Document:

Exhibit 10.6

 

January 24, 2006

 

VIA HAND DELIVERY

 

Dear Doug,

 

This letter agreement between you and Websense, Inc. (the “Company”)
confirms an amendment to the terms of your employment agreement of June 11,
1999, between you and the Company (the “Employment Agreement”).  Under this letter agreement, a new paragraph “(d)”
is hereby added to Section 5 of the Employment Agreement which paragraph
reads as follows:

 

“(d)                           Notwithstanding
the foregoing, if the Company determines that any cash severance payment benefit
payable to you fails to satisfy the distribution requirement of Section 409A(a)(2)(A) of
the Internal Revenue Code of 1986, as amended (the “Code”), as a result of Section 409A(a)(2)(B)(i) of
the Code, then the payment schedule will be modified as follows:  If acceleration of the benefit will avoid
application of Section 409(a)(1) of the Code, then the Company will
accelerate the payment of the benefit to the minimum extent necessary so that
the benefit is not subject to the provisions of Section 409A(a)(1) of
the Code.  If acceleration of the benefit
would not avoid the application of Section 409A(a)(1) of the Code,
however, then the Company will delay the benefit to the minimum extent
necessary so that the benefit is not subject to the provisions of Section 409A(a)(1) of
the Code.  If any payments are delayed as
a result of the previous sentence, all such delayed payments shall become
payable in a lump sum on the first day they can be paid following the
termination date.  Thereafter, payments
will resume in accordance with the payment schedule set forth in this
letter.  The Board may attach conditions
to or adjust the severance amounts paid to preserve, as closely as possible,
the economic consequences that would have applied in the absence of these requirements;
provided, however, that no such
condition or adjustment shall result in the payments being subject to Section 409A(a)(1) of
the Code.”

 

If this amendment of the Employment Agreement is acceptable to you,
please sign below and return one original to me.

 

Sincerely,

 

 

Gene Hodges

President and Chief Executive Officer

 

AGREED:

 

 

	
  Date:

  	
  January 24, 2006

  	
   

  	
   

  	
   

  
	
   

  	
  Douglas
  WrideExhibit 10.10

 

WEBSENSE,
INC.

AMENDED AND RESTATED

2000 STOCK INCENTIVE PLAN

 

ARTICLE ONE

GENERAL PROVISIONS

 

I.
PURPOSE OF THE PLAN

 

This 2000 Stock Incentive Plan is intended to promote the interests of
Websense, Inc., a Delaware corporation, by providing eligible persons in
the Corporation’s service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service.

 

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

 

II.
STRUCTURE OF THE PLAN

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

III.
ADMINISTRATION OF THE PLAN

 

A.                                   The
Primary Committee shall have sole and exclusive authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section 16
Insiders. Administration of the Discretionary Option Grant and Stock Issuance
Programs

 

1

 

with respect to all other persons eligible to
participate in those programs may, at the Board’s discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power
to administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.

 

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

 

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

 

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

 

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

 

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

 

2

 

IV.
ELIGIBILITY

 

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

 

(i)                                     Employees,

 

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

 

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

 

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

 

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

 

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

 

E.                                      The
individuals who shall be eligible to participate in the Automatic Option Grant
Program shall be limited to (i) those individuals who first become
non-employee Board members on or after the Underwriting Date, whether through
appointment by the Board or election by the Corporation’s stockholders, and (ii) those
individuals who continue to serve as non-employee Board members at one or more
Annual Stockholders Meetings held after the Underwriting Date. A non-employee
Board member who has previously been in the employ of the Corporation (or any
Parent or Subsidiary) shall not be eligible to receive an option grant under
the Automatic Option Grant Program at the time he or she first becomes a
non-employee Board member, but shall be eligible to receive periodic option
grants under the Automatic Option Grant Program while he or she continues to
serve as a non-employee Board member.

 

3

 

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

 

V.
STOCK SUBJECT TO THE PLAN

 

A.                                   The
stock issuable under the Plan shall be shares of authorized but unissued or
reacquired Common Stock, including shares repurchased by the Corporation on the
open market.  The number of shares of
Common Stock initially reserved for issuance over the term of the Plan shall
not exceed 4,500,000 shares.  Such
reserve shall consist of (i) the number of shares estimated to remain
available for issuance, as of the Plan Effective Date, under the Predecessor
Plan as last approved by the Corporation’s stockholders, including the shares
subject to outstanding options under the Predecessor Plan, (ii) plus an
additional increase of approximately 1,000,000 shares to be approved by the Corporation’s
stockholders prior to the Underwriting Date.

 

B.                                     The
number of shares of Common Stock available for issuance under the Plan shall
automatically increase on the first trading day of January each calendar
year during the term of the Plan, beginning with calendar year 2001, by an
amount equal to four percent (4%) of the total number of shares of Common Stock
outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
1,500,000 shares.

 

C.                                     No
one person participating in the Plan may receive stock options, separately
exercisable stock appreciation rights and direct stock issuances for more than
750,000 shares of Common Stock in the aggregate per calendar year.

 

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

 

4

 

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

 

ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM

 

I.
OPTION TERMS

 

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

 

A.
EXERCISE PRICE.

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

C.
EFFECT OF TERMINATION OF SERVICE.

 

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

 

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

 

(ii)                                  Any
option held by the Optionee at the time of death and exercisable in whole or in
part at that time may be subsequently exercised by the personal representative
of the Optionee’s estate or by the person or persons to whom the option is
transferred pursuant to the Optionee’s will or the laws of inheritance or by
the Optionee’s designated beneficiary or beneficiaries of that option.

 

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

 

(iv)                              During
the applicable post-Service exercise period, the option may not be exercised in
the aggregate for more than the number of vested shares for which the option is
exercisable on the date of the Optionee’s cessation of Service. Upon the
expiration of the applicable exercise period or (if earlier)

 

6

 

upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall, immediately
upon the Optionee’s cessation of Service, terminate and cease to be outstanding
to the extent the option is not otherwise at that time exercisable for vested
shares.

 

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

 

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

 

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

 

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

 

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

 

F.                                      LIMITED
TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive
Options shall be exercisable only by the Optionee and shall not be assignable
or transferable other than by will or the laws of inheritance following the
Optionee’s death. Non-Statutory Options shall be subject to the same
restriction, except that a Non-Statutory Option may be assigned in whole or in
part during the Optionee’s lifetime to one or more members of the Optionee’s
family or to a trust established exclusively for one or more such family
members or to Optionee’s former spouse, to the extent such assignment is in
connection with the Optionee’s estate plan or pursuant to a domestic relations
order. The assigned portion may only be exercised by the person or persons who
acquire a proprietary interest in the option pursuant to the assignment. The
terms applicable to the assigned portion shall be the same as those in effect
for the option immediately prior to such assignment and shall be set forth in
such documents issued to

 

7

 

the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also
designate one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee’s death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee’s death.

 

II.
INCENTIVE OPTIONS

 

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

 

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

 

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

 

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

 

III.
CORPORATE TRANSACTION/CHANGE IN CONTROL

 

A.                                   In
the event of any Corporate Transaction, each outstanding option shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become exercisable for all the
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully vested shares of Common Stock. However,
an outstanding option shall NOT become exercisable on such an accelerated basis
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, to be assumed by the successor corporation (or parent thereof) or (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing at the time of the Corporate

 

8

 

Transaction on any shares for which the
option is not otherwise at that time exercisable and provides for subsequent
payout in accordance with the same exercise/vesting schedule applicable to
those option shares or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant.

 

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

 

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

 

D.                                    Each
option which is assumed in connection with a Corporate Transaction shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply
to the number and class of securities which would have been issuable to the
Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments to reflect such Corporate Transaction shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same, (ii) the
maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year and (iv) the maximum number and/or class of securities
by which the share reserve is to increase automatically each calendar year. To
the extent the actual holders of the Corporation’s outstanding Common Stock
receive cash consideration for their Common Stock in consummation of the
Corporate Transaction, the successor corporation may, in connection with the
assumption of the outstanding options under the Discretionary Option Grant
Program, substitute one or more shares of its own common stock with a fair
market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.

 

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

 

9

 

shall accordingly terminate upon the
consummation of such Corporate Transaction, and the shares subject to those
terminated rights shall thereupon vest in full.

 

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

 

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

 

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

 

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

 

IV.
CANCELLATION AND REGRANT OF OPTIONS

 

The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from

 

10

 

the Predecessor Plan) and to grant in substitution new options covering
the same or a different number of shares of Common Stock but with an exercise
price per share based on the Fair Market Value per share of Common Stock on the
new grant date.

 

V.
STOCK APPRECIATION RIGHTS

 

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

 

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

 

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

 

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

 

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

 

ARTICLE THREE

SALARY INVESTMENT OPTION GRANT PROGRAM

 

I.
OPTION GRANTS

 

The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16
Insiders and other highly compensated Employees eligible to

 

11

 

participate in the Salary Investment Option Grant Program for such
calendar year or years. Each selected individual who elects to participate in
the Salary Investment Option Grant Program must, prior to the start of each
calendar year of participation, file with the Plan Administrator (or its
designate) an irrevocable authorization directing the Corporation to reduce his
or her base salary for that calendar year by an amount not less than Ten
Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00).
Each individual who files such a timely authorization shall automatically be
granted an option under the Salary Investment Grant Program on the first
trading day in January of the calendar year for which the salary reduction
is to be in effect.

 

II.
OPTION TERMS

 

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

 

A.
EXERCISE PRICE.

 

1.                                       The
exercise price per share shall be thirty-three and one-third percent (33-1/3%)
of the Fair Market Value per share of Common Stock on the option grant date.

 

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

 

B.                                     NUMBER
OF OPTION SHARES. The number of shares of Common Stock subject to the option
shall be determined pursuant to the following formula (rounded down to the
nearest whole number):

 

X = A / (B x 66-2/3%), where

 

X is the number of option shares,

 

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

 

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

 

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

 

12

 

D.                                    EFFECT
OF TERMINATION OF SERVICE. Should the Optionee cease Service for any reason
while holding one or more options under this Article Three, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such
cessation of Service. Should the Optionee die while holding one or more options
under this Article Three, then each such option may be exercised, for any
or all of the shares for which the option is exercisable at the time of the
Optionee’s cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee’s estate
or by the person or persons to whom the option is transferred pursuant to the
Optionee’s will or the laws of inheritance or by the designated beneficiary or
beneficiaries of the option. Such right of exercise shall lapse, and the option
shall terminate, upon the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee’s cessation of Service. However, the option shall,
immediately upon the Optionee’s cessation of Service for any reason, terminate
and cease to remain outstanding with respect to any and all shares of Common
Stock for which the option is not otherwise at that time exercisable.

 

III.
CORPORATE TRANSACTION/

CHANGE IN CONTROL

 

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

 

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

 

13

 

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

 

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

 

IV.
REMAINING TERMS

 

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

 

ARTICLE FOUR

STOCK ISSUANCE PROGRAM

 

I.
STOCK ISSUANCE TERMS

 

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

 

A.
PURCHASE PRICE.

 

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

 

2.                                       Subject
to the provisions of Section I of Article Seven, shares of Common
Stock may be issued under the Stock Issuance Program for any of the following
items of

 

14

 

consideration which the Plan Administrator
may deem appropriate in each individual instance:

 

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

 

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

 

B.
VESTING PROVISIONS.

 

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

 

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

 

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

 

4.                                       Should
the Participant cease to remain in Service while holding one or more unvested
shares of Common Stock issued under the Stock Issuance Program or should the
performance objectives not be attained with respect to one or more such unvested
shares of Common Stock, then those shares shall be immediately surrendered to
the Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant’s purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and

 

15

 

shall cancel the unpaid principal balance of
any outstanding purchase-money note of the Participant attributable to the
surrendered shares.

 

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

 

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

 

II.
CORPORATE TRANSACTION/CHANGE IN CONTROL

 

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

 

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

 

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

 

16

 

III.
SHARE ESCROW/LEGENDS

 

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

 

ARTICLE FIVE

AUTOMATIC OPTION GRANT PROGRAM

 

I.
OPTION TERMS

 

A.                                   GRANT
DATES. Option grants shall be made on the dates specified below:

 

1.                                       Each
individual who is first elected or appointed as a non-employee Board member at
any time on or after the Underwriting Date shall automatically be granted, on
the date of such initial election or appointment, a Non-Statutory Option to
purchase 50,000 shares of Common Stock, provided that individual has not
previously been in the employ of the Corporation or any Parent or Subsidiary.

 

2.                                       On
the date of each Annual Stockholders Meeting held after the Underwriting Date,
each individual who is to continue to serve as a non-employee Board member,
whether or not that individual is standing for re-election to the Board at that
particular Annual Meeting, shall automatically be granted a Non-Statutory
Option to purchase 2,500 shares of Common Stock, provided such individual has
served as a non-employee Board member for at least six (6) months. There
shall be no limit on the number of such 2,500-share option grants any one
non-employee Board member may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received one or
more stock option grants from the Corporation prior to the Underwriting Date
shall be eligible to receive one or more such annual option grants over their
period of continued Board service.

 

B.
EXERCISE PRICE.

 

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

 

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

 

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

 

17

 

D.                                    EXERCISE
AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or
all of the option shares. However, any unvested shares purchased under the
option shall be subject to repurchase by the Corporation, at the exercise price
paid per share, upon the Optionee’s cessation of Board service prior to vesting
in those shares. The shares subject to each initial 50,000-share grant shall
vest, and the Corporation’s repurchase right shall lapse, in a series of four (4) successive
equal annual installments upon the Optionee’s completion of each year of
service as a Board member over the four (4)-year period measured from the
option grant date. The shares subject to each annual 2,500-share option grant
shall vest in one installment upon the Optionee’s completion of the one
(1)-year period of service measured from the grant date.

 

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

 

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

 

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

 

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

 

18

 

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

 

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

 

II.
CORPORATE TRANSACTION/

CHANGE IN CONTROL

 

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

 

B.                                     In
connection with any Change in Control while the Optionee remains a Board
member, the shares of Common Stock at the time subject to each outstanding
option under the Automatic Option Grant Program but not otherwise vested shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Change in Control, become exercisable for all the
option shares as fully vested shares of Common Stock and may be exercised for
any or all of those vested shares. Each such option shall remain exercisable
for such fully vested option shares until the earliest to occur of (i) the
expiration of the ten (10)-year option term, (ii) the expiration of the
twelve (12)-month period measured from the date of the Optionee’s cessation of
Board service, or (iii) the termination of the option in connection with a
Corporate Transaction.

 

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

 

D.                                    Each
option which is assumed in connection with a Corporate Transaction shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply
to the

 

19

 

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

 

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

 

III.
REMAINING TERMS

 

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

 

ARTICLE SIX

DIRECTOR FEE OPTION GRANT PROGRAM

 

I.
OPTION GRANTS

 

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

 

II.
OPTION TERMS

 

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

 

20

 

A.
EXERCISE PRICE.

 

1.                                       The
exercise price per share shall be thirty-three and one-third percent (33-1/3%)
of the Fair Market Value per share of Common Stock on the option grant date.

 

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

 

B.                                     NUMBER
OF OPTION SHARES. The number of shares of Common Stock subject to the option
shall be determined pursuant to the following formula (rounded down to the
nearest whole number):

 

X = A / (B x 66-2/3%), where

 

X is the number of option shares,

 

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

 

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

 

C.                                     EXERCISE
AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve
(12) equal monthly installments upon the Optionee’s completion of each calendar
month of Board service during the calendar year for which the retainer fee election
is in effect. Each option shall have a maximum term of ten (10) years
measured from the option grant date.

 

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

 

E.                                      TERMINATION
OF BOARD SERVICE. Should the Optionee cease Board service for any reason (other
than death or Permanent Disability) while holding one or more options

 

21

 

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

 

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

 

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

(3)-year period measured from the date of the Optionee’s cessation of Board
service.

 

III.
CORPORATE TRANSACTION/

CHANGE IN CONTROL

 

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

 

22

 

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

 

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

 

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

 

IV.
REMAINING TERMS

 

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

 

ARTICLE SEVEN

MISCELLANEOUS

 

I.
FINANCING

 

The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering
a full-recourse, interest-bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion.

 

23

 

In no event may the maximum credit available to the Optionee or
Participant exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares (less the par value of such
shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

 

II.
TAX WITHHOLDING

 

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

 

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

 

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

 

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

 

III.
EFFECTIVE DATE AND TERM OF THE PLAN

 

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

 

24

 

under this Plan shall terminate and cease to
be outstanding, and no further options shall be granted and no shares shall be
issued under the Plan.

 

B.                                     The
Plan shall serve as the successor to the Predecessor Plan, and no further
option grants or direct stock issuances shall be made under the Predecessor
Plan after the Plan Effective Date. All options outstanding under the
Predecessor Plan on the Plan Effective Date shall be incorporated into the Plan
at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision
of the Plan shall be deemed to affect or otherwise modify the rights or
obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.

 

C.                                     One
or more provisions of the Plan, including (without limitation) the
option/vesting acceleration provisions of Article Two relating to
Corporate Transactions and Changes in Control, may, in the Plan Administrator’s
discretion, be extended to one or more options incorporated from the
Predecessor Plan which do not otherwise contain such provisions.

 

D.                                    The
Plan shall terminate upon the earliest to occur of (i) January 31,
2010, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully vested shares or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. Should the Plan terminate on January 31, 2010, then all
option grants and unvested stock issuances outstanding at that time shall
continue to have force and effect in accordance with the provisions of the
documents evidencing such grants or issuances.

 

IV.
AMENDMENT OF THE PLAN

 

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

 

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

 

25

 

shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.

 

V.
USE OF PROCEEDS

 

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

 

VI.
REGULATORY APPROVALS

 

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

 

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

 

VII.
NO EMPLOYMENT/SERVICE RIGHTS

 

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

 

26

 

APPENDIX

 

The following definitions shall be in effect under the Plan:

 

A.                                   AUTOMATIC
OPTION GRANT PROGRAM shall mean the automatic option grant program in effect
under Article Five of the Plan.

 

B.                                     BOARD shall mean the Corporation’s Board of
Directors.

 

C.                                     CHANGE
IN CONTROL shall mean a change in ownership or control of the Corporation
effected through either of the following transactions:

 

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

 

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

 

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

 

E.                                      COMMON
STOCK shall mean the Corporation’s common stock.

 

F.                                      CORPORATE
TRANSACTION shall mean either of the following stockholder-approved transactions
to which the Corporation is a party:

 

(i)                                     a
merger or consolidation in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation’s outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction, or

 

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

 

A-1

 

G.                                     CORPORATION
shall mean Websense, Inc., a Delaware corporation, and any corporate
successor to all or substantially all of the assets or voting stock of Websense, Inc.
which shall by appropriate action adopt the Plan.

 

H.                                    DIRECTOR
FEE OPTION GRANT PROGRAM shall mean the special stock option grant in effect
for non-employee Board members under Article Six of the Plan.

 

I.                                         DISCRETIONARY
OPTION GRANT PROGRAM shall mean the discretionary option grant program in
effect under Article Two of the Plan.

 

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

 

K.                                    EXERCISE
DATE shall mean the date on which the Corporation shall have received written
notice of the option exercise.

 

L.                                      FAIR
MARKET VALUE per share of Common Stock on any relevant date shall be determined
in accordance with the following provisions:

 

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

 

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

 

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

 

M.                                 INCENTIVE
OPTION shall mean an option which satisfies the requirements of Code Section 422.

 

A-2

 

N.                                    INVOLUNTARY
TERMINATION shall mean the termination of the Service of any individual which
occurs by reason of:

 

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

 

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

 

O.                                    MISCONDUCT
shall mean the commission of any act of fraud, embezzlement or dishonesty by
the Optionee or Participant, any unauthorized use or disclosure by such person
of confidential information or trade secrets of the Corporation (or any Parent
or Subsidiary), or any other intentional misconduct by such person adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).

 

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

 

Q.                                    NON-STATUTORY
OPTION shall mean an option not intended to satisfy the requirements of Code Section 422.

 

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

 

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

 

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

 

U.                                    PERMANENT
DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or
the Participant to engage in any substantial gainful activity by

 

A-3

 

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

 

V.                                     PLAN
shall mean the Corporation’s 2000 Stock Incentive Plan, as set forth in this
document.

 

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

 

X.                                    PLAN
EFFECTIVE DATE shall mean the date the Plan shall become effective and shall be
coincident with the Underwriting Date.

 

Y.                                     PREDECESSOR
PLAN shall mean the Corporation’s 1998 Equity Incentive Plan in effect
immediately prior to the Plan Effective Date hereunder.

 

Z.                                     PRIMARY
COMMITTEE shall mean the committee of two (2) or more non-employee Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to Section 16 Insiders and to
administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.

 

AA.                         SALARY
INVESTMENT OPTION GRANT PROGRAM shall mean the salary investment option grant
program in effect under Article Three of the Plan.

 

BB.                             SECONDARY
COMMITTEE shall mean a committee of one or more Board members appointed by the
Board to administer the Discretionary Option Grant and Stock Issuance Programs
with respect to eligible persons other than Section 16 Insiders.

 

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

 

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

 

A-4

 

EE.                               STOCK
EXCHANGE shall mean either the American Stock Exchange or the New York Stock
Exchange.

 

FF.                               STOCK
ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and
the Participant at the time of issuance of shares of Common Stock under the
Stock Issuance Program.

 

GG.                             STOCK
ISSUANCE PROGRAM shall mean the stock issuance program in effect under Article Four
of the Plan.

 

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

 

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

 

JJ.                                   UNDERWRITING
AGREEMENT shall mean the agreement between the Corporation and the underwriter
or underwriters managing the initial public offering of the Common Stock.

 

KK.                           UNDERWRITING
DATE shall mean the date on which the Underwriting Agreement is executed and
priced in connection with an initial public offering of the Common Stock.

 

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

 

A-5

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