Document:

exv10w5

 

Exhibit 10.5

Photon Dynamics, Inc.

2005 Employee Stock Purchase Plan

Adopted By the Board of Directors: January 21, 2005

Approved By Shareholders: March 7, 2005

1. Purpose.

     (a) The purpose of the Plan is to provide a means by which Employees of the Company and
certain designated Related Corporations may be given an opportunity to purchase shares of the
Common Stock of the Company.

     (b) The Company, by means of the Plan, seeks to retain the services of such Employees, to
secure and retain the services of new Employees and to provide incentives for such persons to exert
maximum efforts for the success of the Company and its Related Corporations.

     (c) The Company intends that the Purchase Rights be considered options issued under an
Employee Stock Purchase Plan.

2. Definitions.

     (a) “Board” means the Board of Directors of the Company.

     (b) “Code” means the Internal Revenue Code of 1986, as amended.

     (c) “Committee” means a committee appointed by the Board in accordance with Section 3(c) of
the Plan.

     (d) “Common Stock” means the common stock of the Company.

     (e) “Company” means Photon Dynamics, Inc., a California corporation.

     (f) “Contributions” means the payroll deductions, and other additional payments specifically
provided for in the Offering, that a Participant contributes to fund the exercise of a Purchase
Right. A Participant may make additional payments into his or her account, if specifically provided
for in the Offering, and then only if the Participant has not already had the maximum permitted
amount through payroll deductions withheld during the Offering.

     (g) “Corporate Transaction” means the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events:

          (i) a sale or other disposition of all or substantially all, as determined by the Board in its
sole discretion, of the consolidated assets of the Company and its Subsidiaries;

          (ii) a sale or other disposition of at least ninety percent (90%) of the outstanding
securities of the Company;

          (iii) a merger, consolidation or similar transaction following which the Company is not the
surviving corporation; or

          (iv) a merger, consolidation or similar transaction following which the Company is the
surviving corporation but the shares of Common Stock outstanding immediately preceding the merger,
consolidation or similar transaction are converted or exchanged by virtue of the merger,
consolidation or similar transaction into other property, whether in the form of securities, cash
or otherwise.

     (h) “Director” means a member of the Board.

     (i) “Eligible Employee” means an Employee who meets the requirements set forth in the Offering
for eligibility to participate in the Offering, provided that such Employee also meets the
requirements for eligibility to participate set forth in the Plan.

 

 

     (j) “Employee” means any person, including Officers and Directors, who is employed for
purposes of Section 423(b)(4) of the Code by the Company or a Related Corporation. Neither service
as a Director nor payment of a director’s fee shall be sufficient to make an individual an Employee
of the Company or a Related Corporation.

     (k) “Employee Stock Purchase Plan” means a plan that grants Purchase Rights intended to be
options issued under an “employee stock purchase plan,” as that term is defined in Section 423(b)
of the Code.

     (l) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

     (m) “Fair Market Value” means, as of any date, the value of the Common Stock determined as
follows:

          (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq
National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest volume of trading in
the Common Stock) on the day of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable. If such date falls on a non-Trading Day, then the Fair Market
Value of a share of Common Stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market
with the greatest volume of trading in the Common Stock) on the next subsequent Trading Day, as
reported in The Wall Street Journal or such other source as the Board deems reliable.

          (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be
determined by the Board in good faith.

     (n) “Offering” means the grant of Purchase Rights to purchase shares of Common Stock under the
Plan to Eligible Employees.

     (o) “Offering Date” means a date selected by the Board for an Offering to commence.

     (p) “Officer” means a person who is an officer of the Company within the meaning of Section 16
of the Exchange Act and the rules and regulations promulgated thereunder.

     (q) “Own,” “Owned,” “Owner,” “Ownership.” A person or Entity shall be deemed to “Own,” to have
“Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or
Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power, which includes the power to vote or to direct the voting,
with respect to such securities.

     (r) “Participant” means an Eligible Employee who holds an outstanding Purchase Right granted
pursuant to the Plan.

     (s) “Plan” means this Photon Dynamics, Inc. 2005 Employee Stock Purchase Plan.

     (t) “Purchase Date” means one or more dates during an Offering established by the Board on
which Purchase Rights shall be exercised and as of which purchases of shares of Common Stock shall
be carried out in accordance with such Offering.

     (u) “Purchase Period” means a period of time specified within an Offering beginning on the
Offering Date or on the next day following a Purchase Date within an Offering and ending on a
Purchase Date. An Offering may consist of one or more Purchase Periods.

     (v) “Purchase Right” means an option to purchase shares of Common Stock granted pursuant to
the Plan.

     (w) “Related Corporation” means any parent corporation or subsidiary corporation, whether now
or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the
Code.

     (x) “Securities Act” means the Securities Act of 1933, as amended.

     (y) “Subsidiary” means, with respect to the Company, (i) any corporation of which more than
fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether, at the time, stock
of any other class or classes of such corporation shall have or might have voting power by reason
of the

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happening of any contingency) is at the time, directly or indirectly, Owned by the Company,
and (ii) any partnership in which the Company has a direct or indirect interest (whether in the
form of voting or participation in profits or capital contribution) of more than fifty percent
(50%).

     (z) “Trading Day” means any day the exchange(s) or market(s) on which shares of Common Stock
are listed, whether it be any established stock exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market or otherwise, is open for trading.

3. Administration.

     (a) The Board shall administer the Plan unless and until the Board delegates administration to
a Committee, as provided in Section 3(c). Whether or not the Board has delegated administration,
the Board shall have the final power to determine all questions of policy and expediency that may
arise in the administration of the Plan.

     (b) The Board (or the Committee) shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:

          (i) To determine when and how Purchase Rights to purchase shares of Common Stock shall be
granted and the provisions of each Offering of such Purchase Rights (which need not be identical).

          (ii) To designate from time to time which Related Corporations of the Company shall be
eligible to participate in the Plan.

          (iii) To construe and interpret the Plan and Purchase Rights, and to establish, amend and
revoke rules and regulations for the administration of the Plan. The Board, in the exercise of this
power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent
it shall deem necessary or expedient to make the Plan fully effective.

          (iv) To amend the Plan as provided in Section 15.

          (v) Generally, to exercise such powers and to perform such acts as it deems necessary or
expedient to promote the best interests of the Company and its Related Corporations and to carry
out the intent that the Plan be treated as an Employee Stock Purchase Plan.

     (c) The Board may delegate administration of the Plan to a Committee of the Board composed of
one (1) or more members of the Board. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers theretofore possessed by
the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan,
as may be adopted from time to time by the Board. The Board may abolish the Committee at any time
and revest in the Board the administration of the Plan. If administration is delegated to a
Committee, references to the Board in this Plan and in the Offering document shall thereafter be
deemed to be to the Board or the Committee, as the case may be.

4. Shares of Common Stock Subject to the Plan.

     (a) Subject to the provisions of Section 14 relating to adjustments upon changes in
securities, the shares of Common Stock that may be sold pursuant to Purchase Rights shall not
exceed in the aggregate one million (1,000,000) shares of Common Stock. If any Purchase Right
granted under the Plan shall for any reason terminate without having been exercised, the shares of
Common Stock not purchased under such Purchase Right shall again become available for issuance
under the Plan.

5. Grant of Purchase Rights; Offering.

     (a) The Board may from time to time grant or provide for the grant of Purchase Rights to
purchase shares of Common Stock under the Plan to Eligible Employees in an Offering (consisting of
one or more Purchase Periods) on an Offering Date or Offering Dates selected by the Board. Each
Offering shall be in such form and shall contain such terms and conditions as the Board shall deem
appropriate, which shall comply with the requirement of Section 423(b)(5) of the Code that all
Employees granted Purchase Rights shall have the same rights and privileges. The terms and
conditions of an Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each Offering shall
include (through incorporation of the provisions of this Plan by reference in the document
comprising the Offering or otherwise) the period during which the Offering shall be effective,
which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the
substance of the provisions contained in Sections 6 through 9, inclusive.

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     (b) If a Participant has more than one Purchase Right outstanding under the Plan, unless he or
she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice
delivered by that Participant shall be deemed to apply to all of his or her Purchase Rights under
the Plan, and (ii) a Purchase Right with a lower exercise price (or an earlier-granted Purchase
Right, if different Purchase Rights have identical exercise prices) shall be exercised to the
fullest possible extent before a Purchase Right with a higher exercise price (or a later-granted
Purchase Right if different Purchase Rights have identical exercise prices) shall be exercised.

6. Eligibility.

     (a) Purchase Rights may be granted only to Employees of the Company or, as the Board may
designate as provided in Section 3(b), to Employees of a Related Corporation. Except as provided in
Section 6(b), an Employee shall not be eligible to be granted Purchase Rights under the Plan
unless, on the Offering Date, such Employee has been in the employ of the Company or the Related
Corporation, as the case may be, for such continuous period preceding such Offering Date as the
Board may require, but in no event shall the required period of continuous employment be greater
than two (2) years. In addition, the Board may provide that no Employee shall be eligible to be
granted Purchase Rights under the Plan unless, on the Offering Date, such Employee’s customary
employment with the Company or the Related Corporation is more than twenty (20) hours per week and
more than five (5) months per calendar year.

     (b) The Board may provide that each person who, during the course of an Offering, first
becomes an Eligible Employee shall, on a date or dates specified in the Offering which coincides
with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive
a Purchase Right under that Offering, which Purchase Right shall thereafter be deemed to be a part
of that Offering. Such Purchase Right shall have the same characteristics as any Purchase Rights
originally granted under that Offering, as described herein, except that:

          (i) the date on which such Purchase Right is granted shall be the “Offering Date” of such
Purchase Right for all purposes, including determination of the exercise price of such Purchase
Right;

          (ii) the period of the Offering with respect to such Purchase Right shall begin on its
Offering Date and end coincident with the end of such Offering; and

          (iii) the Board may provide that if such person first becomes an Eligible Employee within a
specified period of time before the end of the Offering, he or she shall not receive any Purchase
Right under that Offering.

     (c) No Employee shall be eligible for the grant of any Purchase Rights under the Plan if,
immediately after any such Purchase Rights are granted, such Employee owns stock possessing five
percent (5%) or more of the total combined voting power or value of all classes of stock of the
Company or of any Related Corporation. For purposes of this Section 6(c), the rules of Section
424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which
such Employee may purchase under all outstanding Purchase Rights and options shall be treated as
stock owned by such Employee.

     (d) As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted
Purchase Rights under the Plan only if such Purchase Rights, together with any other rights granted
under all Employee Stock Purchase Plans of the Company and any Related Corporations, do not permit
such Eligible Employee’s rights to purchase stock of the Company or any Related Corporation to
accrue at a rate which exceeds twenty five thousand dollars ($25,000) of Fair Market Value of such
stock (determined at the time such rights are granted, and which, with respect to the Plan, shall
be determined as of their respective Offering Dates) for each calendar year in which such rights
are outstanding at any time.

     (e) Officers of the Company and any designated Related Corporation, if they are otherwise
Eligible Employees, shall be eligible to participate in Offerings under the Plan. Notwithstanding
the foregoing, the Board may provide in an Offering that Employees who are highly compensated
Employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to
participate.

7. Purchase Rights; Purchase Price.

     (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the
Plan, shall be granted a Purchase Right to purchase up to that number of shares of Common Stock
purchasable either with a percentage or with a maximum dollar amount, as designated by the Board,
but in either case not exceeding twenty percent (20%), of such Employee’s Earnings (as defined

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by the Board in each Offering) during the period that begins on the Offering Date (or such
later date as the Board determines for a particular Offering) and ends on the date stated in the
Offering, which date shall be no later than the end of the Offering.

     (b) The Board shall establish one (1) or more Purchase Dates during an Offering as of which
Purchase Rights granted pursuant to that Offering shall be exercised and purchases of shares of
Common Stock shall be carried out in accordance with such Offering.

     (c) In connection with each Offering made under the Plan, the Board may specify a maximum
number of shares of Common Stock that may be purchased by any Participant on any Purchase Date
during such Offering. In connection with each Offering made under the Plan, the Board may specify a
maximum aggregate number of shares of Common Stock that may be purchased by all Participants
pursuant to such Offering. In addition, in connection with each Offering that contains more than
one Purchase Date, the Board may specify a maximum aggregate number of shares of Common Stock that
may be purchased by all Participants on any given Purchase Date under the Offering. If the
aggregate purchase of shares of Common Stock issuable upon exercise of Purchase Rights granted
under the Offering would exceed any such maximum aggregate number, then, in the absence of any
Board action otherwise, a pro rata allocation of the shares of Common Stock available shall be made
in as nearly a uniform manner as shall be practicable and equitable.

     (d) The purchase price of shares of Common Stock acquired pursuant to Purchase Rights shall be
not less than the lesser of:

          (i) an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of
Common Stock on the Offering Date; or

          (ii) an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of
Common Stock on the applicable Purchase Date.

8. Participation; Withdrawal; Termination.

     (a) A Participant may elect to authorize payroll deductions pursuant to an Offering under the
Plan by completing and delivering to the Company, within the time specified in the Offering, an
enrollment form (in such form as the Company may provide). Each such enrollment form shall
authorize an amount of Contributions expressed as a percentage of the submitting Participant’s
Earnings (as defined in each Offering) during the Offering (not to exceed the maximum percentage
specified by the Board). Each Participant’s Contributions shall be credited to a bookkeeping
account for such Participant under the Plan and shall be deposited with the general funds of the
Company except where applicable law requires that Contributions be deposited with a third party. To
the extent provided in the Offering, a Participant may begin such Contributions after the beginning
of the Offering. To the extent provided in the Offering, a Participant may thereafter reduce
(including to zero) or increase his or her Contributions.

     (b) During an Offering, a Participant may cease making Contributions and withdraw from the
Offering by delivering to the Company a notice of withdrawal in such form as the Company may
provide. Such withdrawal may be elected at any time prior to the end of the Offering, except as
provided otherwise in the Offering. Upon such withdrawal from the Offering by a Participant, the
Company shall distribute to such Participant all of his or her accumulated Contributions (reduced
to the extent, if any, such deductions have been used to acquire shares of Common Stock for the
Participant) under the Offering, and such Participant’s Purchase Right in that Offering shall
thereupon terminate. A Participant’s withdrawal from an Offering shall have no effect upon such
Participant’s eligibility to participate in any other Offerings under the Plan, but such
Participant shall be required to deliver a new enrollment form in order to participate in
subsequent Offerings.

     (c) Purchase Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon a Participant ceasing to be an Employee for any reason or for no reason (subject
to any post-employment participation period required by law) or other lack of eligibility. The
Company shall distribute to such terminated or otherwise ineligible Employee all of his or her
accumulated Contributions (reduced to the extent, if any, such deductions have been used to acquire
shares of Common Stock for the terminated or otherwise ineligible Employee) under the Offering.

     (d) Purchase Rights shall not be transferable by a Participant otherwise than by will or the
laws of descent and distribution, or by a beneficiary designation as provided in Section 13 and,
during a Participant’s lifetime, shall be exercisable only by such Participant.

     (e) Unless otherwise specified in an Offering, the Company shall have no obligation to pay
interest on Contributions.

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9. Exercise.

     (a) On each Purchase Date during an Offering, each Participant’s accumulated Contributions
shall be applied to the purchase of shares of Common Stock up to the maximum number of shares of
Common Stock permitted pursuant to the terms of the Plan and the applicable Offering, at the
purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of
Purchase Rights unless specifically provided for in the Offering.

     (b) If any amount of accumulated Contributions remains in a Participant’s account after the
purchase of shares of Common Stock and such remaining amount is less than the amount required to
purchase one share of Common Stock on the final Purchase Date of an Offering, then such remaining
amount shall be held in such Participant’s account for the purchase of shares of Common Stock under
the next Offering under the Plan, unless such Participant withdraws from such next Offering, as
provided in Section 8(b), or is not eligible to participate in such Offering, as provided in
Section 6, in which case such amount shall be distributed to such Participant after the final
Purchase Date, without interest. If the amount of Contributions remaining in a Participant’s
account after the purchase of shares of Common Stock is at least equal to the amount required to
purchase one (1) whole share of Common Stock on the final Purchase Date of the Offering, then such
remaining amount shall be distributed in full to such Participant at the end of the Offering.

     (c) No Purchase Rights may be exercised to any extent unless the shares of Common Stock to be
issued upon such exercise under the Plan are covered by an effective registration statement
pursuant to the Securities Act and the Plan is in material compliance with all applicable federal,
state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date
during any Offering hereunder the shares of Common Stock are not so registered or the Plan is not
in such compliance, no Purchase Rights or any Offering shall be exercised on such Purchase Date,
and the Purchase Date shall be delayed until the shares of Common Stock are subject to such an
effective registration statement and the Plan is in such compliance, except that the Purchase Date
shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more
than twenty-seven (27) months from the Offering Date. If, on the Purchase Date under any Offering
hereunder, as delayed to the maximum extent permissible, the shares of Common Stock are not
registered and the Plan is not in such compliance, no Purchase Rights or any Offering shall be
exercised and all Contributions accumulated during the Offering (reduced to the extent, if any,
such deductions have been used to acquire shares of Common Stock) shall be distributed to the
Participants.

10. Covenants of the Company.

     The Company shall seek to obtain from each federal, state, foreign or other regulatory
commission or agency having jurisdiction over the Plan such authority as may be required to issue
and sell shares of Common Stock upon exercise of the Purchase Rights. If, after commercially
reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency
the authority that counsel for the Company deems necessary for the lawful issuance and sale of
shares of Common Stock under the Plan, the Company shall be relieved from any liability for failure
to issue and sell shares of Common Stock upon exercise of such Purchase Rights unless and until
such authority is obtained.

11. Use of Proceeds from Shares of Common Stock.

     Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights shall constitute
general funds of the Company.

12. Rights as a stockholder.

     A Participant shall not be deemed to be the holder of, or to have any of the rights of a
holder with respect to, shares of Common Stock subject to Purchase Rights unless and until the
Participant’s shares of Common Stock acquired upon exercise of Purchase Rights are recorded in the
books of the Company (or its transfer agent).

     13. Designation of Beneficiary.

     (a) A Participant may file a written designation of a beneficiary who is to receive any shares
of Common Stock and/or cash, if any, from the Participant’s account under the Plan in the event of
such Participant’s death subsequent to the end of an Offering but prior to delivery to the
Participant of such shares of Common Stock or cash. In addition, a Participant may file a written
designation of a beneficiary who is to receive any cash from the Participant’s account under the
Plan in the event of such Participant’s death during an Offering.

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     (b) The Participant may change such designation of beneficiary at any time by written notice
to the Company. In the event of the death of a Participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such Participant’s death, the
Company shall deliver such shares of Common Stock and/or cash to the executor or administrator of
the estate of the Participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its sole discretion, may deliver such shares of Common
Stock and/or cash to the spouse or to any one or more dependents or relatives of the Participant,
or if no spouse, dependent or relative is known to the Company, then to such other person as the
Company may designate.

14. Adjustments upon Changes in Securities; Corporate Transactions.

     (a) If any change is made in the shares of Common Stock, subject to the Plan, or subject to
any Purchase Right, without the receipt of consideration by the Company (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan shall be appropriately adjusted in the type(s), class(es)
and maximum number of shares of Common Stock subject to the Plan pursuant to Section 4(a), and the
outstanding Purchase Rights shall be appropriately adjusted in the type(s), class(es), number of
shares and purchase limits of such outstanding Purchase Rights. The Board shall make such
adjustments, and its determination shall be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a “transaction not involving the
receipt of consideration by the Company.”)

     (b) In the event of a Corporate Transaction, then: (i) any surviving or acquiring corporation
may continue or assume Purchase Rights outstanding under the Plan or may substitute similar rights
(including a right to acquire the same consideration paid to stockholders in the Corporate
Transaction) for those outstanding under the Plan, or (ii) if any surviving or acquiring
corporation does not continue or assume such Purchase Rights or does not substitute similar rights
for Purchase Rights outstanding under the Plan, then, the Participants’ accumulated Contributions
shall be used to purchase shares of Common Stock within five (5) business days prior to the
Corporate

Transaction under the ongoing Offering, and the Participants’ Purchase Rights under the ongoing
Offering shall terminate immediately after such purchase.

15. Amendment of the Plan.

     (a) The Board at any time, and from time to time, may amend the Plan. However, except as
provided in Section 14 relating to adjustments upon changes in securities and except as to
amendments solely to benefit the administration of the Plan, to take account of a change in
legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for
Participants or the Company or any Related Corporation, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval is necessary for the
Plan to satisfy the requirements of Section 423 of the Code or other applicable laws or
regulations.

     (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board
deems necessary or advisable to provide Employees with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated thereunder relating to
Employee Stock Purchase Plans and/or to bring the Plan and/or Purchase Rights into compliance
therewith.

     (c) The rights and obligations under any Purchase Rights granted before amendment of the Plan
shall not be adversely affected by any amendment of the Plan except: (i) with the consent of the
person to whom such Purchase Rights were granted, or (ii) as necessary to comply with any laws or
governmental regulations (including, without limitation, the provisions of the Code and the
regulations promulgated thereunder relating to Employee Stock Purchase Plans); provided, however,
that regardless of whether any Participant’s Purchase Rights may be considered to have been
“adversely affected,” the Board (or the Committee) shall be entitled to change the Offering
Periods, limit the frequency and/or number of changes in the amount withheld during Offering
Periods, establish the exchange ratio applicable to amounts withheld in a currency other than U.S.
dollars, permit payroll withholding in excess of the amount designated by a Participant in order to
adjust for delays or mistakes in the Company’s processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant
properly correspond with amounts withheld from the Participant’s Earnings, and establish such other
limitations or procedures as the Board (or the Committee) determines in its sole discretion
advisable which are consistent with the Plan.

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16. Termination or Suspension of the Plan.

     (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate at the time that all of the shares of Common Stock reserved
for issuance under the Plan, as increased and/or adjusted from time to time, have been issued under
the terms of the Plan. No Purchase Rights may be granted under the Plan while the Plan is suspended
or after it is terminated.

     (b) Any benefits, privileges, entitlements and obligations under any Purchase Rights while the
Plan is in effect shall not be impaired by suspension or termination of the Plan except (i) as
expressly provided in the Plan or with the consent of the person to whom such Purchase Rights were
granted, (ii) as necessary to comply with any laws, regulations, or listing requirements, or (iii)
as necessary to ensure that the Plan and/or Purchase Rights comply with the requirements of Section
423 of the Code. Notwithstanding the foregoing, if the Company’s accountants advise the Company
that the accounting treatment of purchases under the Plan will change or has changed in a manner
that the Company determines is detrimental to its best interests, then the Company may, in its
discretion, take any or all of the following actions: (i) terminate each Offering hereunder that is
then ongoing as of the next Purchase Date (after the purchase of stock on such Purchase Date) under
such Offering; (ii) set a new Purchase Date for each ongoing Offering and terminate such Offerings
after the purchase of stock on such Purchase Date; (iii) amend the Plan and the ongoing Offering so
that such Offering will no longer have an accounting treatment that is detrimental to the Company’s
best interests and (iv) terminate each ongoing Offering and refund any Contributions (reduced to
the extent, if any, such Contributions have been used to acquire shares of Common Stock) without
interest to the participants.

17. Effective Date of Plan.

     The Plan shall become effective as determined by the Board, but no Purchase Rights shall be
exercised unless and until the Plan has been approved by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted by the Board.

18. Miscellaneous Provisions.

     (a) The Plan and Offering do not constitute an employment contract. Nothing in the Plan or in
the Offering shall in any way alter the at will nature of a Participant’s employment or be deemed
to create in any way whatsoever any obligation on the part of any Participant to continue in the
employ of the Company or a Related Corporation, or on the part of the Company or a Related
Corporation to continue the employment of a Participant.

     (b) The provisions of the Plan shall be governed by the laws of the State of California
without resort to that state’s conflicts of laws rules.

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Exhibit 10.6

Photon Dynamics, Inc.

2005 Non-Employee Directors’ Stock Option Plan

Adopted: January 21, 2005

Approved By Shareholders: March 7, 2005

1. Purposes.

     (a) Eligible Option Recipients. The persons eligible to receive Options are the Non-Employee
Directors of the Company.

     (b) Available Options. The purpose of the Plan is to provide a means by which Non-Employee
Directors may be given an opportunity to benefit from increases in value of the Common Stock
through the granting of Nonstatutory Stock Options.

     (c) General Purpose. The Company, by means of the Plan, seeks to retain the services of its
Non-Employee Directors, to secure and retain the services of new Non-Employee Directors and to
provide incentives for such persons to exert maximum efforts for the success of the Company and its
Affiliates.

2. Definitions.

     As used in the Plan, the following definitions shall apply to the capitalized terms indicated
below:

     (a) “Affiliate” means any parent corporation or subsidiary corporation of the Company, whether
now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of
the Code.

     (b) “Annual Grant” means an Option granted annually to all Non-Employee Directors who meet the
specified criteria pursuant to Section 6(b).

     (c) “Annual Meeting” means the annual meeting of the shareholders of the Company.

     (d) “Board” means the Board of Directors of the Company.

     (e) “Capitalization Adjustment” has the meaning ascribed to that term in Section 11(a).

     (f) “Cause” means, with respect to an Optionholder, the occurrence of any of the following:
(i) such Optionholder’s commission of any felony or any crime involving fraud, dishonesty or moral
turpitude under the laws of the United States or any state thereof; (ii) such Optionholder’s
attempted commission of, or participation in, a fraud or act of dishonesty against the Company;
(iii) such Optionholder’s intentional, material violation of any material contract or agreement
between the Optionholder and the Company or any statutory duty owed to the Company; (iv) such
Optionholder’s unauthorized use or disclosure of the Company’s confidential information or trade
secrets; or (v) such Optionholder’s gross misconduct. The determination that a termination is for
Cause shall be made by the Company in its sole discretion. Any determination by the Company that
the Continuous Service of an Optionholder was terminated by reason of dismissal without Cause for
the purposes of outstanding Options held by such Optionholder shall have no effect upon any
determination of the rights or obligations of the Company or such Optionholder for any other
purpose.

     (g) “Change in Control” means the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events:

          (i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the
Company representing more than fifty percent (50%) of the combined voting power of the Company’s
then outstanding securities other than by virtue of a merger, consolidation or similar transaction.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of
the acquisition of securities of the Company by an investor, any affiliate thereof or any other
Exchange Act Person from the Company in a transaction or series of related transactions the primary
purpose of which is to obtain financing for the Company through the issuance of equity securities
or (B) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”)
exceeds the designated percentage threshold of the outstanding voting securities as a result of a
repurchase or other

 

 

acquisition of voting securities by the Company reducing the number of shares outstanding,
provided that if a Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of voting securities by the Company, and after such share acquisition,
the Subject Person becomes the Owner of any additional voting securities that, assuming the
repurchase or other acquisition had not occurred, increases the percentage of the then outstanding
voting securities Owned by the Subject Person over the designated percentage threshold, then a
Change in Control shall be deemed to occur;

          (ii) there is consummated a merger, consolidation or similar transaction involving (directly
or indirectly) the Company and, immediately after the consummation of such merger, consolidation or
similar transaction, the shareholders of the Company immediately prior thereto do not Own, directly
or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%)
of the combined outstanding voting power of the surviving Entity in such merger, consolidation or
similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power
of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each
case in substantially the same proportions as their Ownership of the outstanding voting securities
of the Company immediately prior to such transaction;

          (iii) there is consummated a sale, lease, license or other disposition of all or substantially
all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease,
license or other disposition of all or substantially all of the consolidated assets of the Company
and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of
the voting securities of which are Owned by shareholders of the Company in substantially the same
proportions as their Ownership of the outstanding voting securities of the Company immediately
prior to such sale, lease, license or other disposition; or

          (iv) individuals who, on the date this Plan is adopted by the Board, are members of the Board
(the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of
the Board; provided, however, that if the appointment or election (or nomination for election) of
any new Board member was approved or recommended by a majority vote of the members of the Incumbent
Board then still in office, such new member shall, for purposes of this Plan, be considered as a
member of the Incumbent Board.

     The term Change in Control shall not include a sale of assets, merger or other transaction
effected exclusively for the purpose of changing the domicile of the Company.

     Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in
Control (or any analogous term) in an individual written agreement between the Company or any
Affiliate and the Optionholder shall supersede the foregoing definition with respect to Options
subject to such agreement (it being understood, however, that if no definition of Change in Control
or any analogous term is set forth in such an individual written agreement, the foregoing
definition shall apply).

     (h) “Code” means the Internal Revenue Code of 1986, as amended.

     (i) “Common Stock” means the common stock of the Company.

     (j) “Company” means Photon Dynamics, Inc., a California corporation.

     (k) “Consultant” means any person, including an advisor, who (i) is engaged by the Company or
an Affiliate to render consulting or advisory services and is compensated for such services or (ii)
is serving as a member of the Board of Directors of an Affiliate and is compensated for such
services. However, service solely as a Director, or payment of a fee for such services, shall not
cause a Director to be considered a “Consultant” for purposes of the Plan.

     (l) “Continuous Service” means that the Optionholder’s service with the Company or an
Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A
change in the capacity in which the Optionholder renders service to the Company or an Affiliate as
an Employee, Consultant or Director or a change in the entity for which the Optionholder renders
such service, provided that there is no interruption or termination of the Optionholder’s service
with the Company or an Affiliate, shall not terminate an Optionholder’s Continuous Service. For
example, a change in status from a Non-Employee Director of the Company to a Consultant of an
Affiliate or an Employee of the Company will not constitute an interruption of Continuous Service.
The Board or the chief executive officer of the Company, in that party’s sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case of any leave of
absence approved by that party, including sick leave, military leave or any other personal leave.
Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for
purposes of vesting in an Option only to such extent as may be provided in the Company’s leave of
absence policy or in the written terms of the Optionholder’s leave of absence.

2

 

     (m) “Corporate Transaction” means the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events:

          (i) a sale or other disposition of all or substantially all, as determined by the Board in its
sole discretion, of the consolidated assets of the Company and its Subsidiaries;

          (ii) a sale or other disposition of at least ninety percent (90%) of the outstanding
securities of the Company;

          (iii) a merger, consolidation or similar transaction following which the Company is not the
surviving corporation; or

          (iv) a merger, consolidation or similar transaction following which the Company is the
surviving corporation but the shares of Common Stock outstanding immediately preceding the merger,
consolidation or similar transaction are converted or exchanged by virtue of the merger,
consolidation or similar transaction into other property, whether in the form of securities, cash
or otherwise.

     (n) “Director” means a member of the Board of Directors of the Company.

     (o) “Disability” means the permanent and total disability of a person within the meaning of
Section 22(e)(3) of the Code.

     (p) “Employee” means any person employed by the Company or an Affiliate. However, service
solely as a Director or Consultant, or payment of a fee for such services, shall not cause a
Director to be considered an “Employee” for purposes of the Plan.

     (q) “Entity” means a corporation, partnership or other entity.

     (r) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

     (s) “Exchange Act Person” means any natural person, Entity or “group” (within the meaning of
Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include
(i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or
any Subsidiary of the Company or any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter
temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned,
directly or indirectly, by the shareholders of the Company in substantially the same proportions as
their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the
meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the effective date of the Plan
as set forth in Section 14, is the Owner, directly or indirectly, of securities of the Company
representing more than fifty percent (50%) of the combined voting power of the Company’s then
outstanding securities.

     (t) “Fair Market Value” means, as of any date, the value of the Common Stock determined as
follows:

          (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq
National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest volume of trading in
the Common Stock) on the day of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable. If such date falls on a non-Trading Day, then the Fair Market
Value of a share of Common Stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market
with the greatest volume of trading in the Common Stock) on the next subsequent Trading Day, as
reported in The Wall Street Journal or such other source as the Board deems reliable.

          (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be
determined by the Board in good faith.

     (u) “Initial Grant” means an Option granted to a Non-Employee Director who meets the specified
criteria pursuant to Section 6(a).

     (v) “Non-Employee Director” means a Director who is not an Employee.

3

 

     (w) “Nonstatutory Stock Option” means an Option not intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

     (x) “Officer” means a person who is an officer of the Company within the meaning of Section 16
of the Exchange Act and the rules and regulations promulgated thereunder.

     (y) “Option” means a Nonstatutory Stock Option granted pursuant to the Plan.

     (z) “Option Agreement” means a written agreement between the Company and an Optionholder
evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be
subject to the terms and conditions of the Plan.

     (aa) “Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if
applicable, such other person who holds an outstanding Option.

     (bb) “Own,” “Owned,” “Owner,” “Ownership” A person or Entity shall be deemed to “Own,” to have
“Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or
Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power, which includes the power to vote or to direct the voting,
with respect to such securities.

     (cc) “Plan” means this Photon Dynamics, Inc. 2005 Non-Employee Directors’ Stock Option Plan.

     (dd) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule
16b-3, as in effect from time to time.

     (ee) “Securities Act” means the Securities Act of 1933, as amended.

     (ff) “Subsidiary” means, with respect to the Company, (i) any corporation of which more than
fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether, at the time, stock
of any other class or classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company,
and (ii) any partnership in which the Company has a direct or indirect interest (whether in the
form of voting or participation in profits or capital contribution) of more than fifty percent
(50%).

     (gg) “Trading Day” means any day the exchange(s) or market(s) on which shares of Common Stock
are listed, whether it be any established stock exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market or otherwise, is open for trading.

3. Administration.

     (a) Administration by Board. The Board shall administer the Plan. The Board may not delegate
administration of the Plan to a committee.

     (b) Powers of Board. The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:

          (i) To determine the provisions of each Option to the extent not specified in the Plan.

          (ii) To construe and interpret the Plan and Options granted under it, and to establish, amend
and revoke rules and regulations for its administration. The Board, in the exercise of this power,
may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

          (iii) To amend the Plan or an Option as provided in Section 12.

          (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary
or expedient to promote the best interests of the Company and that are not in conflict with the
provisions of the Plan.

     (c) Effect of Board’s Decision. All determinations, interpretations and constructions made by
the Board in good faith shall not be subject to review by any person and shall be final, binding
and conclusive on all persons.

4

 

4. Shares Subject to the Plan.

     (a) Share Reserve. Subject to the provisions of Section 11 relating to adjustments upon
changes in the Common Stock, the Common Stock that may be issued pursuant to Options shall not
exceed in the aggregate four hundred thousand (400,000) shares of Common Stock.

     (b) Reversion of Shares to the Share Reserve. If any Option shall for any reason expire or
otherwise terminate, in whole or in part, without having been exercised in full, or if any shares
of Common Stock issued to an Optionholder pursuant to an Option are forfeited to or repurchased by
the Company, including, but not limited to, any repurchase or forfeiture caused by the failure to
meet a contingency or condition required for the vesting of such shares, then the shares of Common
Stock not issued under such Option, or forfeited to or repurchased by the Company, shall revert to
and again become available for issuance under the Plan. If any shares subject to an Option are not
delivered to an Optionholder because such shares are withheld for the payment of taxes or the
Option is exercised through a reduction of shares subject to the Option (i.e., “net exercised”),
the number of shares that are not delivered to the Optionholder shall remain available for issuance
under the Plan. If the exercise price of any Option is satisfied by tendering shares of Common
Stock held by the Optionholder (either by actual delivery or attestation), then the number of
shares so tendered shall remain available for issuance under the Plan.

     (c) Source of Shares. The shares of Common Stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.

5. Eligibility.

     The Options, as set forth in Section 6, automatically shall be granted under the Plan to all
Non-Employee Directors who meet the criteria specified in Section 6.

6. Non-Discretionary Grants.

     (a) Initial Grants. Without any further action of the Board, each person who, after the Plan
is approved by the Company’s shareholders and thereafter the Company’s Amended and Restated 1995
Stock Option Plan (the “1995 Plan”) terminates, is elected or appointed for the first time to be a
Non-Employee Director automatically shall, upon the date of his or her initial election or
appointment to be a Non-Employee Director, be granted an Initial Grant to purchase twenty thousand
(20,000) shares of Common Stock on the terms and conditions set forth herein.

     (b) Annual Grants. Without any further action of the Board, on the date of each Annual
Meeting, commencing with the Annual Meeting in 2006, each person who is then a Non-Employee
Director automatically shall be granted an Annual Grant to purchase fifteen thousand five hundred
(15,000) shares of Common Stock on the terms and conditions set forth herein; provided, however,
that if the person has not been serving as a Non-Employee Director for the entire period since the
preceding Annual Meeting, then the number of shares subject to such Annual Grant shall be reduced
pro rata for each full quarter prior to the date of grant during which such person did not serve as
a Non-Employee Director.

7. Option Provisions.

     Each Option shall be in such form and shall contain such terms and conditions as required by
the Plan. Each Option shall contain such additional terms and conditions, not inconsistent with the
Plan, as the Board shall deem appropriate. Each Option shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of each of the following
provisions:

     (a) Term. No Option shall be exercisable after the expiration of ten (10) years from the date
it was granted.

     (b) Exercise Price. The exercise price of each Option shall be one hundred percent (100%) of
the Fair Market Value of the stock subject to the Option on the date the Option is granted.

     (c) Consideration. The purchase price of stock acquired pursuant to an Option may be paid, to
the extent permitted by applicable law, in any combination of (i) cash or check, (ii) delivery to
the Company of other Common Stock or (iii) pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in
either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to
pay the aggregate exercise price to the

5

 

Company from the sales proceeds. The purchase price of Common Stock acquired pursuant to an
Option that is paid by delivery to the Company of other Common Stock acquired, directly or
indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that
have been held for more than six (6) months (or such longer or shorter period of time required to
avoid a charge to earnings for financial accounting purposes).

     (d) Transferability. An Option shall be transferable pursuant to a domestic relations order
and to such further extent provided in the Option Agreement. If the Option does not provide for
transferability, then the Option shall not be transferable except by will or by the laws of descent
and distribution and shall be exercisable during the lifetime of the Optionholder only by the
Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to
the Company, in a form provided by or otherwise satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise
the Option.

     (e) Vesting. Options shall vest as follows:

          (i) Initial Grants: 1/4th of the shares shall vest on each anniversary of the date of grant,
so that each Initial Grant shall be fully vested four (4) years after its grant date.

          (ii) Annual Grants: 1/12th of the shares shall vest one month after the date of grant and
1/12th of the shares shall vest monthly thereafter, so that each Annual Grant shall be fully vested
one (1) years after its grant date.

     (f) Early Exercise. The Option may, but need not, include a provision whereby the Optionholder
may elect at any time before the Optionholder’s Continuous Service terminates to exercise the
Option as to any part or all of the shares of Common Stock subject to the Option prior to the full
vesting of the Option. Any unvested shared of Common Stock so purchased may be subject to a
repurchase option in favor of the Company or to any other restriction the Board determines to be
appropriate. The Company will not exercise its repurchase option until at least six (6) months (or
such longer or shorter period of time required to avoid a charge to earnings for financial
accounting purposes) have elapsed following exercise of the Option unless the Board otherwise
specifically provides in the Option.

     (g) Termination of Continuous Service. In the event that an Optionholder’s Continuous Service
terminates (other than for Cause or upon the Optionholder’s death or Disability or upon a Change in
Control), the Optionholder may exercise his or her Option (to the extent that the Optionholder was
entitled to exercise such Option as of the date of termination of Continuous Service) but only
within such period of time ending on the earlier of (i) the expiration of the term of the Option as
set forth in the Option Agreement or (ii) the date three (3) months following the termination of
the Optionholder’s Continuous Service. If, after termination of Continuous Service, the
Optionholder does not exercise his or her Option within the time specified herein or in the Option
Agreement (as applicable), the Option shall terminate.

     (h) Extension of Termination Date. If the exercise of the Option following the termination of
the Optionholder’s Continuous Service (other than for Cause or upon the Optionholder’s death or
Disability) would be prohibited at any time solely because the issuance of shares would violate the
registration requirements under the Securities Act, then the Option shall terminate on the earlier
of (i) the expiration of the term of the Option as set forth in the Option Agreement or (ii) the
expiration of a period of three (3) months after the termination of the Optionholder’s Continuous
Service during which the exercise of the Option would not be in violation of such registration
requirements.

     (i) Disability of Optionholder. In the event an Optionholder’s Continuous Service terminates
as a result of the Optionholder’s Disability, the Optionholder may exercise his or her Option (to
the extent that the Optionholder was entitled to exercise it as of the date of termination), but
only within such period of time ending on the earlier of (i) the expiration of the term of the
Option as set forth in the Option Agreement or (ii) the date twelve (12) months following such
termination of Continuous Service. If, after termination of Continuous Service, the Optionholder
does not exercise his or her Option within the time specified herein, the Option shall terminate.

     (j) Death of Optionholder. In the event (i) an Optionholder’s Continuous Service terminates as
a result of the Optionholder’s death or (ii) the Optionholder dies within the three-month period
after the termination of the Optionholder’s Continuous Service for a reason other than death, then
the Option may be exercised (to the extent the Optionholder was entitled to exercise the Option as
of the date of death) by the Optionholder’s estate, by a person who acquired the right to exercise
the Option by bequest or inheritance or by a person designated to exercise the Option upon the
Optionholder’s death, but only within the period ending on the earlier of (i) the expiration of the
term of such Option as set forth in the Option Agreement or (ii) the date eighteen (18) months
following the date of death. If, after death, the Option is not exercised within the time specified
herein, the Option shall terminate.

6

 

     (k) Termination for Cause. In the event that an Optionholder’s Continuous Service is
terminated for Cause, the Option shall terminate upon the termination date of such Optionholder’s
Continuous Service, and the Optionholder shall be prohibited from exercising his or her Option from
and after the time of such termination of Continuous Service.

     (l) Termination Upon Change in Control. In the event that an Optionholder’s Continuous Service
terminates as of, or within twelve (12) months following a Change in Control, the Optionholder may
exercise his or her Option (to the extent that the Optionholder was entitled to exercise such
Option as of the date of termination of Continuous Service) within such period of time ending on
the earlier of (i) the expiration of the term of the Option as set forth in the Option Agreement or
(ii) the date twelve (12) months following the termination of the Optionholder’s Continuous
Service. If, after termination of Continuous Service, the Optionholder does not exercise his or her
Option within the time specified herein or in the Option Agreement (as applicable), the Option
shall terminate.

8. Securities Law Compliance.

     The Company shall seek to obtain from each regulatory commission or agency having jurisdiction
over the Plan such authority as may be required to grant Options and to issue and sell shares of
Common Stock upon exercise of the Options; provided, however, that this undertaking shall not
require the Company to register under the Securities Act the Plan, any Option or any stock issued
or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to
obtain from any such regulatory commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of such Options
unless and until such authority is obtained.

9. Use of Proceeds from Stock.

     Proceeds from the sale of stock pursuant to Options shall constitute general funds of the
Company.

10. Miscellaneous.

     (a) Shareholder Rights. No Optionholder shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such Option unless and until such
Optionholder has satisfied all requirements for exercise of the Option pursuant to its terms.

     (b) No Service Rights. Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Optionholder any right to continue to serve the Company as a
Non-Employee Director or shall affect the right of the Company or an Affiliate to terminate (i) the
employment of an Employee with or without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate or
(iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or the Affiliate is
incorporated, as the case may be.

     (c) Investment Assurances. The Company may require an Optionholder, as a condition of
exercising or acquiring stock under any Option, (i) to give written assurances satisfactory to the
Company as to the Optionholder’s knowledge and experience in financial and business matters and/or
to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable
and experienced in financial and business matters and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of exercising the Option;
and (ii) to give written assurances satisfactory to the Company stating that the Optionholder is
acquiring the stock subject to the Option for the Optionholder’s own account and not with any
present intention of selling or otherwise distributing the stock. The foregoing requirements, and
any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the
shares upon the exercise or acquisition of stock under the Option has been registered under a then
currently effective registration statement under the Securities Act or (2) as to any particular
requirement, a determination is made by counsel for the Company that such requirement need not be
met in the circumstances under the then applicable securities laws. The Company may, upon advice of
counsel to the Company, place legends on stock certificates issued under the Plan as such counsel
deems necessary or appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the stock.

     (d) Withholding Obligations. The Optionholder may satisfy any federal, state or local tax
withholding obligation relating to the exercise or acquisition of stock under an Option by any of
the following means (in addition to the Company’s right to withhold from

7

 

any compensation paid to the Optionholder by the Company) or by a combination of such means:
(i) tendering a cash payment; (ii) authorizing the Company to withhold shares from the shares of
the Common Stock otherwise issuable to the Optionholder as a result of the exercise or acquisition
of stock under the Option; provided, however, that no shares of Common Stock are withheld with a
value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to
the Company owned and unencumbered shares of the Common Stock.

     (e) Electronic Delivery. Any reference herein to a “written” agreement or document shall
include any agreement or document delivered electronically or posted on the Company’s intranet.

11. Adjustments upon Changes in Common Stock.

     (a) Capitalization Adjustments. If any change is made in, or other events occur with respect
to, the stock subject to the Plan, or subject to any Option, without the receipt of consideration
by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation,
stock dividend, dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or other transaction not
involving the receipt of consideration by the Company (each a “Capitalization Adjustment”)), the
Plan will be appropriately adjusted in the class(es) and maximum number of securities subject both
to the Plan pursuant to Section 4 and to the nondiscretionary Options specified in Section 6, and
the outstanding Options will be appropriately adjusted in the class(es) and number of securities
and price per share of stock subject to such outstanding Options. The Board shall make such
adjustments, and its determination shall be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a transaction “without receipt of
consideration” by the Company.)

     (b) Dissolution or Liquidation. In the event of a dissolution or liquidation of the Company,
then all outstanding Options shall terminate immediately prior to the completion of such
dissolution or liquidation.

     (c) Corporate Transaction. In the event of a Corporate Transaction, any surviving corporation
or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or
continue any or all Options outstanding under the Plan or may substitute similar stock options for
Options outstanding under the Plan (it being understood that similar stock options include, but are
not limited to, options to acquire the same consideration paid to the shareholders or the Company,
as the case may be, pursuant to the Corporate Transaction). In the event that any surviving
corporation or acquiring corporation (or its parent company) does not assume or continue all such
outstanding Options or substitute similar stock options for such outstanding Options, then with
respect to Options that have been not assumed, continued or substituted and are held by
Option holders whose Continuous Service has not terminated prior to the effective time of the
Corporate Transaction, the vesting of such Options (and, if applicable, the time at which such
Options may be exercised) shall (contingent upon the effectiveness of the Corporate Transaction) be
accelerated in full to a date prior to the effective time of such Corporate Transaction as the
Board shall determine (or, if the Board shall not determine such a date, to the date that is five
(5) days prior to the effective time of the Corporate Transaction), and the Options shall terminate
if not exercised (if applicable) at or prior to such effective time. With respect to any other
Options outstanding under the Plan that have not been assumed, continued or substituted, the
vesting of such Options (and, if applicable, the time at which such Options may be exercised) shall
not be accelerated unless otherwise provided in Section 11(d) or in a written agreement between the
Company or any Affiliate and the holder of such Options, and such Options shall terminate if not
exercised (if applicable) prior to the effective time of the Corporate Transaction.

     (d) Change in Control. If a Change in Control occurs and an Optionholder’s Continuous Service
with the Company has not terminated immediately prior to the effective time of the Change in
Control, then, immediately prior to the effective time of such Change in Control (and contingent
upon the effectiveness of the Change in Control), the vesting and exercisability of an
Optionholder’s Options shall be accelerated in full. In the event that an Optionholder is required
to resign his or her position as a Non-Employee Director as a condition of a Change in Control, the
outstanding Options of such Optionholder shall become fully vested and exercisable immediately
prior to the effectiveness of such resignation (and contingent upon the effectiveness of the Change
in Control).

12. Amendment of the Plan and Options.

     (a) Amendment of Plan. The Board, at any time and from time to time, may amend the Plan.
However, except as provided in Section 11 relating to adjustments upon changes in Common Stock, no
amendment shall be effective unless approved by the shareholders of the Company to the extent
shareholder approval is necessary to satisfy the requirements of applicable laws.

8

 

     (b) Shareholder Approval. The Board, in its sole discretion, may submit any other amendment to
the Plan for shareholder approval.

     (c) No Impairment of Rights. Rights under any Option granted before amendment of the Plan
shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of
the Optionholder and (ii) the Optionholder consents in writing.

     (d) Amendment of Options. The Board, at any time, and from time to time, may amend the terms
of any one or more Options; provided, however, that the rights under any Option shall not be
impaired by any such amendment unless (i) the Company requests the consent of the Optionholder and
(ii) the Optionholder consents in writing.

13. Termination or Suspension of the Plan.

     (a) Plan Term. The Board may suspend or terminate the Plan at any time. No Options may be
granted under the Plan while the Plan is suspended or after it is terminated.

     (b) No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and
obligations under any Option granted while the Plan is in effect except with the written consent of
the Optionholder.

14. Effective Date of Plan.

     The Plan shall become effective on the date that the Plan is adopted by the Board, but no
Option shall be exercised unless and until the Plan has been approved by the shareholders of the
Company, which approval shall be within twelve (12) months before or after the date the Plan is
adopted by the Board.

15. Choice of Law.

     The law of the state of California shall govern all questions concerning the construction,
validity and interpretation of this Plan, without regard to such state’s conflict of laws rules.

9

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