment-of-inventions, or noncompete agreement entered into with the Company
or any parent or subsidiary of the Company, whether such breach occurs before or
after termination of such participant’s employment or other service with the
Company or any subsidiary, the Committee in its sole discretion may immediately
terminate all rights of the participant under the Plan and any agreements
evidencing an Incentive then held by the participant without notice of any kind.
 
10.15    Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Minnesota, notwithstanding the conflicts-of-law
principles of Minnesota or any other jurisdiction.
 
10.16    Successors and Assigns. The Plan will be binding upon and inure to the
benefit of the successors and permitted assigns of the Company and the
participants in the Plan.
 

 
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