PRO-DEX, INC



Exhibit 4.2


 


PRO-DEX, INC.


2004 DIRECTORS' STOCK OPTION PLAN


This 2004 Directors' Stock Option Plan (the "Plan") is
adopted in consideration for services rendered and to be rendered to Pro-Dex,
Inc. and related companies.


1.                 
Definitions. Unless otherwise indicated or required by the
particular context, the terms used in this Plan shall have the following
meanings:


(a)               
Board: The Board of Directors of Pro-Dex, Inc.


(b)               
Code: The Internal Revenue Code of 1986, as amended.


(c)               
Common Stock: The no par value common stock of Pro-Dex, Inc.


(d)               Company: Pro-Dex, Inc., a corporation incorporated under the
laws of Colorado, and any successors in interest by merger, operation of law,
assignment or purchase of all or substantially all of the property, assets or
business of the Company.


(e)               
Date of Grant: The date on which an Option (see below) is granted
under the Plan.


(f)                
Fair Market Value: If, at any time an Option is granted under the Plan,
the Company's Common Stock is publicly traded, Fair Market Value shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date an Option is granted and shall
mean (i) the average (on that date) of the high and low prices of the Common
Stock on the principal national securities exchange by which the Common Stock
is traded, if the stock is then traded on a national securities exchange; or,
(ii) the last reported sale price (on that date) of the Common Stock on NASDAQ,
if the stock is not then traded on a national securities exchange; or (iii) the
closing bid price (or average of bid prices) last quoted (on that date) by an
established quotation service for over-the-counter securities, if the stock is
not reported on NASDAQ. However, if the Common Stock is not publicly-traded at
the time an Option is granted under the Plan, Fair Market Value shall be as
determined in good faith by the Board after such consultation with outside
legal, accounting and other experts as the Board may deem advisable.


(g)               
Nonemployee Director: A person who is a member of the Board of Directors
and who is not an employee of the Company.


(h)               
Option: The rights to purchase Common Stock granted pursuant
to the terms and conditions of an Option Agreement (defined below).


(i)                
Option Agreement:  The written agreement (including any amendments or
supplements thereto) between the Company and a Nonemployee Director designating
the terms and conditions of an Option.


 






 


(j)                
Option Shares: The shares of Common Stock underlying an Option
granted to a Nonemployee Director.


(k)                
Optionee: A Nonemployee Director who has been granted an
Option.


2.                 
Purpose and Scope.


(a)              
The purpose of this Plan is to
advance the interests of the Company and its shareholders by affording
Nonemployee Directors, whose participation and guidance contribute to the
successful operation of the Company, and affording them an opportunity for
investment in the Company and the incentive advantages inherent in stock
ownership in this Company.


(b)              
This Plan authorizes that Options
be granted to Nonemployee Directors according to the formula set forth in Section
3 of this Plan.


(c)               
It is the further intent of the
Plan that it conform in all respects with the requirements of Rule 16b-3 of the
Securities and Exchange Commission under the Exchange Act ("Rule 16b-3").
To the extent that any aspect of the Plan or its administration is at any time
viewed as inconsistent with the requirements of Rule 16b-3 or, in connection
with ISOs, the Code, that aspect shall be deemed to be modified, deleted, or
otherwise changed as necessary to ensure continued compliance with the Rule
16b-3 requirements.


3.                 
Operation of the Plan. 


(a)               
Grant of Options; Amount and
Timing. Options to purchase 20,000
shares of Common Stock shall be granted under the Plan to each Nonemployee
Director at the later to occur of (i) the date this Plan is adopted by the
Company's shareholders, or (ii) the date he or she is first elected or
appointed a Nonemployee Director of the Company. In addition, effective on the
anniversary dates of commencement of service on the Board, options to purchase
an additional 15,000 shares shall automatically be granted to the Optionee
provided that, at that time, he or she is a Nonemployee Director. All Options
shall be exercisable only as set forth in Sections 3(c) and 6 below and
shall be subject to the other terms and conditions set forth in this Plan or
otherwise established by the Company.


(b)                
Option Purchase Price. The exercise price for each Option Share shall be
the Fair Market Value of the Company's Common Stock on the Date of Grant.


(c)               
Term. Each Option shall expire ten years after the Date of
Grant, except that an Option will expire, if not exercised, 90 days after the
Optionee ceases to be a director of the Company.


(d)               
Amendments. This Plan may be changed or modified from time to
time provided, however, that, (i) no such change or modification shall impair
any Option previously granted under the Plan; (ii) the provisions relating to
the amount, price and timing of the Options shall not be amended more than once
every six months other than to comport with changes in the Code, the Employee
Retirement Income Security Act, or rules promulgated thereunder, or other
applicable law; and (iii) the approval by the affirmative vote of the holders
of a majority of shares of the Company's securities present, or represented,
and entitled to vote at a meeting duly held in accordance with the applicable
laws of the State of Colorado, shall be required for any amendment which would
do any of the following:


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(i)                 materially modify the eligibility
requirements for receiving Options under the Plan;


(ii)               
except as provided in Section 8
relative to capital changes, increase the number of 

        shares purchasable pursuant
to the granting of any Option hereunder or the exercise 

        price of each Option;


(iii)              
increase the maximum term of
Options granted;


(iv)             
decrease the minimum price at
which Options may be granted;


(v)               change the dollar amount pursuant
to which Options may be granted at any one time;


(vi)             
change the timing of Option
Grants; or


(vii)             
increase the term of the Plan.


4.                 
Number of Shares. The Board is authorized to appropriate, issue and
sell for the purposes of the Plan, an aggregate maximum of 500,000 shares of
Common Stock, including both treasury and newly issued shares, or the number
and kind of shares of stock or other securities which in accordance with Section
8 shall be substituted for the 500,000 shares or into which such 500,000
shares shall be adjusted. Such number of shares shall include any options
granted under any other stock option plan of the Company that may from time to
time become subject to and governed by the terms and conditions of this Plan. All
or any unsold shares subject to an Option that for any reason expires or
otherwise terminates before it has been exercised, again may be made subject to
other Options granted under the Plan.


5.                 
Eligibility. Options shall be granted under the Plan only to
Nonemployee Directors provided that any Nonemployee Director may waive his
right to participate in the Plan. 


6.                  
Exercise of Options. 


(a)               
Each Option granted pursuant to
this Plan shall be exercisable in full commencing six months after the Date of
Grant, except as otherwise determined by the Board of Directors.


(b)               
Except as otherwise provided in Section
9, during the lifetime of the Optionee, the Option shall be exercisable
only by the Optionee; provided that, in the event of the legal disability of an
Optionee, the guardian or personal representative of the Optionee may exercise
the Option.


(c)               
Each Option shall be exercised in
whole or in part by delivering to the office of the Treasurer of the Company
written notice of the number of shares with respect to which the Option is to
be exercised and by paying in full the purchase price for the Option Shares as
set forth in Section 7 herein; provided, that an Option may not be
exercised in part unless the purchase price for the Option Shares purchased is
at least $2,000.


 


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(d)              
No Option may be exercised, and no
Option Shares may be sold, transferred or otherwise disposed of for a period of
at least six months following the Date of Grant of the Option.


7.                 
Payment for Option Shares. Upon exercise of any Option, the aggregate exercise
price shall be paid to the Company in cash or by certified or cashier's check.
For any single purchase by an Optionee of Option Shares at a total purchase
price in excess of $2,000, the Company, in its sole discretion, upon request by
the Optionee, may permit all or part of the purchase price for the Option
Shares to be paid by (a) delivery to the Company for cancellation shares of the
Common Stock previously owned by the Optionee ("Previously Owned Shares")
with a Fair Market Value as of the date of the payment equal to the portion of
the purchase price for the Option Shares that the Optionee does not pay in
cash; (b) having shares withheld from the amount of shares to be received by
the Optionee; (c) delivering an irrevocable subscription agreement obligating
the Optionee to take and pay for the shares to be purchased within one year of
the date of such exercise; or (d) complying with any other payment mechanism as
the Company may approve from time to time. Notwithstanding the above, an Optionee
shall be permitted to exercise his Option by delivering Previously Owned Shares
only if he has held, and provides appropriate evidence of such, the Previously
Owned Shares for more than six months prior to the date of exercise. This
period (the "Holding Period") may be extended by the Company acting in
its sole discretion as is necessary, in the opinion of the Company, so that,
under generally accepted accounting principles, no compensation shall be
considered to have been or to be paid to the Optionee as a result of the
exercise of the Option in this manner. At the time the Option is exercised, the
Optionee shall provide an affidavit, and such other evidence and documents as
the Company shall request, to establish the Optionee's Holding Period. As indicated
above, an Optionee may deliver shares of Common Stock as part of the purchase
price only if the Company, in its sole discretion agrees, on a case by case
basis, to permit this form of payment.


8.                 
Change in Stock, Adjustments,
Etc.


(a)               
In the event that each of the
outstanding shares of Common Stock (other than shares held by dissenting
shareholders which are not changed or exchanged) should be changed into, or
exchanged for, a different number or kind of shares of stock or other
securities of the Company, or if further changes or exchanges of any stock or
other securities into which the Common Stock shall have been changed, or for
which it shall have been exchanged, shall be made (whether by reason of merger,
consolidation, reorganization, recapitalization, stock dividends,
reclassification, split-up, combination of shares or otherwise) then there
shall be substituted for each share of Common Stock that is subject to the Plan
but not subject to an outstanding Option hereunder, the number and kind of
shares of stock or other securities into which each outstanding shares of
Common Stock (other than shares held by dissenting shareholders which are not
changed or exchanged) shall be so changed or for which each outstanding share
of Common Stock (other than shares held by dissenting shareholders) shall be so
changed or for which each such share shall be exchanged. Any securities so
substituted shall be subject to similar successive adjustments.


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(b)              
In the event of any such changes
or exchanges, (i) the number, or kind, or exercise price of the Option Shares
or other securities that are then subject to an Option or Options granted
pursuant to the Plan shall be deemed automatically adjusted in order to prevent
dilution or enlargement of rights and (ii) such adjustments shall be effective
and binding for all purposes or the Plan.


9.                 
Nontransferability of Option. Except as herein provided, no Option granted under
the Plan shall be transferable by the Optionee, either voluntarily or
involuntarily, except by will, by the laws of descent and distribution, or
pursuant to a qualified domestic relations order as defined in the Code or the
Employee Retirement Income Security Act or rules promulgated thereunder; and no
Option shall be subject to execution, attachment or similar process. Any
attempt to transfer an Option except as otherwise herein provided shall void
the Option. Notwithstanding anything herein to the contrary, an Option may be
transferred to an immediate family member or a family trust if such transfer is
then permitted by the rules adopted under Section 16(b) of the Securities
Exchange Act of 1934, as amended.


10.             
Rights as a Shareholder. No person shall have any rights as a shareholder
with respect to any shares covered by an Option until that person becomes the
holder of record of such shares and, except as provided in Section 8, no
adjustments shall be made for dividends or other distributions or other rights
as to which there is an earlier record date.


11.             
Securities Laws Requirements. No Option Shares shall be issued unless and until,
in the opinion of the Company, any applicable registration requirements of the
Securities Act of 1933, as amended ("Securities Act"), any applicable
listing requirements of any securities exchange on which stock of the same
class is then listed, and any other requirement of law or of any regulatory
bodies having jurisdiction over such issuance and delivery, have been fully
complied with. Each Option Agreement and each Option Share certificate may be
imprinted with legends reflecting federal and state securities laws
restrictions and conditions, and the Company may comply therewith and issue
"stop transfer" instructions to its transfer agent and registrar in good faith
without liability.


12.             
Disposition of Shares. To the extent reasonably requested by the Company,
each Optionee, as a condition of exercise, shall represent, warrant and agree,
in a form of written certificate approved by the Company, as follows: (a) that
all Option Shares are being acquired solely for his/her own account and not on
behalf of any other person or entity; (b) that no Option Shares will be sold or
otherwise distributed in violation of the Securities Act or any other
applicable federal or state securities laws; (c) that he/she will report all
sales of Option Shares to the Company in writing on a form prescribed by the
Company; and (d) that if he/she is subject to the reporting requirements under
Section 16(a) of the Exchange Act (i) he will not violate Section 16(b) of the
Exchange Act, (ii) he will furnish the Company with a copy of each Form 4 and
Form 5 filed by him, and (iii) he will timely file all reports required under
the federal securities laws.


13.             
Effective Date of Plan;
Termination Date of Plan. The Plan
shall be effective on the date the Plan has been approved by the Board of
Directors and the shareholders of the Company. The Plan was adopted, subject to
shareholder approval, by the Board as of October 16, 2003. The Plan shall
terminate on October 16, 2013, except as to Options previously granted and
outstanding under the Plan at that time. No Options shall be granted after the
date on which the Plan terminates. In no event may the Option period exceed ten
years from the date on which the Option is granted. The Plan may be abandoned
or terminated at any earlier time by the affirmative vote of the holders of a
majority of the shares of Common Stock present, or represented, and entitled to
vote at a meeting duly held in accordance with the applicable laws of the State
of Colorado, except with respect to any Options then outstanding under the
Plan.


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14.             
Withholding Taxes. The Option Agreement shall provide that the Company
may take such steps as it may deem necessary or appropriate for the withholding
of any taxes which the Company is required by any law or regulation or any
governmental authority, whether federal, state or local, domestic or foreign,
to withhold in connection with any Option including, but riot limited to, the
withholding of all or any portion of any payment or the withholding of issuance
of Option Shares upon the exercise of any Option.


15.             
Other Provisions. The following provisions are also in effect under
the Plan:


(a)               
The use of a masculine gender in
the Plan shall also include within its meaning the feminine, and the singular
may include the plural, and the plural may include the singular, unless the
context clearly indicates to the contrary. 


(b)               
Any expenses of administering the
plan shall be borne by the Company.


(c)               
This Plan shall be construed to be
in addition to any and all other compensation plans or programs. The adoption of
the Plan by the shareholders of the Company shall not be construed as creating
any limitations on the power or authority of the Board to adopt such other
additional incentive or other compensation arrangements as the Board may deem
necessary or desirable. 


(d)                
The corporate laws of the State of
Colorado shall govern all issues concerning the relative rights of the Company
and its shareholders under the Plan. All other questions and obligations under
the Plan shall be construed and enforced in accordance with the internal laws
of the State of California, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of California or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of California.


(e)                
Notwithstanding anything to the
contrary contained in this Plan, the following provisions, in compliance with
the California Corporate Securities Law of 1968 and the rules and regulations
promulgated thereunder, shall apply to the Plan and all Options granted under
the Plan:


(i)                 
Each Option shall be exercisable
in whole or in consecutive installments, cumulative or otherwise, during its
term as determined in the discretion of the Board. Each Option granted to an
Optionee shall provide for the right to exercise at the rate of at least 20%
per year over five years from the date the Option is granted, subject to
reasonable conditions such as continued employment or service; however, in the
case of an Option granted to officers, directors, managers or consultants of
the Company, the Option may become fully exercisable, subject to reasonable
conditions such as continued employment or service, at any time or during any
period established by the Company.


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(ii)               
(A) if the Optionee's service with
the Company terminates for any reason (other than involuntary dismissal for
"cause" or voluntary resignation in violation of any agreement to remain in the
employ of the Company), he or she may, at any time before the expiration of
thirty days after termination or before expiration of the Option, whichever
first occurs, exercise the Option (to the extent that the Option was
exercisable by him or her on the date of the termination of his or her
service); (B) if the Optionee's service terminates due to disability (as
defined in Section 22(e)(3) of the Code and subject to such proof of disability
as the Option Committee may require), the Option may be exercised by the
Optionee (or by his guardian(s), or conservator(s), or other legal
representative(s)) before the expiration of six months after termination or
before expiration of the Option, whichever first occurs (to the extent that the
Option was exercisable by him or her on the date of the termination of his or
her service); and (C) in the event of the death of the Optionee, an Option
exercisable by him or her at the date of his or her death shall be exercisable
by his or her legal representative(s), legatee(s), or heir(s), or by his or her
beneficiary or beneficiaries so designated by him or her, as the case may be,
within six months after his or her death or before the expiration of the
Option, whichever first occurs (to the extent that the Option was exercisable
by him or her on the date of his or her death).


(iii)              
Optionees under the Plan who do
not otherwise have access to financial statements of the Company will receive
the Company's financial statements at least annually.


(iv)              
Except as permitted by rule 701 of
the Securities Act, Options granted under the Plan are nontransferable other
than by will, by the laws of descent and distribution, by instrument to an
inter vivos or testamentary trust in which the Options are to be passed to
beneficiaries upon the death of the trustor (settlor), or by gift to immediate
family. The term "immediate family" means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law, and also includes
adoptive relationships.
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