Document:

Exhibit 4.1

Exhibit 4.1

 

PRO-DEX, INC.

2004 STOCK OPTION PLAN

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

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

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

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

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

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

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

(f)                
Disinterested Person: A director who has not been granted or awarded
equity securities pursuant to any plan of the Company or of any Related Company
of the Company during one year prior to that director's service as an
administrator of the Plan, except as otherwise provided in Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") with respect to (i) participation in formula plans or ongoing
securities acquisitions plans, and (ii) an election to receive securities for
an annual retainer fee.

(g)                
Employee: An Employee is an employee of the Company or any
Related Company.

(h)                
Fair Market Value: The Fair Market Value of the Option Shares. Such
Fair Market Value as of any date shall be determined by the Option Committee as
of the last business day for which the prices or quotes discussed in this
sentence are available prior to the date an Option is granted and shall mean
(i) the average (on that date) of the high and low prices of the Common Stock
on the principal national securities exchange by which the Common Stock is
traded, if the stock is then traded on a national securities exchange; or, (ii)
the last reported sale price (on that date) of the Common Stock on NASDAQ, if
the stock is not then traded on a national securities exchange; or (iii) the
closing bid price (or average of bid prices) last quoted (on that date) by an
established quotation service for over-the-counter securities, if the stock is
not reported on NASDAQ. However, if the Common Stock is not publicly-traded at
the time an Option is granted under the Plan, Fair Market Value shall be deemed
to be the fair value of the stock as determined in good faith by the Board or
the Option Committee, and a written record of the method of determining such
value shall be maintained.

 

 

(i)                
Incentive Stock Options
("ISOs"): "Incentive Stock Options"
as that term is defined in Section 422 of the Code.

(j)                
Key Employee: A person designated by the Option Committee who
either is employed by the Company or a Related Company (see below) and upon
whose judgment, initiative and efforts the Company or a Related Company is
largely dependent for the successful conduct of its business; provided,
however, that Key Employees shall not include those members of the Board who
are not employees of the Company or a Related Company.

(k)              
Non-Incentive Stock Options
("Non-ISOs"): Options which are not
intended to qualify as "Incentive Stock Options" under Section 422 of the Code.

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

(m)              
Option Agreement: The written agreement (and any amendment or
supplement thereto) between the Company and an Employee designating the terms
and conditions of an Option.

(n)               
Option Committee: With respect to grants of Options to Employees who
are not also Officers and/or Directors of the Company, the Plan shall be
administered by an Option Committee ("Option Committee") composed of the
Board or at least two members of the Board. With respect to grants of Options
to Employees who are also Officers or Directors, the Plan shall be administered
by a committee, selected by the Board, consisting of two or more persons, each
of whom is a Disinterested Person. Such committee may also be deemed an Option
Committee.

(o)               
Option Shares: The shares of Common Stock underlying an Option
granted to an Employee.

(p)               
Optionee: An Employee who has been granted an Option.

(q)               
Related Company: Any corporation that is a "parent corporation" or a
"subsidiary corporation" with respect to the Company, as those terms are
defined in Section 425 of the Code. The determination of whether a corporation
is a Related Company shall be made without regard to whether the corporation or
the relationship between the corporation and the Company now exists or comes
into existence hereinafter.

2.                 
Purpose and Scope.

(a)               
The purpose of this Plan is to
advance the interests of the Company and its shareholders by affording
Employees an opportunity for investment in the Company and the incentive
advantages inherent in stock ownership in this Company.

(b)               
This Plan authorizes the Option
Committee to grant Options to purchase shares of Common Stock to Employees
selected by the Option Committee while considering criteria such as employment
position or other relationship with the Company, duties and responsibilities,
ability, productivity, length of service or association, morale, interest in
the Company, recommendations by supervisors, and other matters.

 

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3.                 
Administration of the Plan.

(a)              
The Plan shall be administered by
the Option Committee. The Option Committee shall have the authority granted to
it under this Section and under each other Section of the Plan.

(b)              
In accordance with and subject to
the provisions of the Plan, the Option Committee shall select the Optionees,
shall determine (i) the number of shares of Common Stock to be subject to each
Option, (ii) the time at which each Option is to be granted, (iii) whether an
Option shall be granted in exchange for the cancellation and termination of a
previously granted option or options under the Plan or otherwise, (iv) the
purchase price for the Option Shares, (v) the option period, and (vi) the
manner in which the Option becomes exercisable. In addition, the Option
Committee shall fix such other terms of each Option as the Option Committee may
deem necessary or desirable. The Option Committee shall determine the form of
Option Agreement to evidence each Option.

(c)               
The Option Committee from time to
time may adopt such rules and regulations for carrying out the purposes of the
Plan as it may deem proper and in the best interests of the Company. The Option
Committee shall keep minutes of its meetings and those minutes shall be
distributed to every member of the Board.

(d)                The Board may from time to time make
such changes in and additions to the Plan as it may deem proper and in the best
interest of the Company; provided, however, that no such change or addition
shall impair any Option previously granted under the Plan, and that the
approval by the affirmative vote of the holders of a majority of the Company's
securities entitled to vote and represented at a meeting duly held in
accordance with the applicable laws of the State of California, shall be
required for any amendment which would:

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

(ii)               
materially increase the benefits
accruing to Employees under the Plan; or

(iii)              
increase the number of shares of
Common Stock that may be issued under the Plan.

(e)               
All actions taken and all
interpretations and determinations made by the Option Committee in good faith
(including determinations of Fair Market Value) shall be final and binding upon
all Employees, the Company and all other interested persons. No member of the
Option Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan, and all members of
the Option Committee shall, in addition to rights they may have as Directors of
the Company be fully protected by the Company with respect to any such action,
determination or interpretation.

 

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

4.                 
Number of Shares. The Board is authorized to appropriate, issue and
sell for the purposes of the Plan, and the Option Committee is authorized to
grant Options with respect to, a total number, not in excess of 1,500,000
shares of Common Stock, either treasury or authorized but unissued, or the
number and kind of shares of stock or other securities which in accordance with
Section 9 shall be substituted for the 1,500,000 shares or into which such
1,500,000 shares shall be adjusted. Such number of shares shall include any
options granted under any other stock option plan of the Company that may from
time to time become subject to and governed by the terms and conditions of this
Plan. All or any unsold shares subject to an Option that for any reason expires
or otherwise terminates, may again be made subject to Options under the Plan.

5.                  
Eligibility. Options which are intended to qualify as ISOs will
be granted only to Key Employees. Key Employees and other Employees may hold
more than one Option under the Plan and may hold Options under the Plan and
options granted pursuant to other plans or otherwise.

6.                 
Option Price. The Option Committee shall determine the purchase
price for the Options Shares, provided that the purchase price to be paid by
Optionees for the Option Shares which are intended to qualify as ISOs shall not
be less than 100 percent of the Fair Market Value of the Option Shares at the
time the ISO is granted. The price per share to be paid by the Optionee at the
time an NQO is exercised shall not be less than 85% of the Fair Market Value on
the date as of which the NQO is granted, as determined by the Option Committee.
The purchase price for the Option Shares shall be a fixed, and cannot be a fluctuating,
price.

7.                   
Duration and Exercise of
Options.

(a)              
Each Option granted under the Plan
shall be exercisable on such date or dates and during such period and for such
number of shares as shall be determined pursuant to the provisions of the
instrument evidencing such Option. The Option Committee shall have the right to
accelerate the date of exercise of any Option, provided that the Option
Committee shall not accelerate the exercise of any ISO granted if such
acceleration would violate the annual vesting limitation contained in Section
422(d)(1) of the Code.

(b)              
Except as otherwise permitted
under Section 11, during the lifetime of the Optionee, the Option shall
be exercisable only by the Optionee; provided, that in the event of the legal
disability of an Optionee, the guardian or personal representative of the
Optionee may exercise the Option. However, if the Option is an ISO it may be
exercised by the guardian or personal representative of the Optionee only if
such guardian or personal representative obtains a ruling from the Internal
Revenue Service or an opinion of counsel to the effect that neither the grant
nor the exercise of such power is violative of Section 422(b)(5) of the Code.
Any opinion of counsel must be both from counsel and in a form acceptable to
the Option Committee.

 

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(c)               
The Option Committee may determine
whether any Option shall be exercisable as provided in Subsection (a) of this Section
7 or whether the Options shall be exercisable in installments only; if the
Option Committee determines the latter, it shall determine the number of
installments and the percentage of the Option exercisable at each installment
date. All such installments shall be cumulative.

(d)               
If the Optionee ceases to be
employed by either the Company or a Related Company because of the death or
permanent and total disability (as defined in Section 22(e) (3) of the Code) of
the Optionee, any Option held by the Optionee at the time his employment ceases
may be exercised within 90 days after the date his employment ceased, but only
to the extent that the Option was exercisable according to its terms on the
date the Optionee's employment ceased. After such 90-day period, any
unexercised portion of an Option shall expire.

(e)               
Notwithstanding the provisions of
Subsection (d) of this Section 7, if an Optionee's employment by the
Company or a Related Company ceases for any reason other than the Optionee's
death or permanent and total disability, any unexercised portion of any Option
held by the Optionee at the time his employment ceases may be exercised within
30 days after the date his employment ceased, but only to the extent that the
Option was exercisable according to its terms on the date the Optionee's
employment ceased. After such date, any unexercised portion of an Option shall
expire.

(f)               
Each Option shall be exercised in
whole or part by delivering to the office of the Treasurer of the Company
written notice of the number of shares with respect to which the Option is to
be exercised and by paying in full the purchase price for the Option Shares
purchased as set forth in Section 8; provided, that an Option may not be
exercised in part unless the purchase price for the Option Shares purchased is
at least $2,000.

(g)              
To the extent required to qualify
for the exemption provided by Rule 16b-3 under the Exchange Act, and any
successor provision, at least six months must elapse from the date of
acquisition of an Option by any person who is subject to the reporting
requirements of Section 16(a) of the Exchange Act to the date of exercise of
such Option or disposition of the Option Shares.

8.                 
Payment for Option Shares. If the purchase price of the Option Shares purchased
by any Optionee at one time exceeds $2,000, the Option Committee may permit all
or part of the purchase price for the Option Shares to be paid by the Optionee
by (a) delivering to the Company shares of the Company's common Stock
previously owned by the Optionee with a Fair Market Value as of the date of
payment equal to the portion of the purchase price for the Option Shares that
the Optionee does not pay in cash, (b) having shares withheld from the amount
of shares to be received by the Optionee, (c) delivering an irrevocable
subscription agreement obligating the Optionee to take and pay for the shares
to be purchased within one year of the date of such exercise, or (d) complying
with any other payment mechanisms as the Option Committee may approve from time
to time. As a condition to the exercise of any Option granted under this Plan,
the Optionee shall make such arrangements as the Option Committee may require
for the satisfaction of any federal, state or withholding tax obligations which
may arise in connection with such exercise. The issuance, transfer or delivery
of certificates of shares of Common Stock pursuant to the exercise or Options may
be delayed, at the discretion of the Option Committee, until the Option
Committee is satisfied that the applicable requirements of federal and state
securities laws and the withholding provisions of the Code have been met. Until
such person has been issued a certificate or certificates for the Option Shares
so purchased, he or she shall possess no rights of a recordholder with respect
to any of such shares.

 

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9.                 
Change in Stock, Adjustments,
Inc.

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

(b)              
In the event of any such changes
or exchanges, the Option Committee shall determine whether, in order to prevent
dilution or enlargement of rights, an adjustment should be made in the number,
or kind, or Option price of the shares or other securities then subject to an
Option or Options granted pursuant to the Plan and the Option Committee shall
make any such adjustment, and such adjustments shall be made and shall be
effective and binding for all purposes of the Plan.

10.             
Relationship to Employment. Nothing contained in the Plan, or in any Option
granted pursuant to the Plan, shall confer upon any Optionee any right with
respect to continuance of employment by the Company, or interfere in any way
with the right of the Company to terminate the Optionee's employment at any
time.

11.             
Nontransferability of Option. No Option granted under the Plan shall be
transferable by the Optionee, either voluntarily or involuntarily, except by
will or the laws of descent and distribution, pursuant to a qualified domestic
relations order as defined in the Code, or pursuant to the Employee Retirement
Income Security Act or rules promulgated thereunder; except that (a) Optionees
who are not subject to Section 16(b) of the Exchange Act may upon written
notice transfer an Option (i) to an Optionee's spouse, parents, siblings, or
lineal descendants, or (ii) to a trust for the benefit of the Optionee or any
of the Optionee's spouse, parents, siblings, or lineal descendants, or (iii) to
any corporation or partnership controlled by the Optionee; and (b) Optionees
who are subject to Section 16(b) of the Exchange Act may transfer Options to
immediate family members and family trusts. No Option shall be subject to
execution, attachment or similar process. Except as specifically provided
herein, any attempt to transfer the Option shall void the Option.

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12.             
Rights as a Shareholder. No person shall have any rights as a shareholder
with respect to any shares covered by an Option until that person shall become
the holder of record of such shares and, except as provided in Section 9,
no adjustments shall be made for dividends or other distributions or other
rights as to which there is an earlier record date.

13.             
Securities Laws Requirements. No Option Shares shall be issued unless and until,
in the opinion of the Company, any applicable registration requirements of the
Securities Act of 1933, as amended ("Securities Act"), any applicable
listing requirements of any securities exchange on which stock of the same
class is then listed, and any other requirements of law or of any regulatory
bodies having jurisdiction over such issuance and delivery, have been fully
complied with. Each Option and each Option Share certificate may be imprinted
with legends reflecting federal and state securities laws, restrictions and
conditions, and the Company may comply therewith and issue "stop transfer"
instructions to its transfer agent and registrar in good faith without
liability.

14.             
Disposition of Shares. Each Optionee, as a condition of exercise, shall
represent, warrant and agree, in a form of written certificate approved by the
Company, as follows: (a) that all Option Shares are being acquired solely for
his own account and not on behalf of any other person or entity; (b) that no
Option Shares will be sold or otherwise distributed in violation of the
Securities Act, or any other applicable federal or state securities laws; (c)
that if he is subject to reporting requirements under Section 16(a) of the
Exchange Act, he will (i) not violate Section 16(b) of the Exchange Act, (ii)
furnish the Company with a copy of each Form 4 and Form 5 filed by him, and
(iii) timely file all reports required under the federal securities laws; and
(d) that he will report all sales of Option Shares to the Company in
writing on a form prescribed by the Company.

15.             
Effective Date of Plan;
Termination Date of Plan. The Plan
shall be effective on the date of the approval of the Plan by the affirmative
vote of the holders of a majority of the Company's securities entitled to vote
and represented at a meeting duly held in accordance with applicable law. The
Plan was adopted, subject to shareholder approval, by the Board as of October
16, 2003. The Plan shall terminate on October 16, 2013, except as to Options
previously granted and outstanding under the Plan at that time. No Options
shall be granted after the date on which the Plan terminates. In no event may
the Option period exceed ten years from the date on which the Option is
granted. The Plan may be abandoned or terminated at any earlier time by the
Board, except with respect to any Options then outstanding under the Plan.

16.             
Limitation on Amount of Option. The aggregate Fair Market Value (determined at the
time any ISO is granted) of the Common Stock with respect to which an
Optionee's ISOs, together with incentive stock options granted under any other
plan of the Company and any parent, are exercisable for the first time by such
Optionee during any calendar year shall not exceed $100,000. If an Optionee
holds ISOs that become first exercisable (including as a result of acceleration
of exercisability under the Plan) in any one year for shares having a Fair
Market Value at the date of grant in excess of $100,000, then the most recently
granted of the ISOs, to the extent that they are exercisable for shares having
an aggregate Fair Market Value in excess of the limit, shall be deemed to be
NQOs.

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17.             
Ten Percent Shareholder Rule. With respect to ISOs, no Option may be granted to a Key
Employee who, at the time the Option is granted, owns stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or of any "parent corporation" or "subsidiary corporation" as those
terms are defined in Section 425 of the Code, unless at the time the Option is
granted the purchase price for the Option shares is at least 110 percent of the
Fair Market Value of the Option Shares at the time the ISO is granted and such
Option by its terms is not exercisable after the expiration of five years from
the Date of Grant. For purposes of the preceding sentence, stock ownership
shall be determined as provided in Section 425 of the Code.

18.             
Withholding Taxes. The Company, or any Related Company, may take such
steps as it may deem necessary or appropriate for the withholding of any taxes
which the Company, or any Related Company, is required by any law or regulation
or any governmental authority, whether federal, state or local, domestic or
foreign, to withhold in connection with any Option including, but riot limited
to, the withholding of all or any portion of any payment or the withholding of
issuance of Option Shares to be issued upon the exercise of any Option.

19.              
Change in Control, Stock
Dividends, Reorganization and Other Extraordinary Actions.

(a)               
If (i) the company shall at any
time be involved in a transaction described n Section 424(a) of the Code (or
any successor provision) or any "corporate transaction" described in the
regulations thereunder; (ii) the Company shall declare dividends payable in, or
shall subdivide or combine, its Common Stock or (iii) any other event with
substantially the same effect shall occur, the Option Committee shall, with
respect to each outstanding Option, proportionately adjust the number of Option
Shares and/or the exercise price per share so as to preserve the rights of the
Optionee substantially proportionate to the rights of the Optionee prior to
such event, and to the extent that such action shall include an increase or
decrease in the number of Option Shares subject to outstanding Options, the
number of shares available under this Plan shall automatically be increased or
decreased, as this case may be, proportionately, without further action on the
part of the Option Committee, the Company or the Company's shareholders.

(b)               
If the Company is liquidated or
dissolved, the Option Committee may allow the holders of any outstanding
Options to exercise all or any part of the unvested portion of the Options held
by them; provided, however, that such Options must be exercised prior to the
effective date of such liquidation or dissolution. If the Option Holders do not
exercise their Options prior to such effective date, each outstanding Option
shall terminate as of the effective date of the liquidation or dissolution.

(c)               
The grant of an Option shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge, consolidate or dissolve, to liquidate or to sell or
transfer all or part of its business or assets.

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(d)              
In the event of a Change in
Control (as defined below) of the Company, the Option Committee may, in its
discretion, accelerate all outstanding Options so that they immediately become
fully vested and immediately exercisable for the duration of the Option Term.
For purposes of this Subsection (d), "Change in Control" shall mean
either one of the following: (i) when any "person," as such term is used in
Sections 13(d) and 14(d) of the Exchange Act (other than a shareholder of the
Company on the date of this Plan), the Company, a subsidiary or a Company
Employee Benefit Plan, (including any trustee of such Plan acting as trustee)
becomes, after the date of this Plan, the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 35% or more of the combined voting power of the
Company's then outstanding securities; or (ii) the occurrence of a transaction
requiring shareholder approval, arid involving the sale of all or substantially
all of the assets of the Company or the merger of the Company with or into
another corporation.

(e)               
If at any time the Company
declares an Extraordinary Dividend, as defined below, all Options shall accelerate
and thereupon become fully vested and immediately exercisable for the duration
of the Option Term. For purposes of this Subsection (e), "Extraordinary
Dividend" shall mean a cash dividend payable to holders of record of the
Common Stock in an amount in excess of 10% of the then Fair Market Value of the
Company's Common Stock.

20.             
Other Provisions.

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

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

(c)               
This Plan shall be construed to be
in addition to any and all other compensation plans or programs. Neither the adoption
of the Plan by the Board nor the submission of the Plan to the shareholders of
the Company shall be construed as creating any limitations on the power of
authority of the Board to adopt such other additional incentive or other
compensation arrangements as the Board may deem necessary or desirable.

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

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

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

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

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

(iv)              
Except as permitted by rule 701 of
the Securities Act, Options granted under the Plan are nontransferable other
than by will, by the laws of descent and distribution, by instrument to an
inter vivos or testamentary trust in which the Options are to be passed to
beneficiaries upon the death of the trustor (settlor), or by gift to immediate
family. The term "immediate family" means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law, and also includes
adoptive relationships.
10PRO-DEX, INC

Exhibit 4.2

 

PRO-DEX, INC.

2004 DIRECTORS' STOCK OPTION PLAN

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

2.                 
Purpose and Scope.

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

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

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

3.                 
Operation of the Plan. 

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

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

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

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

2

 

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

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

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

        price of each Option;

(iii)              
increase the maximum term of
Options granted;

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

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

(vi)             
change the timing of Option
Grants; or

(vii)             
increase the term of the Plan.

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

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

6.                  
Exercise of Options. 

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

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

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

 

3

 

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

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

8.                 
Change in Stock, Adjustments,
Etc.

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

4

 

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

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

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

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

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

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

5

 

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

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

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

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

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

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

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

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

6

 

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

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

(iv)              
Except as permitted by rule 701 of
the Securities Act, Options granted under the Plan are nontransferable other
than by will, by the laws of descent and distribution, by instrument to an
inter vivos or testamentary trust in which the Options are to be passed to
beneficiaries upon the death of the trustor (settlor), or by gift to immediate
family. The term "immediate family" means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law, and also includes
adoptive relationships.
7

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