EXHIBIT 10.23

 

ELECTRO SCIENTIFIC INDUSTRIES, INC.
2004 STOCK INCENTIVE PLAN

(As amended January 25, 2005 and April 20, 2005)

 

1.     Purpose.  The purpose of this 2004 Stock Incentive Plan (the “Plan”) is
to enable Electro Scientific Industries, Inc. (the “Company”) to attract and
retain the services of selected employees, officers and directors of the Company
or any parent or subsidiary of the Company. For purposes of this Plan, a person
is considered to be employed by or in the service of the Company if the person
is employed by or in the service of any entity (the “Employer”) that is either
the Company or a parent or subsidiary of the Company.

 

2.     Shares Subject to the Plan.  Subject to adjustment as provided below and
in Section 12, the shares to be offered under the Plan shall consist of Common
Stock of the Company (“Common Stock”), and the total number of shares of Common
Stock that may be issued under the Plan shall be 3,000,000 shares plus any
shares that at the time the Plan is approved by shareholders are available for
grant under the Company’s 1989 Stock Option Plan, 1996 Stock Incentive Plan and
2000 Stock Option Incentive Plan, which plans were previously approved by
shareholders of the Company, and the Company’s 2000 Stock Option Plan, which
plan was not previously approved by the Company’s shareholders (collectively,
the “Prior Plans”), or that may subsequently become available for grant under
any of the Prior Plans through the expiration, termination, forfeiture or
cancellation of grants.  If an option, stock appreciation right or
Performance-Based Award granted under the Plan expires, terminates or is
canceled, the unissued shares subject to that option, stock appreciation right
or Performance-Based Award shall again be available under the Plan.  If shares
awarded as a bonus pursuant to Section 9 or sold pursuant to Section 10 under
the Plan are forfeited to or repurchased by the Company, the number of shares
forfeited or repurchased shall again be available under the Plan.

 

3.     Effective Date and Duration of Plan.

 

3.1           Effective Date.  The Plan shall become effective as of July 15,
2004.  No awards shall be made under the Plan until the Plan is approved by
shareholders of the Company in accordance with rules of The Nasdaq Stock Market.

 

3.2           Duration.  The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
the shares have lapsed.  The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, Performance-Based Awards, stock
appreciation rights, and shares subject to restrictions then outstanding under
the Plan.  Termination shall not affect any outstanding options,
Performance-Based Awards, stock appreciation rights or any right of the Company
to repurchase shares or the forfeitability of shares issued under the Plan.

 

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4.     Administration.

 

4.1           Board of Directors.  The Plan shall be administered by the Board
of Directors of the Company, which shall determine and designate the individuals
to whom awards shall be made, the amount of the awards and the other terms and
conditions of the awards. Subject to the provisions of the Plan, the Board of
Directors may adopt and amend rules and regulations relating to administration
of the Plan, advance the lapse of any waiting period, accelerate any exercise
date, waive or modify any restriction applicable to shares (except those
restrictions imposed by law) and make all other determinations in the judgment
of the Board of Directors necessary or desirable for the administration of the
Plan.  The interpretation and construction of the provisions of the Plan and
related agreements by the Board of Directors shall be final and conclusive.  The
Board of Directors may correct any defect or supply any omission or reconcile
any inconsistency in the Plan or in any related agreement in the manner and to
the extent it deems expedient to carry the Plan into effect, and the Board of
Directors shall be the sole and final judge of such expediency.

 

4.2           Committee.  The Board of Directors may delegate to any committee
of the Board of Directors (the “Committee”) any or all authority for
administration of the Plan.  If authority is delegated to the Committee, all
references to the Board of Directors in the Plan shall mean and relate to the
Committee, except (i) as otherwise provided by the Board of Directors and
(ii) that only the Board of Directors may amend or terminate the Plan as
provided in Sections 3 and 13.

 

5.     Types of Awards; Eligibility; Limitations.

 

5.1           Types of Awards, Eligibility.  The Board of Directors may, from
time to time, take the following actions, separately or in combination, under
the Plan:  (i) grant Incentive Stock Options, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the “Code”), as provided in
Sections 6.1, 6.2 and 8; (ii) grant options other than Incentive Stock Options
(“Non-Statutory Stock Options”) as provided in Sections 6.1, 6.3 and 8;
(iii) grant stock appreciation rights as provided in Sections 7 and 8;
(iv) award stock bonuses (including bonuses in the form of restricted stock
units) as provided in Section 9; (v) sell shares subject to restrictions as
provided in Sections 10; (vi) award Performance-Based Awards as provided in
Section 11.  Awards may be made to employees, including employees who are
officers or directors, and to non-employee directors; provided, however, that
only employees of the Company or any parent or subsidiary of the Company (as
defined in subsections 424(e) and 424(f) of the Code) are eligible to receive
Incentive Stock Options under the Plan.  The Board of Directors shall select the
individuals to whom awards shall be made and shall specify the action taken with
respect to each individual to whom an award is made.

 

5.2           Per Employee Share Limitations.  No employee may be granted
options and/or stock appreciation rights for more than an aggregate of
500,000 shares of Common Stock in any calendar year; provided, however, that to
the extent the annual limitation is not fully used in any year for an employee,
any shares not used may be added to the number of shares for which options
and/or stock appreciation rights may be granted to that employee in any future
year.

 

5.3           Prohibition on Option Repricing.  Except as provided in
Section 12, without the prior approval of the Company’s shareholders, an option
issued under the Plan may not be repriced by lowering the option exercise price
or by cancellation of an outstanding option with a subsequent replacement or
regrant of an option with a lower exercise price.

 

5.4           Maximum Number of Shares Issuable Upon Exercise of ISOs.  The
maximum aggregate number of shares of Common Stock that may be issued under the
Plan upon exercise of Incentive Stock

 

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Options shall be equal to the sum of 3,000,000 shares plus any shares that at
July 15, 2004 are available for grant under the Prior Plans or that may
subsequently become available for grant under any of the Prior Plans through the
expiration, termination, forfeiture or cancellation of grants, which number will
not exceed 9,568,684 shares.

 

5.5           Reservation of Additional Shares.  Except as provided in
Section 12, additional shares of Common Stock may not be reserved for issuance
under the Plan without the approval of the Company’s shareholders.

 

6.     Stock Options.

 

6.1           General Rules Relating to Options.

 

6.1-1        Terms of Grant.  The Board of Directors may grant options under the
Plan.  With respect to each option grant, the Board of Directors shall determine
the number of shares subject to the option, the exercise price, the period of
the option, the time or times at which the option may be exercised and whether
the option is an Incentive Stock Option or a Non-Statutory Stock Option.  At the
time of the grant of an option or at any time thereafter, the Board of Directors
may provide that an optionee who exercised an option with Common Stock of the
Company shall automatically receive a new option to purchase additional shares
equal to the number of shares surrendered and may specify the terms and
conditions of such new options.

 

6.1-2        Nontransferability.  Each Incentive Stock Option and, unless
otherwise determined by the Board of Directors, each other option granted under
the Plan by its terms (i) shall be nonassignable and nontransferable by the
optionee, either voluntarily or by operation of law, except by will or by the
laws of descent and distribution of the state or country of the optionee’s
domicile at the time of death, and (ii) during the optionee’s lifetime, shall be
exercisable only by the optionee.

 

6.1-3        Purchase of Shares.  Unless the Board of Directors determines
otherwise, on or before the date specified for completion of the purchase of
shares pursuant to an option exercise, the optionee must pay the Company the
full purchase price of those shares in cash or by check or, with the consent of
the Board of Directors, in whole or in part, in Common Stock of the Company
valued at fair market value, restricted stock or other contingent awards
denominated in either stock or cash, promissory notes and other forms of
consideration.  Unless otherwise determined by the Board of Directors, any
Common Stock provided in payment of the purchase price must have been previously
acquired and held by the optionee for at least six months.  The fair market
value of Common Stock provided in payment of the purchase price shall be the
closing price of the Common Stock last reported before the time payment in
Common Stock is made or, if earlier, committed to be made, if the Common Stock
is publicly traded, or another value of the Common Stock as specified by the
Board of Directors.  No shares shall be issued until full payment for the shares
has been made, including all amounts owed for tax withholding.  With the consent
of the Board of Directors, an optionee may request the Company to apply
automatically the shares to be received upon the exercise of a portion of a
stock option (even though stock certificates have not yet been issued) to
satisfy the purchase price for additional portions of the option.

 

6.1-4        Limitations on Grants to Non-Exempt Employees.  Unless otherwise
determined by the Board of Directors, if an employee of the Company or any
parent or subsidiary of the Company is a non-exempt employee subject to the
overtime compensation provisions of Section 7 of the Fair Labor Standards Act
(the “FLSA”), any option granted to that employee shall be subject to the
following restrictions:  (i) the option price shall be at least 85 percent of
the fair market value, as described in Section 6.2-4, of the Common Stock
subject to the option on the date it is granted; and (ii) the option shall not
be exercisable until at least six months after the date it is granted; provided,
however, that this six-month restriction on exercisability will cease to apply
if the employee dies, becomes disabled or retires, there is a change in
ownership

 

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of the Company, or in other circumstances permitted by regulation, all as
prescribed in Section 7(e)(8)(B) of the FLSA.

 

6.2           Incentive Stock Options.  Incentive Stock Options shall be subject
to the following additional terms and conditions:

 

6.2-1        Limitation on Amount of Grants.  If the aggregate fair market value
of stock (determined as of the date the option is granted) for which Incentive
Stock Options granted under this Plan (and any other stock incentive plan of the
Company or its parent or subsidiary corporations, as defined in
subsections 424(e) and 424(f) of the Code) are exercisable for the first time by
an employee during any calendar year exceeds $100,000, the portion of the option
or options not exceeding $100,000, to the extent of whole shares, will be
treated as an Incentive Stock Option and the remaining portion of the option or
options will be treated as a Non-Statutory Stock Option.  The preceding sentence
will be applied by taking options into account in the order in which they were
granted.  If, under the $100,000 limitation, a portion of an option is treated
as an Incentive Stock Option and the remaining portion of the option is treated
as a Non-Statutory Stock Option, unless the optionee designates otherwise at the
time of exercise, the optionee’s exercise of all or a portion of the option will
be treated as the exercise of the Incentive Stock Option portion of the option
to the full extent permitted under the $100,000 limitation.  If an optionee
exercises an option that is treated as in part an Incentive Stock Option and in
part a Non-Statutory Stock Option, the Company will designate the portion of the
stock acquired pursuant to the exercise of the Incentive Stock Option portion as
Incentive Stock Option stock by issuing a separate certificate for that portion
of the stock and identifying the certificate as Incentive Stock Option stock in
its stock records.

 

6.2-2        Limitations on Grants to 10 percent Shareholders.  An Incentive
Stock Option may be granted under the Plan to an employee possessing more than
10 percent of the total combined voting power of all classes of stock of the
Company or any parent or subsidiary (as defined in subsections 424(e) and
424(f) of the Code) only if the option price is at least 110 percent of the fair
market value, as described in Section 6.2-4, of the Common Stock subject to the
option on the date it is granted and the option by its terms is not exercisable
after the expiration of five years from the date it is granted.

 

6.2-3        Duration of Options.  Subject to Sections 6.2-2, 8.1 and 8.2,
Incentive Stock Options granted under the Plan shall continue in effect for the
period fixed by the Board of Directors, except that by its terms no Incentive
Stock Option shall be exercisable after the expiration of 10 years from the date
it is granted.

 

6.2-4        Option Price.  The option price per share shall be determined by
the Board of Directors at the time of grant.  Except as provided in
Section 6.2-2, the option price shall not be less than 100 percent of the fair
market value of the Common Stock covered by the Incentive Stock Option at the
date the option is granted.  The fair market value shall be the closing price of
the Common Stock last reported on the date the option is granted, if the stock
is publicly traded, or another value of the Common Stock as specified by the
Board of Directors.

 

6.2-5        Limitation on Time of Grant.  No Incentive Stock Option shall be
granted on or after the tenth anniversary of the last action by the Board of
Directors adopting the Plan or approving an increase in the number of shares
available for issuance under the Plan, which action was subsequently approved
within 12 months by the shareholders.

 

6.2-6        Early Dispositions.  If within two years after an Incentive Stock
Option is granted or within 12 months after an Incentive Stock Option is
exercised, the optionee sells or otherwise disposes of Common Stock acquired on
exercise of the Option, the optionee shall within 30 days of the sale or
disposition

 

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notify the Company in writing of (i) the date of the sale or disposition,
(ii) the amount realized on the sale or disposition and (iii) the nature of the
disposition (e.g., sale, gift, etc.).

 

6.3           Non-Statutory Stock Options.  Non-Statutory Stock Options shall be
subject to the following terms and conditions, in addition to those set forth in
Sections 6.1 and 8.

 

6.3-1        Option Price.  The option price for Non-Statutory Stock Options
shall be determined by the Board of Directors at the time of grant.  The option
price shall not be less than 100 percent of the fair market value of the Common
Stock covered by the Non-Statutory Stock Option at the date the option is
granted.  The fair market value shall be the closing price of the Common Stock
last reported on the date the option is granted, if the stock is publicly
traded, or another value of the Common Stock as specified by the Board of
Directors.

 

6.3-2        Duration of Options.  Non-Statutory Stock Options granted under the
Plan shall continue in effect for the period fixed by the Board of Directors,
except that no Non-Statutory Option shall be exercisable after the expiration of
10 years from the date it is granted.

 

7.     Stock Appreciation Rights.

 

7.1           Grant.  Stock appreciation rights may be granted under the Plan by
the Board of Directors, subject to such rules, terms, and conditions as the
Board of Directors prescribes.  The Board of Directors may provide that stock
appreciation rights may be granted in substitution for stock options granted
under the Plan.  With respect to each grant, the Board shall determine the
number of shares subject to the stock appreciation right, the exercise price of
the stock appreciation right, the period of the stock appreciation right, and
the time or times at which the stock appreciation right may be exercised.  Stock
appreciation rights shall continue in effect for the period fixed by the Board
of Directors.

 

7.2           Stock Appreciation Rights Granted in Connection with Options.  If
a stock appreciation right is granted in connection with an option, the stock
appreciation right shall be exercisable only to the extent and on the same
conditions that the related option could be exercised.  Upon exercise of a stock
appreciation right, any option or portion thereof to which the stock
appreciation right relates terminates.  If a stock appreciation right is granted
in connection with an option, upon exercise of the option, the stock
appreciation right or portion thereof to which the grant relates terminates.

 

7.3           Exercise.  Each stock appreciation right shall entitle the holder,
upon exercise, to receive from the Company in exchange therefor an amount equal
in value to the excess of the fair market value on the date of exercise of one
share of Common Stock of the Company over the exercise price as determined by
the Board of Directors (or, in the case of a stock appreciation right granted in
connection with an option, the option price per share under the option to which
the stock appreciation right relates), multiplied by the number of shares
covered by the stock appreciation right, or portion thereof, that is
surrendered.  Payment by the Company upon exercise of a stock appreciation right
may be made in Common Stock valued at fair market value, in cash, or partly in
Common Stock and partly in cash, all as determined by the Board of Directors. 
For this purpose, the fair market value of the Common Stock shall be the closing
price of the Common Stock last reported before the time of exercise, or such
other value of the Common Stock as specified by the Board of Directors.

 

7.4           Fractional Shares.  No fractional shares shall be issued upon
exercise of a stock appreciation right.  In lieu thereof, cash may be paid in an
amount equal to the value of the fraction or, if the Board of Directors shall
determine, the number of shares may be rounded downward to the next whole share.

 

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7.5           Nontransferability.  Each stock appreciation right granted in
connection with an Incentive Stock Option and, unless otherwise determined by
the Board of Directors, each other stock appreciation right granted under the
Plan, by its terms shall be nonassignable and nontransferable by the holder,
either voluntarily or by operation of law, except by will or by the laws of
descent and distribution of the state or country of the holder’s domicile at the
time of death, and each stock appreciation right by its terms shall be
exercisable during the holder’s lifetime only by the holder.

 

8.     Exercise of Options and Stock Appreciation Rights.

 

8.1           Exercise.  Except as provided in Section 8.2 or as determined by
the Board of Directors, no option or stock appreciation right granted under the
Plan may be exercised unless at the time of exercise the holder is employed by
or in the service of the Company and shall have been so employed or provided
such service continuously since the date the option or stock appreciation right
was granted.  Except as provided in Sections 8.2 and 12, options and stock
appreciation rights granted under the Plan may be exercised from time to time
over the period stated in each option or stock appreciation right in amounts and
at times prescribed by the Board of Directors, provided that options and stock
appreciation rights may not be exercised for fractional shares.  Unless
otherwise determined by the Board of Directors, if a holder does not exercise an
option or stock appreciation right in any one year for the full number of shares
to which the holder is entitled in that year, the holder’s rights shall be
cumulative and the holder may acquire those shares in any subsequent year during
the term of the option or stock appreciation right.

 

8.2           Termination of Employment or Service.

 

8.2-1        General Rule.  Unless otherwise determined by the Board of
Directors, if a holder’s employment or service with the Company terminates for
any reason other than because of total disability or death as provided in
Sections 8.2-2 and 8.2-3, his or her option or stock appreciation right may be
exercised at any time before the expiration date of the option or stock
appreciation right or the expiration of 3 months after the date of termination,
whichever is the shorter period, but only if and to the extent the holder was
entitled to exercise the option or stock appreciation right at the date of
termination.  Notwithstanding the foregoing, unless otherwise determined by the
Board of Directors, if a holder’s employment or service with the Company
terminates for any reason other than because of total disability or death as
provided in Sections 8.2-2 and 8.2-3, and such holder dies before the expiration
date of the option or stock appreciation right and the expiration of 3 months
after the date of termination, his or her option or stock appreciation right may
be exercised at any time before the expiration date of the option or stock
appreciation right or before the date 12 months after the date of termination,
whichever is the shorter period, but only if and to the extent the holder was
entitled to exercise the option or stock appreciation right at the date of
termination and only by the person or persons to whom the holder’s rights under
the option or stock appreciation right shall pass by the holder’s will or by the
laws of descent and distribution of the state or country of domicile at the time
of death.

 

8.2-2        Termination Because of Total Disability.  Unless otherwise
determined by the Board of Directors, if a holder’s employment or service with
the Company terminates because of total disability, his or her option or stock
appreciation right may be exercised at any time before the expiration date of
the option or stock appreciation right or before the date 12 months after the
date of termination, whichever is the shorter period, but only if and to the
extent the holder was entitled to exercise the option or stock appreciation
right at the date of termination.  The term “total disability” means a medically
determinable mental or physical impairment that is expected to result in death
or has lasted or is expected to last for a continuous period of 12 months or
more and that, in the opinion of the Company and two independent physicians,
causes the holder to be unable to perform his or her duties as an employee,
director or officer of the Employer and unable to be engaged in any

 

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substantial gainful activity.  Total disability shall be deemed to have occurred
on the first day after the two independent physicians have furnished their
written opinion of total disability to the Company and the Company has reached
an opinion of total disability.

 

8.2-3        Termination Because of Death.  Unless otherwise determined by the
Board of Directors, if a holder dies while employed by or providing service to
the Company, his or her option or stock appreciation right may be exercised at
any time before the expiration date of the option or stock appreciation right or
before the date 12 months after the date of death, whichever is the shorter
period, but only if and to the extent the holder was entitled to exercise the
option or stock appreciation right at the date of death and only by the person
or persons to whom the holder’s rights under the option or stock appreciation
right shall pass by the holder’s will or by the laws of descent and distribution
of the state or country of domicile at the time of death.

 

8.2-4        Amendment of Exercise Period Applicable to Termination.  The Board
of Directors may at any time extend the 3-month and 12-month exercise periods
any length of time not longer than the original expiration date of the option or
stock appreciation right.  The Board of Directors may at any time increase the
portion of an option or stock appreciation right that is exercisable, subject to
terms and conditions determined by the Board of Directors.

 

8.2-5        Failure to Exercise Option or Stock Appreciation Right.  To the
extent that the option or stock appreciation right of any deceased holder or any
holder whose employment or service terminates is not exercised within the
applicable period, all further rights to purchase shares pursuant to the option
or stock appreciation right shall cease and terminate.

 

8.2-6        Leave of Absence.  Absence on leave approved by the Employer or on
account of illness or disability shall not be deemed a termination or
interruption of employment or service.  Unless otherwise determined by the Board
of Directors, vesting of options and stock appreciation rights shall continue
during a medical, family or military leave of absence or other leave approved by
the Employer, whether paid or unpaid, and vesting of options and stock
appreciation rights shall be suspended during any other unpaid leave of absence.

 

8.3           Notice of Exercise or Surrender.  Unless the Board of Directors
determines otherwise, shares may be acquired pursuant to an option or stock
appreciation right granted under the Plan only upon the Company’s receipt of
written notice from the holder of the holder’s binding commitment to purchase
shares, specifying the number of shares the holder desires to acquire under the
option or stock appreciation right and the date on which the holder agrees to
complete the transaction, and, if required to comply with the Securities Act of
1933, containing a representation that it is the holder’s intention to acquire
the shares for investment and not with a view to distribution.  Unless the Board
of Directors determines otherwise, cash may be paid upon surrender of a stock
appreciation right granted under the Plan only upon the Company’s receipt of
written notice from the holder of the holder’s binding commitment to surrender
the stock appreciation right, specifying the number of shares subject to the
stock appreciation right being surrendered and the date on which the holder
agrees to complete the surrender.

 

8.4           Tax Withholding.  Each holder who has exercised an option or stock
appreciation right shall, immediately upon notification of the amount due, if
any, pay to the Company in cash or by check amounts necessary to satisfy any
applicable federal, state and local tax withholding requirements.  If additional
withholding is or becomes required (as a result of exercise of an option or
stock appreciation right or as a result of disposition of shares acquired
pursuant to exercise of an option or stock appreciation right) beyond any amount
deposited before delivery of the certificates, the holder shall pay such amount,
in cash or by check, to the Company on demand.  If the holder fails to pay the
amount demanded, the Company or the Employer may withhold that amount from other
amounts payable to the holder, including salary, subject to applicable law.

 

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With the consent of the Board of Directors, a holder may satisfy this
obligation, in whole or in part, by instructing the Company to withhold from the
shares to be issued upon exercise or by delivering to the Company other shares
of Common Stock; provided, however, that the number of shares so withheld or
delivered in connection with an option exercise shall not exceed the minimum
amount necessary to satisfy the required withholding obligation.

 

8.5           Reduction of Reserved Shares.  Upon the exercise of an option or
stock appreciation right, the number of shares reserved for issuance under the
Plan shall be reduced by the number of shares issued upon exercise of the option
or stock appreciation right.  Cash payments of stock appreciation rights shall
not reduce the number of shares of Common Stock reserved for issuance under the
Plan.

 

9.     Stock Bonuses.  The Board of Directors may award shares under the Plan as
stock bonuses, including restricted stock units that provide for delivery of
Common Stock at a later date.  Shares awarded as a bonus shall be subject to the
terms, conditions and restrictions determined by the Board of Directors.  The
restrictions may include restrictions concerning transferability and forfeiture
of the shares awarded, together with any other restrictions determined by the
Board of Directors.  The Board of Directors may require the recipient to sign an
agreement as a condition of the award, but may not require the recipient to pay
any monetary consideration other than amounts necessary to satisfy tax
withholding requirements.  The agreement may contain any terms, conditions,
restrictions, representations and warranties required by the Board of
Directors.  The certificates representing the shares awarded shall bear any
legends required by the Board of Directors.  The Company may require any
recipient of a stock bonus to pay to the Company in cash or by check upon demand
amounts necessary to satisfy any applicable federal, state or local tax
withholding requirements.  If the recipient fails to pay the amount demanded,
the Company or the Employer may withhold that amount from other amounts payable
to the recipient, including salary, subject to applicable law. With the consent
of the Board of Directors, a recipient may satisfy this obligation, in whole or
in part, by instructing the Company to withhold from any shares to be issued or
by delivering to the Company other shares of Common Stock; provided, however,
that the number of shares so withheld or delivered shall not exceed the minimum
amount necessary to satisfy the required withholding obligation.  Upon the
issuance of a stock bonus, the number of shares reserved for issuance under the
Plan shall be reduced by the number of shares issued.

 

10.   Restricted Stock

 

10.1         Restricted Stock.  The Board of Directors may issue shares under
the Plan for any consideration (including promissory notes and services)
determined by the Board of Directors.  Shares issued under the Plan shall be
subject to the terms, conditions and restrictions determined by the Board of
Directors; provided, however, that any award made under this Section 10 the
vesting for which is time-based will provide for a restriction period of at
least three years, with the restriction to lapse no more quickly than with
respect to one-third of the shares annually over the three-year restriction
period.  Subject to the provisions of the Plan, the restrictions may include
restrictions concerning transferability, repurchase by the Company and
forfeiture of the shares issued, together with any other restrictions determined
by the Board of Directors.  All Common Stock issued pursuant to this
Section 10.1 shall be subject to a Restricted Stock Agreement, which shall be
executed by the Company and the prospective recipient of the shares before the
delivery of certificates representing the shares.  The Agreement may contain any
terms, conditions, restrictions, representations and warranties required by the
Board of Directors.

 

10.2         Other Provisions.  The certificates representing shares of
restricted stock shall bear any legends required by the Board of Directors.  The
Company may require any participant receiving restricted stock to pay to the
Company in cash or by check upon demand amounts necessary to satisfy any
applicable federal, state or local tax withholding requirements.  If the
participant fails to pay the amount demanded, the Company or the Employer may
withhold that amount from other amounts payable to the participant, including
salary, subject

 

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to applicable law.  With the consent of the Board of Directors, a participant
may satisfy this obligation, in whole or in part, by instructing the Company to
withhold from any shares to be issued or by delivering to the Company other
shares of Common Stock; provided, however, that the number of shares so withheld
or delivered shall not exceed the minimum amount necessary to satisfy the
required withholding obligation.  Upon the issuance of restricted stock, the
number of shares reserved for issuance under the Plan shall be reduced by the
number of shares issued.

 

11.   Performance-Based Awards.  The Board of Directors may grant awards
intended to qualify as qualified performance-based compensation under
Section 162(m) of the Code and the regulations thereunder (“Performance-Based
Awards”).  Performance-Based Awards shall be denominated at the time of grant
either in Common Stock (“Stock Performance Awards”) or in dollar amounts
(“Dollar Performance Awards”).  Payment under a Stock Performance Award or a
Dollar Performance Award shall be made, at the discretion of the Board of
Directors, in Common Stock (“Performance Shares”), or in cash or in any
combination thereof.  Performance-Based Awards shall be subject to the following
terms and conditions:

 

11.1         Award Period.  The Board of Directors shall determine the period of
time for which a Performance-Based Award is made (the “Award Period”).

 

11.2         Performance Goals and Payment.  The Board of Directors shall
establish in writing objectives (“Performance Goals”) that must be met by the
Company or any subsidiary, division or other unit of the Company (“Business
Unit”) during the Award Period as a condition to payment being made under the
Performance-Based Award.  The Performance Goals for each award shall be one or
more targeted levels of performance with respect to one or more of the following
objective measures with respect to the Company or any Business Unit:  earnings,
earnings per share, stock price increase, total shareholder return (stock price
increase plus dividends), return on equity, return on assets, return on capital,
economic value added, revenues, operating income, inventories, inventory turns,
cash flows, or any of the foregoing before the effect of acquisitions,
divestitures, accounting changes, and restructuring and special charges
(determined according to criteria established by the Board of Directors).  The
Board of Directors shall also establish the number of Performance Shares or the
amount of cash payment to be made under a Performance-Based Award if the
Performance Goals are met or exceeded, including the fixing of a maximum payment
(subject to Section 11.4).  The Board of Directors may establish other
restrictions to payment under a Performance-Based Award, such as a continued
employment requirement, in addition to satisfaction of the Performance Goals. 
Some or all of the Performance Shares may be issued at the time of the award as
restricted shares subject to forfeiture in whole or in part if Performance Goals
or, if applicable, other restrictions are not satisfied.

 

11.3         Computation of Payment.  During or after an Award Period, the
performance of the Company or Business Unit, as applicable, during the period
shall be measured against the Performance Goals.  If the Performance Goals are
not met, no payment shall be made under a Performance-Based Award.  If the
Performance Goals are met or exceeded, the Board of Directors shall certify that
fact in writing and certify the number of Performance Shares earned or the
amount of cash payment to be made under the terms of the Performance-Based
Award.

 

11.4         Maximum Awards.  No participant may receive in any fiscal year
Stock Performance Awards under which the aggregate amount payable under the
Awards exceeds the equivalent of 200,000 shares of Common Stock or Dollar
Performance Awards under which the aggregate amount payable under the Awards
exceeds $4,000,000.

 

11.5         Tax Withholding.  Each participant who has received Performance
Shares shall, upon notification of the amount due, pay to the Company in cash or
by check amounts necessary to satisfy any applicable federal, state and local
tax withholding requirements.  If the participant fails to pay the amount

 

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demanded, the Company or the Employer may withhold that amount from other
amounts payable to the participant, including salary, subject to applicable
law.  With the consent of the Board of Directors, a participant may satisfy this
obligation, in whole or in part, by instructing the Company to withhold from any
shares to be issued or by delivering to the Company other shares of Common
Stock; provided, however, that the number of shares so delivered or withheld
shall not exceed the minimum amount necessary to satisfy the required
withholding obligation.

 

11.6         Effect on Shares Available.  The payment of a Performance-Based
Award in cash shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan.  The number of shares of Common Stock reserved for
issuance under the Plan shall be reduced by the number of shares issued upon
payment of an award.  Cash payments of Performance-Based Awards shall not reduce
the number of shares of Common Stock reserved for issuance under the Plan.

 

12.   Changes in Capital Structure.

 

12.1         Stock Splits, Stock Dividends.  If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged for
a different number or kind of shares or other securities of the Company by
reason of any stock split, combination of shares, dividend payable in shares,
recapitalization or reclassification, appropriate adjustment shall be made by
the Board of Directors in the number and kind of shares available for grants
under the Plan and in all other share amounts set forth in the Plan.  In
addition, the Board of Directors shall make appropriate adjustment in the number
and kind of shares as to which outstanding options and stock appreciation
rights, or portions thereof then unexercised, shall be exercisable, so that the
holder’s proportionate interest before and after the occurrence of the event is
maintained.  Notwithstanding the foregoing, the Board of Directors shall have no
obligation to effect any adjustment that would or might result in the issuance
of fractional shares, and any fractional shares resulting from any adjustment
may be disregarded or provided for in any manner determined by the Board of
Directors.  Any such adjustments made by the Board of Directors shall be
conclusive.

 

12.2         Mergers, Reorganizations, Etc.  In the event of a merger,
consolidation, plan of exchange, acquisition of property or stock, split-up,
split-off, spin-off, reorganization or liquidation to which the Company is a
party or any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the assets of
the Company (each, a “Transaction”), the Board of Directors shall, in its sole
discretion and to the extent possible under the structure of the Transaction,
select one of the following alternatives for treating outstanding options and
stock appreciation rights under the Plan:

 

12.2-1      Outstanding options and stock appreciation rights shall remain in
effect in accordance with their terms.

 

12.2-2      Outstanding options and stock appreciation rights shall be converted
into options and stock appreciation rights to purchase stock in one or more of
the corporations, including the Company, that are the surviving or acquiring
corporations in the Transaction.  The amount, type of securities subject thereto
and exercise price of the converted options and stock appreciation rights shall
be determined by the Board of Directors of the Company, taking into account the
relative values of the companies involved in the Transaction and the exchange
rate, if any, used in determining shares of the surviving corporation(s) to be
held by holders of shares of the Company following the Transaction.  Unless
otherwise determined by the Board of Directors, the converted options and stock
appreciation rights shall be vested only to the extent that the vesting
requirements relating to options granted hereunder have been satisfied.

 

12.2-3      The Board of Directors shall provide a period of 30 days or less
before the completion of the Transaction during which outstanding options and
stock appreciation rights may be exercised

 

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to the extent then exercisable, and upon the expiration of that period, all
unexercised options and stock appreciation rights shall immediately terminate. 
The Board of Directors may, in its sole discretion accelerate the exercisability
of options and stock appreciation rights so that they are exercisable in full
during that period.

 

12.3         Dissolution of the Company.  In the event of the dissolution of the
Company, options and stock appreciation rights shall be treated in accordance
with Section 12.2-3.

 

12.4         Rights Issued by Another Corporation.  The Board of Directors may
also grant options, stock appreciation rights, stock bonuses and
Performance-Based Awards and issue restricted stock under the Plan with terms,
conditions and provisions that vary from those specified in the Plan, provided
that any such awards are granted in substitution for, or in connection with the
assumption of, existing options, stock appreciation rights, stock bonuses,
Performance-Based Awards or restricted stock granted, awarded or issued by
another corporation and assumed or otherwise agreed to be provided for by the
Company pursuant to or by reason of a Transaction.

 

13.   Amendment of the Plan.  The Board of Directors may at any time modify or
amend the Plan in any respect.  Except as provided in Section 12, however, no
change in an award already granted shall be made without the written consent of
the holder of the award if the change would adversely affect the holder.

 

14.   Approvals.  The Company’s obligations under the Plan are subject to the
approval of state and federal authorities or agencies with jurisdiction in the
matter.  The Company will use its best efforts to take steps required by state
or federal law or applicable regulations, including rules and regulations of the
Securities and Exchange Commission and any stock exchange on which the Company’s
shares may then be listed, in connection with the grants under the Plan.  The
foregoing notwithstanding, the Company shall not be obligated to issue or
deliver Common Stock under the Plan if such issuance or delivery would violate
state or federal securities laws.

 

15.   Employment and Service Rights.  Nothing in the Plan or any award pursuant
to the Plan shall (i) confer upon any employee any right to be continued in the
employment of an Employer or interfere in any way with the Employer’s right to
terminate the employee’s employment at will at any time, for any reason, with or
without cause, or to decrease the employee’s compensation or benefits, or
(ii) confer upon any person engaged by an Employer any right to be retained or
employed by the Employer or to the continuation, extension, renewal or
modification of any compensation, contract or arrangement with or by the
Employer.

 

Rights as a Shareholder.  The recipient of any award under the Plan shall have
no rights as a shareholder with respect to any shares of Common Stock until the
date the recipient becomes the holder of record of those shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs before the date the
recipient becomes the holder of record.

 

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