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Exhibit 10.6    
    


 
 

TREATY OAK BANCORP, INC.    
    
    2004 STOCK INCENTIVE PLAN    
    


ARTICLE ONE  


GENERAL PROVISIONS  


I.    PURPOSE OF THE PLAN


        This
2004 Stock Incentive Plan is intended to promote the interests of Treaty Oak Bancorp, Inc., a Texas corporation, by providing eligible persons in the Corporation's service
with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in such service. 



        Capitalized
terms shall have the meanings assigned to such terms in the attached Appendix. 


II.    STRUCTURE OF THE PLAN  


        A.    The
Plan shall be divided into five separate equity incentives programs: 



        —the
Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, 



        —the
Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special option grants, 


        —the
Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the
immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), 


        —the
Automatic Option Grant Program under which eligible non-employee Board members shall automatically receive option grants at designated intervals over their
period of continued Board service, and 


        —the
Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable
in cash applied to a special stock option grant. 




        B.    The
provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the plan. 


III.    ADMINISTRATION OF THE PLAN  



        A.    The
Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16
Insiders. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be
vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. However, any discretionary option grants or
stock issuances for members of the Primary Committee must be authorized by a disinterested majority of the Board. 



        B.    Members
of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed at any time. The Board may
also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. 


        C.    Each
Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority to establish such rules and
regulations as it may deem appropriate for 





 



proper
administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of those programs and any
outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be
final and binding on all parties who have an interest in the Issuance Programs under its jurisdiction or any stock option or stock issuance thereunder. 


        D.    The
Primary Committee shall have the sole and exclusive authority to determine which Section 16 Insiders and other highly compensated Employees shall be eligible
for participation in the Salary Investment Option Grant Program for one or more calendar years. However, all option grants under the Salary Investment Option Grant Program shall be made in accordance
with the express terms of that program, and the Primary Committee shall not exercise any discretionary functions with respect to the option grants made under that program. 


        E.    Service
on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of such committee shall accordingly be entitled to
full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made
in good faith with respect to the Plan or any Stock Issuances under the Plan. 



        F.     Administration
of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of those programs,
and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under those programs. 


IV.    ELIGIBILITY  


        A.    The
persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: 



          (i)  employees, 


         (ii)  non-employee
members of the Board or the board of directors of any Parent or Subsidiary, and 


        (iii)  consultants
and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). 




        B.    Only
Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program. 



        C.    Each
Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine: (i) with respect to the option
grants under the Discretionary Option Grant Program, which eligible persons are to receive such grants, the time or times when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a Non-Satutory Option, the time or times when each option is to become exercisable, the vesting schedule (if
any) applicable to the option shares outstanding; and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive such issuances, the time or
times when the issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares, and the consideration for such shares. 


        D.    The
Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances
in accordance with the Stock Issuance Program. 


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        E.    The
individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to those individuals who continue to serve as
non-employee Board members at one or more Annual Shareholders Meetings held after the Offering Date. A non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall be eligible to receive periodic option grants under the Automatic Option Grants Program while he or she continues to serve as a non-employee
Board member. 


        F.     All
non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program. 


V.    STOCK SUBJECT TO THE PLAN  


        A.    The
stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open
market. The number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 500,000 shares. 



        B.    The
number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first business day of January each calendar year
during the term of the Plan, beginning with calendar year 2005, by an amount equal to two percent (2%) of the total number of shares of Common Stock outstanding on the last business day in
December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 100,000 shares. 


        C.    No
one person participating in the Plan may receive stock options, separately exercisable stock appreciation rights; and direct stock issuances for more than 100,000
shares of Common Stock in the aggregate per calendar year. 


        D.    Shares
of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) those options expire or terminate
for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan
and subsequently cancelled or repurchased by the Corporation, at the original issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan, shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the
Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock
available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock. Shares of Common Stock underlying one or more stock appreciation rights exercised under Section IV of Article Two,
Section III of Article Three, Section II of Article Five, or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan. 


        E.    If
any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares, or other change
affecting the outstanding shares of Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to (i) the
maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights, and direct stock issuances under the Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each
outstanding option under the Plan, and (v) the maximum number and/or class of securities by which the share reserve is to increase automatically each calendar year pursuant to the provisions of
Section V.B of this Article One. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator shall be final, binding, and conclusive. 


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ARTICLE TWO    
    
    DISCRETIONARY OPTION GRANT PROGRAM    
    



I.    OPTION TERMS  


        Each option shall be evidenced by one or more documents in the form approved by the Plant Administrator; provided,
however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to
such options. 


        A.    Exercise Price.    



        l.      The
exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date. 


        2.     The
exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Seven and the
documents evidencing the option, be payable in one or more of the forms specified below: 



          (i)  cash
or check made payable to the Corporation, 


         (ii)  shares
of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair
Market Value on the Exercise Date, or 


        (iii)  should
the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised and to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price
payable for the purchased shares plus all applicable Federal, state, and local income and employment taxes required to be withheld by the Corporation by reason of such exercise, and (b) the
Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. 




        Except
to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 


        B.    Exercise and Term of Options.    



        Each
option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. 


        C.    Effect of Termination of Service.    


        1.     The
following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: 



          (i)  Any
option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. 


         (ii)  Any
option held by the Optionee at the time of death and exercisable in whole or in part at that time may be subsequently exercised by the personal representative of
the Optionee's estate 



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or
by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the Optionee's designated beneficiary or beneficiaries of that option. 


        (iii)  Should
the Optionee's service be terminated for Misconduct or should the Optionee otherwise engage in Misconduct while holding one or more outstanding options under
this Article Two, then all those options shall terminate immediately and cease to be outstanding. 


        (iv)  During
the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the
option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at the time exercisable for vested shares. 




        2.     The
Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: 



          (i)  extend
the period of time for which the option is to remain exercisable following the Optionee's Cessation of Service from the limited exercise period otherwise in
effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or 


         (ii)  permit
the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock
for which such option is exercisable at the time of the Optionee's cessation of Service, but also with respect to one or more additional installments in which the Optionee would have vested had the
Optionee continued in Service. 




        D.    Shareholder Rights.    The holder of an option shall have no shareholder rights with
respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price, and become a holder of record of the purchased shares. 


        E.    Repurchase Rights.    The Plan Administrator shall have the discretion to grant options
which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. 


        F.    Limited Transferability of Options.    During the lifetime of the Optionee, Incentive
Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or the laws of inheritance following the Optionee's death. Non-Statutory
Options shall be subject to the same restriction, except that a Non-Statutory option may be assigned in whole or in part during the Optionee's lifetime to one or more members of the
Optionee's family or to a trust established exclusively for one or more such family members or to the Optionee's former spouse, to the extent such assignment is in connection with the Optionee's
estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment.
The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options
under this Article Two, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding
those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable
agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the optionee's death. 


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II.    INCENTIVE OPTIONS  


        The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two, and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall  not be subject to the terms of
this Section II. 


        A.    Eligibility.    Incentive Options may only be granted to Employees. 


        B.    Dollar Limitation.    The aggregate Fair Market Value of the shares of Common Stock
(determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary)
may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two
(2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted. 


        C.    10% Shareholder.    If any Employee to whom an Incentive Option is granted is a 10%
Shareholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term
shall not exceed five (5) years measured from the option grant date. 


III.    CORPORATE TRANSACTION/CHANGE IN CONTROL  


        A.    In
the event of any Corporate Transaction, each outstanding option under the Discretionary Option Grant Program shall automatically accelerate so that each option shall,
immediately prior to the effective date of that Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of
those shares as fully vested shares of Common Stock. However, an outstanding option shall not become exercisable on such an accelerated basis if and to
the extent: (i) such option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof), or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread existing at the time of the Corporate Transaction on any shares for which the option is not otherwise at that time
exercisable and provides for subsequent payout of that spread in accordance with the same exercise/vesting schedule applicable to those option shares, or (iii) the acceleration of such option
is subject to other limitations imposed by the Plan Administrator at the time of the option grant. 



        B.    All
outstanding repurchase rights under the Discretionary Option Grant Program shall automatically terminate, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction, or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is
issued. 


        C.    Immediately
following the consummation of the Corporate Transaction, all outstanding options under the Discretionary Option Grant Program shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or parent thereof). 


        D.    Each
option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the
number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to: (i) the exercise price payable per share under each outstanding option,  provided the exercise price
payable for such securities shall remain the same; (ii) the maximum number and/or class of securities available for
 


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issuance
over the remaining term of the Plan; (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock
appreciation rights, and direct stock issuances under the Plan per calendar year; and (iv) the maximum number and/or class of securities by which the share reserve is to increase automatically
each calendar year. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding options under the Discretionary Option Grant Program, substitute one or more shares of its own common stock with a fair
market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction. 


        E.    The
Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those
options shall, immediately prior to the effective date of such Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to those options and may be exercised
for any or all of those shares as fully vested shares of Common Stock, whether or not those options are to be assumed in the Corporate Transaction. In addition, the Plan Administrator shall have the
discretionary authority to structure one or more of the Corporation's rights under the Discretionary Option Grant Program so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon consummation of such Corporate Transaction, and the shares subject to those terminated rights shall thereupon vest in full. 


        F.     The
Plan Administrator shall have full power and authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options
shall become exercisable for all the shares of Common Stock at the time subject to those options in the event the Optionee's Service is subsequently terminated by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed and do not otherwise accelerate. In
addition, the Plan Administrator may structure one or more of the Corporation's repurchase rights so that those rights shall immediately terminate with respect to any shares held by the Optionee at
the time of his or her Involuntary Termination, and the shares subject to those terminated repurchase rights shall accordingly vest in full at that time. 


        G.    The
Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those
options shall, immediately prior to the effective date of a Change in Control, become exercisable for all the shares of Common Stock at the time subject to those options and may be exercised for any
or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase
rights under the Discretionary Option Grant Program so that those rights shall terminate automatically upon the consummation of such Change in Control, and the shares subject to those terminated
rights shall thereupon vest in full. Alternatively, the Plan Administrator may condition the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program and
the termination of one or more of the Corporation's outstanding purchase rights under such program upon the subsequent termination of the Optionee's Service by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the effective date of such Change in Control. 


        H.    The
portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be
exercisable as a Non-Statutory Option under the Federal tax laws. 


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        I.     The
outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize, or otherwise change its capital or business structure or to
merge, consolidate, dissolve, liquidate, or sell or transfer all or any part of its business or assets. 



IV.    CANCELLATION AND REGRANT OF OPTIONS  


        The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of
any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plan) and to grant in substitution new options covering the
same or a different number of shares of Common Stock but with an exercise per share based on the Fair Market Value per share of Common Stock on the new grant date. 


V.    STOCK APPRECIATION RIGHTS  



        A.    The
Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. 


        B.    The
following terms shall govern the grant and exercise of tandem stock appreciation rights: 



          (i)  One
or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying
option for shares of Common Stack and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the
option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price
payable for such shares. 


         (ii)  No
such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time.
If the surrender is so approved then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the Option surrender date, in cash,
or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. 



        (iii)  If
the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option
(or surrendered portion thereof)
on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt
of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be
exercised more than ten (10) years after the option grant date. 




        C.    The
following terms shall govern the grant and exercise of limited stock appreciation rights: 



          (i)  One
or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. 


         (ii)  Upon
the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the
unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation. In return for the surrendered
option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock at the time
subject to such option (whether or not the option is otherwise at that time vested and exercisable for those shares) over (B) the aggregate exercise price payable for those shares. Such cash
distribution shall be paid within five (5) days following the option surrender date. 


        (iii)  At
the time such limited stock appreciation right is granted, the Plan Administrator shall pre-approve any subsequent exercise of that right in accordance
with the terms of this Paragraph C. Accordingly, no further approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. 



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ARTICLE THREE    
    
    SALARY INVESTMENT OPTION GRANT PROGRAM    
    



I.    OPTION GRANTS  


        The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant
Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for such calendar
year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan
Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars
($10,000) nor more than Fifty Thousand Dollars ($50,000). Each individual who files such a timely authorization shall automatically be granted an option under the Salary Investment Option Grant
Program on the first business day in January of the calendar year for which the salary reduction is to be in effect. 


II.    OPTION TERMS  


        Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator;  provided,
however, that each such document shall comply with the terms specified below. 



        A.    Exercise Price.    



        1.     The
exercise price per share shall be thirty-three and one-third percent (331/3%) of the Fair Market Value per share of Common Stock on the
option grant date. 


        2.     The
exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the
Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the
Exercise Date. 




        B.    Number of Option Shares.    The number of shares of Common Stock subject to the option
shall be determined pursuant to the following formula (rounded down to the nearest whole number): 



        X =
A ÷ (B × 662/3%), where 


        X
is the number of option shares, 


        A
is the dollar amount by which the Optionee's base salary is to be reduced for the calendar year pursuant to his or her election under the Salary Investment Option Grant Program, and 


        B
is the Fair Market Value per share of the Common Stock on the option grant date. 




        C.    Exercise and Term of Options.    The option shall become exercisable in a series of
twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option
shall have a maximum term of ten (10) years measured from the option grant date. 


        D.    Effect of Termination of Service.    Should the Optionee cease Service for any reason
while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such
cessation of Service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the
three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option
may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Service (less any shares subsequently purchased by Optionee prior to
death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the
designated beneficiary or 


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beneficiaries
of the option. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the
ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Service. However, the option shall, immediately upon
the Optionee's cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time
exercisable. 


III.    CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER  


        A.    In
the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant
Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at
the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. Each such outstanding option shall terminate immediately following the
Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed shall remain exercisable for the fully vested
shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the
3-year period measured from the date of the Optionee's cessation of Service. 


        B.    In
the event of a Change of Control while the Optionee remains in Service, each outstanding option held by such Optionee under the Salary Investment Option Grant Program
shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. The option shall remain so exercisable until the  earliest to occur of (i) the
expiration of the ten (10)-year option term, (ii) the expiration of the three
(3)-year period measured from the date of the Optionee's cessation of Service, (iii) the termination of the option in connection with a Corporate Transaction, or (iv) the
surrender of the option in connection with a Hostile Take-Over. 


        C.    Upon
the occurrence of a Hostile Take-Over while the Optionee remains in Service, such Optionee shall have a thirty (30)-day period in which to
surrender to the Corporation each outstanding option held by him or her under the Salary Investment Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the option is
otherwise at the time exercisable for those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following
the surrender of the option to the Corporation. The Primary Committee shall, at the time the option with such limited stock appreciation right is granted under the Salary Investment Option Grant
Program, pre-approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Primary Committee or the Board
shall be required at the time of the actual option surrender and cash distribution. 


        D.    Each
option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the
number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in
consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Salary Investment Option Grant Program, substitute one
or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of the Common Stock in such Corporate Transaction. 



        E.    The
grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize, or otherwise
change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 


IV.    REMAINING TERMS  


        The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under
the Discretionary Option Grant Program. 


10






   ARTICLE FOUR  


STOCK ISSUANCE PROGRAM  



I.    STOCK ISSUANCE TERMS  


        Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such
stock Issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to
share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals or the satisfaction of specified Service requirements. 


        A.    Purchase Price.    



        l.      The
purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the issuance date. 


        2.     Subject
to the provisions of Section I of Article Seven, shares of Common Stock may be issued under the Stock Issuance Program for any of the following
items of consideration which the Plan Administrator may deem appropriate in each individual instance: 



          (i)  cash
or check made payable to the Corporation, or 


         (ii)  past
services rendered to the Corporation (or any Parent or Subsidiary). 




        B.    Vesting Provisions.    


        1.     Shares
of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest
in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of
Common Stock issued under the Stock Issuance Program shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. Shares of Common Stock may also be issued under
the Stock Issuance Program pursuant to share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals or the satisfaction of specified
Service requirements. 


        2.     Any
new, substituted, or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to
receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares, or other change
affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's
unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 


        3.     The
Participant shall have full shareholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not
the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 


        4.     Should
the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the
performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further shareholder rights with respect to those shares. To the extent the surrendered shares were 


11





 



previously
issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 


        5.     The
Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the
cessation of the Participant's Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the
Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives. 


        6.     Outstanding
share right awards under the Stock Issuance Program shall automatically terminate, and no shares of Common Stock shall actually be issued in satisfaction of
those awards, if the performance goals or Service requirements established for such awards are not attained or satisfied. The Plan Administrator, however, shall have the discretionary authority to
issue shares of Common Stock under one or more outstanding share right awards as to which the designated performance goals or Service requirements have not been attained or satisfied. 


II.    CORPORATE TRANSACTION/CHANGE IN CONTROL  


        A.    All
of the Corporation's outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase rights are to be assigned to the successor corporation (or
parent thereof) in connection with such Corporate Transaction, or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. 


        B.    The
Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Stock Issuance Program so that
those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which
those repurchase rights are assigned to the successor corporation (or parent thereof). 



        C.    The
Plan Administrator shall also have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Stock Issuance Program so
that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, either upon the occurrence of a Change in
Control or upon the subsequent termination of the Participant's Service by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the
effective date of that Change in Control. 



III.    SHARE ESCROW/LEGENDS  


        Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be
issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 


12





 


ARTICLE FIVE  


AUTOMATIC OPTION GRANT PROGRAM  


I.    OPTION TERMS  


        A.    Grant Dates.    On the date of each Annual Shareholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as a non-employee Board member, whether or not that individual is standing for re-election to the Board at that
particular Annual Meeting, shall automatically be granted a Non-Statutory Option to purchase one-thousand (1,000) shares of Common Stock, provided such individual has served as
a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 1,000-share option grants any one non-employee Board
member may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who
have otherwise received one or more stock option grants from the Corporation prior to the Underwriting Date shall be eligible to receive one or more such annual option grants over their period of
continued Board service. 


        B.    Exercise Price.    


        1.     The
exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 


        2.     The
exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 



        C.    Option Term.    Each option shall have a term of ten (10) years measured from the
option grant date. 


        D.    Exercise and Vesting of Options.    Each option shall immediately be exercisable for any
or all of the option shares. However, any unvested shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's
cessation of Board service prior to vesting in those shares. The shares subject to each annual 1,000-share option grant shall vest in one installment upon the Optionee's completion of the
one (1)-year period of service measured from the grant date. 


        E.    Limited Transferability of Options.    Each option under this Article Five may be
assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's family or to a trust established exclusively for one or more such family members or to Optionee's
former spouse, to the extent such assignment is in connection with the Optionee's estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior
to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this Article Five, and those options shall, in accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all terms and conditions of the
applicable agreement evidencing each such transferred option, including (without limitation) the limited period during which the option may exercised following the Optionee's death. 


13





 



        F.    Termination of Board Service.    The following provisions shall govern the exercise of
any options held by the Optionee at the time the Optionee ceases to serve as a Board member: 



          (i)  The
Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred
pursuant to the Optionee's will or the laws of inheritance or the designated beneficiary or beneficiaries of such option) shall have a twelve (12)-month period following the date of such cessation of
Board service in which to exercise each such option. 


         (ii)  During
the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the
option is exercisable at the time of the Optionee's cessation of Board service. 



        (iii)  Should
the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately
vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for any or all of those shares as fully vested shares of Common
Stock. 


        (iv)  In
no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier)
upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately
upon the Optionee's cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares. 




II.    CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER  


        A.    In
the event of a Corporate Transaction while the Optionee remains a Board member, the shares of Common Stock at the time subject to each outstanding option held by such
Optionee under this Automatic Option Grant Program but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the option shares as fully vested shares of Common Stock and may be exercised for any or all of those vested shares. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). 


        B.    In
the event of a Change in Control while the Optionee remains a Board member, the shares of Common Stock at the time subject to each outstanding option held by such
Optionee under this Automatic Option Grant Program but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of Change in
Control, become exercisable for all the option shares as fully vested shares of Common Stock and may be exercised for any or all of those vested shares. Each such option shall remain exercisable for
such fully vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Takeover. 


        C.    All
outstanding repurchase rights under this Automatic Option Grant Program shall automatically terminate, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Corporate Transaction or Change in Control. 


        D.    Upon
the occurrence of a Hostile Take-Over while the Optionee remains a Board member, such Optionee shall have a thirty (30)-day period in which
to surrender to the Corporation each of his or her outstanding options under this Automatic Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation
in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option 


14





 



(whether
or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five
(5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required at the time of the actual option surrender and
cash distribution. 


        E.    Each
option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the
number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in
consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Automatic Option Grant Program, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction. 


        F.     The
grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 


III.    REMAINING TERMS  


        The remaining terms of each option grant granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under
the Discretionary Option Grant Program. 


15








   ARTICLE SIX  


DIRECTOR FEE OPTION GRANT PROGRAM  



I.    OPTION GRANTS  


        The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years for which the Director Fee Option Grant Program is to be
in effect. For each such calendar year the program is in effect, each non-employee Board member may irrevocably elect to apply all or any portion of the annual retainer fee otherwise
payable in cash for his or her service on the Board for that year to the acquisition of a special option grant under the Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to the first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each
non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first business day in
January in the calendar year for which the retainer fee election is in effect. 


II.    OPTION TERMS  


        Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. 


        A.    Exercise Price.    



        l.      The
exercise price per share shall be thirty-three and one-third percent (331/3%) of the Fair Market Value per share of Common Stock on the
option grant date. 


        2.     The
exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the
Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the
Exercise Date. 


        B.    Number of Option Shares.    The number of shares of Common Stock subject to the option
shall be determined pursuant to the following formula (rounded down to the nearest whole number): 



        X =
A ÷ (B × 662/3%), where 


        X
is the number of option shares, 


        A
is the portion of the annual retainer fee subject to the non-employee Board member's election under the Director Fee Option Grant Program, and 


        B
is the Fair Market Value per share of Common Stock on the option grant date. 




        C.    Exercise and Term of Options.    The option shall become exercisable in a series of
twelve (12) equal monthly installments upon the Optionee's completion of each calendar month of Board service during the calendar year for which the retainer fee election is in effect. Each
option shall have a maximum term of ten (10) years measured form the option grant date. 



        D.    Limited Transferability of Options.    Each option under this Article Six may be
assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's family or to a trust established exclusively for one or more such family members or to Optionee's
former spouse, to the extent such assignment is in connection with the Optionee's estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior
to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The optionee may also designate one or more persons as the
beneficiary or beneficiaries 


16





 



of
his or her outstanding options under this Article Six, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon
the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all terms and conditions of the applicable agreement evidencing each
such transferred option, including (without limitation) the limited period during which the option may be exercised following the Optionee's death. 


        E.    Termination of Board Service.    Should the Optionee cease Board service for any reason
(other than death or Permanent Disability) while holding one or more options under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares
for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the
Optionee under this Director Fee Option Grant Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all
shares of Common Stock for which the option is not otherwise at that time exercisable. 


        F.    Death or Permanent Disability.    Should the Optionee's service as a Board member cease
by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program shall immediately become exercisable for all the shares of Common Stock
at the time subject to that option, and the option may be exercised for any and all of those shares as fully vested shares until the earlier of
(i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service.
To the extent such option is held by the Optionee at the time of his or her death, that option may be exercised by the personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the designated beneficiary or beneficiaries of such option. 


        Should
the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the
Optionee's will or the laws of inheritance or by the designated beneficiary or beneficiaries of such option. Such right of exercise shall lapse, and the option shall terminate, upon the  earlier of
(i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Board Service. 


III.    CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER  


        A.    In
the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant
Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at
the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. Each such outstanding option shall terminate immediately following the
Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed shall remain exercisable for the fully vested
shares until the earliest to occur of (i) the expiration of the ten (10)-year option term, (ii) the expiration of the three
(3)-year period measured from the date of the Optionee's cessation of Board service, or (iii) the surrender of the option in connection with a Hostile Take-Over. 


17





 

        B.    In
the event of a Change in Control while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program
shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. The option shall remain so exercisable until the  earliest to occur of (i) the
expiration of the ten (10)-year option term, (ii) the expiration of the three
(3)-year period measured from the date of the Optionee's cessation of Board service, (iii) the termination the option in connection with a Corporate Transaction, or (iv) the
surrender of the option in connection with a Hostile Take-Over. 


        C.    Upon
the occurrence of a Hostile Take-Over while the Optionee remains a Board member, such Optionee shall have a thirty (30)-day period in which
to surrender to the Corporation each outstanding option held by him or her under the Director Fee Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the option is
otherwise at that time exercisable for those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following
the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required at the time of the actual option surrender and cash distribution. 


        D.    Each
option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the
number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall
remain the same. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption for the outstanding options under the Director Fee Option Grant Program, substitute one or more shares of its own common stock with a fair
market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction. 


        E.    The
grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize, or otherwise
change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 


IV.    REMAINING TERMS  


        The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the
Discretionary Option Grant Program. 


18





 
ARTICLE SEVEN  


MISCELLANEOUS  


I.    FINANCING  


        The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price
of shares issued under the Stock Issuance Program by delivering a full-recourse, interest-bearing promissory note payable in one or more installments. The terms of any such promissory note
(including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or
Participant exceed the sum of (i) the aggregate option price or purchase price payable for the purchased shares (less the par value of such shares) plus (ii) any Federal, state, and
local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. 


II.    TAX WITHHOLDING  



        A.    The
Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to
the satisfaction of all applicable Federal, state, and local income and employment tax withholding requirements. 


        B.    The
Plan Administrator may, in its discretion, provide any or all holders Non-Statutory Options or unvested shares of Common Stock under the Plan (other than
the options granted or the shares issued under the Automatic Option Grant or Director Fee Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the
Withholding Taxes to which such holders may become subject in connection with the exercise of. their options or the vesting of their shares. Such right may be provided to any such holder in either or
both of the following formats: 



         Stock Withholding:    The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such
Non-Statutory Option or the vesting of
such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. 



        Stock Delivery:    The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or
more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Withholding Taxes) with an aggregate Fair Market Value
equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. 




III.    EFFECTIVE DATE AND TERM OF THE PLAN  



        A.    The
Plan shall become effective immediately on the Plan Effective Date. However, the Salary Investment Option Grant Program and the Director Fee Option Grant Program
shall not be implemented until such time as the Primary Committee may deem appropriate. Options may be granted under the Discretionary Option Grant at any time on or after the Plan Effective Date, and
the initial option grants under the Automatic Option Grant Program shall also be made on the Plan Effective Date to any non-employee Board members eligible for such grants at that time.
However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's shareholders. If such shareholder approval is
not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this plan shall terminate and cease to be outstanding, and no further options
shall be granted and no shares shall be issued under the Plan. 


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        B.    The
Plan shall terminate upon the earliest to occur of (i) January 2014, (ii) the date on which all
shares available for issuance under the Plan shall have been issued as fully vested shares, or (iii) the termination of all outstanding options in connection with a Corporate Transaction.
Should the Plan terminate on January 2014, then all option grants and unvested stock issuances outstanding at that time shall continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances. 


IV.    AMENDMENT OF THE PLAN  


        A.    The
Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall
adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such
amendment or modification. In addition, certain amendments may require shareholder approval pursuant to applicable laws or regulations. 


        B.    Options
to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may
be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under
those programs shall be held in escrow until there is obtained shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan.
If such shareholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding, and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding. 



V.    USE OF PROCEEDS  


        Any cash proceeds received by the Corporation from the sale of Common Stock under the Plan shall be used for general corporate purposes. 


VI.    REGULATORY APPROVALS  


        A.    The
implementation of the Plan, the granting of any stock option under the Plan, and the issuance of any shares of Common Stock (i) upon the exercise of any
granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the stock options granted under it, and the shares of Common Stock issued pursuant to it. 


        B.    No
shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements
of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all
applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. 


VII.    NO EMPLOYMENT/SERVICE RIGHTS  


        Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 


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APPENDIX    
    


        The following definitions shall be in effect under the Plan: 



        A.    Automatic Option Grant Program shall mean the automatic option grant program in effect under Article Five of the
Plan. 


        B.    Board shall mean the Corporation's Board of Directors. 


        C.    Change in Control shall mean a change in ownership or control of the Corporation effected through either of the following
transactions: 



          (i)  the
acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's shareholders, or 


         (ii)  a
change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period
or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office
at the time the Board approved such election or nomination. 




        D.    Code shall mean the Internal Revenue Code of 1986, as amended. 


        E.    Common Stock shall mean the Corporation's common stock. 



        F.     Corporate Transaction shall mean either of the following shareholder-approved transactions to which the Corporation is a
party: 



          (i)  a
merger, consolidation, or other reorganization approved by the Corporation's shareholders, unless securities
representing more than fifty percent (50%) of the total combined voting power of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or
indirectly and in substantially the same proportion, by the persons who beneficially owned the Corporation's outstanding voting securities immediately prior to such transaction, or 



         (ii)  the
sale, transfer, or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. 




        G.    Corporation shall mean Treaty Oak Bancorp, Inc., a Texas corporation, and any corporate successor to all or
substantially all of the assets or voting stock of Treaty Oak Bancorp, Inc. that shall by appropriate action adopt the Plan. 



        H.    Director Fee Option Grant Program shall mean the special stock option grant in effect for non-employee Board
members under Article Six of the Plan. 


        I.     Discretionary Option Grant Program shall mean the discretionary option grant program in effect under Article Two of
the Plan. 


        J.     Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the
control and direction of the employer entity as to both the work to be performed and the manner and method of performance. 


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        K.    Exercise Date shall mean the date on which the Corporation shall have received notice of the option exercise. 



        L.    Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following
provisions: 



          (i)  If
the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the
date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street
Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding
date for which such quotation exists. 


         (ii)  If
the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in
question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such
exchange and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date for which such quotation exists. 


        (iii)  For
purposes of any option grants made on the Offering Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to
be sold in the initial public offering pursuant to the Registration Statement. 


        (iv)  If
the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the
Plan Administrator after taking into consideration such factors as the Plan Administrator shall deem to deem appropriate. 




        M.   Hostile Take-Over shall mean the acquisition, directly or indirectly, by any person or related group of
persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of
Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's shareholders which the Board does not recommend. 


        N.    Incentive Option shall mean an option which satisfies the requirements of Code Section 422. 


        O.    Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of: 



          (i)  such
individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct or Neglect, or 


         (ii)  such
individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and
responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits, and target bonus under any
corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles,
provided such change, reduction, or relocation is effected by the Corporation without the individual's consent. 




        P.     Misconduct shall mean the commission of any act of fraud, embezzlement, or dishonesty by the Optionee or Participant, any
unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct 


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by
such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not in any way preclude or restrict the
right of the Corporation (or any Parent or Subsidiary) to discharge or dismiss any Optionee, Participant, or other person in the Service of the Corporation (or any Parent or Subsidiary) for any other
acts or omissions, but such other acts or omissions shall not be deemed, for purposes of the Plan, to constitute grounds for termination for Misconduct. 


        Q.    Neglect shall mean the continued failure to adequately perform such individual's duties and responsibilities concerning
such individual's Service after having been informed of such failure in writing. 


        R.    1934 Act shall mean the Securities Exchange Act of 1934, as amended. 


        S.     1933 Act shall mean the Securities Act of 1993, as amended. 


        T.     Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422. 



        U.    Offering Date shall mean the date on which the Registration Statement is declared effective by the SEC in connection with
an initial public offering of the Common Stock. 


        V.     Optionee shall mean any person to whom an option is granted under the Discretionary Option Grant, Automatic Option Grant,
Salary Investment Option Grant, or Director Fee Option Grant Program. 


        W.    Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the
Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in such chain. 


        X.    Participant shall mean any person who is issued shares of Common Stock under the Stock Issuance Program. 


        Y.    Permanent Disability or Permanently Disabled shall mean the inability of the Optionee or the Participant to engage in any
substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of a continuous duration of twelve (12) months or more.
However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee
Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more. 


        Z.    Plan shall mean the Corporation's 2004 Stock Incentive Plan, as set forth in this document. 



        AA    Plan Administrator shall mean the particular entity, whether the Primary Committee, the Board, or the
Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. 


        BB.    Plan Effective Date shall mean the date the Plan shall become effective and shall be coincident with the
Offering Date. 


        CC.   Primary Committee shall mean the committee of two (2) or more non-employee Board members
appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment Option Grant 


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Program
solely with respect to the selection of the eligible individuals who may participate in such program. 



        DD.   Registration Statement shall mean the registration statement on Form SB-2 filed by the
Corporation under the 1933 Act in connection with an initial public offering of the Common Stock. 


        EE.   Salary Investment Option Grant Program shall mean the salary investment option grant program in effect
under Article Three of the Plan. 


        FF.     SEC shall mean the Securities and Exchange Commission. 



        GG.   Secondary Committee shall mean a committee of one or more Board members appointed by the Board to
administer the Discretionary option Grant and Stock Issuance programs with respect to eligible persons other than Section 16 Insiders. 


        HH.   Section 16 Insider shall mean an officer or director of the Corporation subject to the short-swing
profit liabilities of Section 16 of the 1934 Act. 


        II.      Service shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a
person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance. 


        JJ.     Short Term Federal Rate shall mean the applicable federal rate as published in revenue rulings from the
Department of Treasury for obligations less than three years. 


        KK.   Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange. 



        LL.    Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at
the time of issuance of shares of Common Stock under the Stock Issuance Program. 


        MM.   Stock Issuance Program shall mean the stock issuance program in effect under Article Four of the
Plan. 


        NN.   Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations
beginning with the Corporation, provided each corporation other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the other corporations in such chain. 


        OO.   Take-Over Price shall mean the greater of
(i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest
reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the
Take-Over price shall not exceed the clause (i) price per share. 


        PP.     10% Shareholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing
more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). 


        QQ.   Withholding Taxes shall mean the Federal, state, and local income and employment withholding taxes to which
the holder of Non-Statutory Options or unvested shares of Common Stock may become subject in connection with the exercise of those options or the vesting of those shares. 


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QuickLinks



Exhibit 10.6


TREATY OAK BANCORP, INC. 2004 STOCK INCENTIVE PLAN

ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM


ARTICLE THREE SALARY INVESTMENT OPTION GRANT PROGRAM


APPENDIX