Document:

exv10w1

 

EXHIBIT
10.1

April 25, 2007

Mr. Daniel R. Feehan

1707 Catalina Ct.

Fort Worth, TX 76107

			
	Re:	 	Extension of Amended and Restated Executive Employment Agreement dated as of January 24, 2004
between Cash America International, Inc. and Daniel R. Feehan (“Employment Agreement’)

Dear Mr. Feehan:

     I am pleased to notify you that the Management Development and Compensation Committee (the
“Committee”) of the Cash America International, Inc. Board of Directors has elected to extend your
Employment Agreement for an additional one-year renewal term commencing May 1, 2007 and ending
April 30, 2008. The current term of your Employment Agreement expires April 30, 2007.

     We are providing you this notice in accordance with Section 5.2 of your Employment Agreement.
Under that Section, this committee may extend the term of your Employment Agreement for additional
successive one-year terms by notifying you in writing of its intention to extend the Employment
Agreement. Please execute this letter in the place provided below to evidence your agreement to
the extension of the term of the Employment Agreement and your agreement to waive the 60-day notice
period described in Section 5.2 of the Employment Agreement.

	 	 	 	 	 
	 

	 	Yours truly,	 	 
	 
	 	 	 	 
	 

	 	/s/ B. D. Hunter	 	 
	 
	 	 	 	 
	 

	 	B. D. Hunter, Chairman	 	 
	 

	 	Management Development and	 	 
	 

	 	Compensation Committee of the	 	 
	 

	 	Cash America International, Inc.	 	 
	 

	 	Board of Directors
	 	 

Agreed and Accepted

	 	 	 
	/s/ Daniel R. Feehan
 

Daniel R. Feehanexv10w1

 

SMITH INTERNATIONAL, INC.

SECOND AMENDED AND RESTATED

1989 LONG-TERM INCENTIVE COMPENSATION PLAN

(Effective January 1, 2005)

 

 

TABLE
OF CONTENTS

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Page
	SECTION 1 GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE, COVERAGE	 	 	 	 
	 	 	 	 	 	 	AND BENEFITS	 	 	1	 
	 	 	 	1.1	 	 	Background and Purpose	 	 	1	 
	 	 	 	1.2	 	 	Definitions	 	 	1	 
	 

	 	 	 	 	 	(a)
	 	Advisory Director
	 	 	2	 
	 

	 	 	 	 	 	(b)
	 	Authorized Officer
	 	 	2	 
	 

	 	 	 	 	 	(c)
	 	Award Date
	 	 	2	 
	 

	 	 	 	 	 	(d)
	 	Board
	 	 	2	 
	 

	 	 	 	 	 	(e)
	 	Cause
	 	 	2	 
	 

	 	 	 	 	 	(f)
	 	CEO
	 	 	2	 
	 

	 	 	 	 	 	(g)
	 	Change in Control
	 	 	2	 
	 

	 	 	 	 	 	(h)
	 	Code
	 	 	2	 
	 

	 	 	 	 	 	(i)
	 	Committee
	 	 	2	 
	 

	 	 	 	 	 	(j)
	 	Common Stock
	 	 	3	 
	 

	 	 	 	 	 	(k)
	 	Common Stock Award
	 	 	3	 
	 

	 	 	 	 	 	(l)
	 	Company
	 	 	3	 
	 

	 	 	 	 	 	(m)
	 	Covered Employee
	 	 	3	 
	 

	 	 	 	 	 	(n)
	 	Disability
	 	 	3	 
	 

	 	 	 	 	 	(o)
	 	Employee
	 	 	3	 
	 

	 	 	 	 	 	(p)
	 	Employment
	 	 	3	 
	 

	 	 	 	 	 	(q)
	 	Exchange Act
	 	 	3	 
	 

	 	 	 	 	 	(r)
	 	Fair Market Value
	 	 	3	 
	 

	 	 	 	 	 	(s)
	 	Grantee
	 	 	4	 
	 

	 	 	 	 	 	(t)
	 	Immediate Family
	 	 	4	 
	 

	 	 	 	 	 	(u)
	 	Incentive Agreement
	 	 	4	 
	 

	 	 	 	 	 	(v)
	 	Incentive Award or Award
	 	 	4	 
	 

	 	 	 	 	 	(w)
	 	Independent SAR or SAR
	 	 	4	 
	 

	 	 	 	 	 	(x)
	 	Insider
	 	 	4	 
	 

	 	 	 	 	 	(y)
	 	Option Price
	 	 	4	 
	 

	 	 	 	 	 	(z)
	 	Other Stock-Based Award
	 	 	4	 
	 

	 	 	 	 	 	(aa)
	 	Outside Director
	 	 	4	 
	 

	 	 	 	 	 	(bb)
	 	Performance-Based Exception
	 	 	4	 
	 

	 	 	 	 	 	(cc)
	 	Performance-Based Restricted Award
	 	 	4	 
	 

	 	 	 	 	 	(dd)
	 	Performance Criteria
	 	 	4	 
	 

	 	 	 	 	 	(ee)
	 	Performance Period
	 	 	4	 
	 

	 	 	 	 	 	(ff)
	 	Plan
	 	 	5	 
	 

	 	 	 	 	 	(gg)
	 	Publicly Held Corporation
	 	 	5	 
	 

	 	 	 	 	 	(hh)
	 	Restricted Stock
	 	 	5	 
	 

	 	 	 	 	 	(ii)
	 	Restricted Stock Award
	 	 	5	 
	 

	 	 	 	 	 	(jj)
	 	Restricted Stock Unit
	 	 	5	 
	 

	 	 	 	 	 	(kk)
	 	Restricted Stock Unit Award
	 	 	5	 
	 

	 	 	 	 	 	(ll)
	 	Restriction Period
	 	 	5	 
	 

	 	 	 	 	 	(mm)
	 	Retirement
	 	 	5	 
	 

	 	 	 	 	 	(nn)
	 	Share
	 	 	5	 
	 

	 	 	 	 	 	(oo)
	 	Share Pool
	 	 	5	 
	 

	 	 	 	 	 	(pp)
	 	Spread
	 	 	5	 
	 

	 	 	 	 	 	(qq)
	 	Stock Appreciation Right or SAR
	 	 	5	 
	 

	 	 	 	 	 	(rr)
	 	Stock Option or Option
	 	 	5	 
	 

	 	 	 	 	 	(ss)
	 	Stock Option Award
	 	 	5	 
	 

	 	 	 	 	 	(tt)
	 	Subsidiary
	 	 	5	 
	 

	 	 	 	 	 	(uu)
	 	Termination of Directorship
	 	 	5	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	i

 

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Page
	 	 	 	1.3	 	 	Plan Administration	 	 	6	 
	 

	 	 	 	 	 	(a)
	 	Authority of the Committee
	 	 	6	 
	 

	 	 	 	 	 	(b)
	 	Meetings
	 	 	6	 
	 

	 	 	 	 	 	(c)
	 	Decisions Binding
	 	 	6	 
	 

	 	 	 	 	 	(d)
	 	Modification of Outstanding Incentive Awards
	 	 	6	 
	 

	 	 	 	 	 	(e)
	 	Delegation of Authority
	 	 	6	 
	 

	 	 	 	 	 	(f)
	 	Expenses of Committee
	 	 	7	 
	 

	 	 	 	 	 	(g)
	 	Surrender of Previous Incentive Awards
	 	 	7	 
	 

	 	 	 	 	 	(h)
	 	Indemnification
	 	 	7	 
	 	 	 	1.4	 	 	Shares of Common Stock Available for Incentive Awards	 	 	7	 
	 	 	 	1.5	 	 	Share Pool Adjustments for Awards and Payouts	 	 	8	 
	 	 	 	1.6	 	 	Common Stock Available	 	 	8	 
	 	 	 	1.7	 	 	Eligibility	 	 	8	 
	 	 	 	1.8	 	 	Types of Incentive Awards	 	 	9	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	SECTION 2 STOCK OPTIONS AND STOCK APPRECIATION RIGHTS	 	 	9	 
	 	 	 	2.1	 	 	Grant of Stock Options	 	 	9	 
	 	 	 	2.2	 	 	Stock Option Terms	 	 	9	 
	 

	 	 	 	 	 	(a)
	 	Written Agreement
	 	 	9	 
	 

	 	 	 	 	 	(b)
	 	Number of Shares
	 	 	9	 
	 

	 	 	 	 	 	(c)
	 	Exercise Price
	 	 	9	 
	 

	 	 	 	 	 	(d)
	 	Term
	 	 	9	 
	 

	 	 	 	 	 	(e)
	 	Exercise
	 	 	9	 
	 	 	 	2.3	 	 	Stock Option Exercises	 	 	10	 
	 

	 	 	 	 	 	(a)
	 	Method of Exercise and Payment
	 	 	10	 
	 

	 	 	 	 	 	(b)
	 	Restrictions on Share Transferability
	 	 	10	 
	 

	 	 	 	 	 	(c)
	 	Proceeds of Option Exercise
	 	 	11	 
	 	 	 	2.4	 	 	Stock Appreciation Rights	 	 	11	 
	 

	 	 	 	 	 	(a)
	 	Grant
	 	 	11	 
	 

	 	 	 	 	 	(b)
	 	General Provisions
	 	 	11	 
	 

	 	 	 	 	 	(c)
	 	Exercise
	 	 	11	 
	 

	 	 	 	 	 	(d)
	 	Settlement
	 	 	11	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	SECTION 3 COMMON STOCK AWARDS	 	 	11	 
	 	 	 	3.1	 	 	Initial Award	 	 	11	 
	 	 	 	3.2	 	 	Annual Award	 	 	12	 
	 	 	 	3.3	 	 	Termination of Directorship	 	 	12	 
	 	 	 	3.4	 	 	Issuance of Common Stock	 	 	12	 
	 	 	 	3.5	 	 	Subsequent Deferrals	 	 	12	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	SECTION 4 RESTRICTED STOCK	 	 	12	 
	 	 	 	4.1	 	 	Award of Restricted Stock	 	 	12	 
	 

	 	 	 	 	 	(a)
	 	Grant
	 	 	12	 
	 

	 	 	 	 	 	(b)
	 	Immediate Transfer Without Immediate Delivery of Restricted Stock
	 	 	13	 
	 	 	 	4.2	 	 	Restrictions	 	 	13	 
	 

	 	 	 	 	 	(a)
	 	Forfeiture of Restricted Stock
	 	 	13	 
	 

	 	 	 	 	 	(b)
	 	Issuance of Certificates
	 	 	13	 
	 

	 	 	 	 	 	(c)
	 	Removal of Restrictions
	 	 	14	 
	 	 	 	4.3	 	 	Delivery of Shares of Common Stock	 	 	14	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	SECTION 5 RESTRICTED STOCK UNITS	 	 	14	 
	 	 	 	5.1	 	 	Award of Restricted Stock Units	 	 	14	 
	 	 	 	5.2	 	 	Restricted Stock Unit Award Terms	 	 	14	 
	 

	 	 	 	 	 	(a)
	 	Written Agreement
	 	 	14	 
	 

	 	 	 	 	 	(b)
	 	Vesting
	 	 	14	 
	 

	 	 	 	 	 	(c)
	 	Payment
	 	 	14	 
	 

	 	 	 	 	 	(d)
	 	Subsequent Deferrals
	 	 	15	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	ii

 

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Page
	SECTION 6 OTHER STOCK-BASED AWARDS	 	 	15	 
	 	 	 	6.1	 	 	Grant of Other Stock-Based Awards	 	 	15	 
	 	 	 	6.2	 	 	Other Stock-Based Award Terms	 	 	15	 
	 

	 	 	 	 	 	(a)
	 	Written Agreement
	 	 	15	 
	 

	 	 	 	 	 	(b)
	 	Purchase Price
	 	 	15	 
	 

	 	 	 	 	 	(c)
	 	Performance Criteria and Other Terms
	 	 	15	 
	 

	 	 	 	 	 	(d)
	 	Payment
	 	 	15	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	SECTION 7 PERFORMANCE CRITERIA	 	 	16	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	SECTION 8 PROVISIONS RELATING TO PLAN PARTICIPATION	 	 	17	 
	 	 	 	8.1	 	 	Incentive Agreement	 	 	17	 
	 	 	 	8.2	 	 	No Right to Employment	 	 	17	 
	 	 	 	8.3	 	 	Securities Requirements	 	 	17	 
	 	 	 	8.4	 	 	Transferability	 	 	18	 
	 	 	 	8.5	 	 	Rights as a Stockholder	 	 	19	 
	 

	 	 	 	 	 	(a)
	 	No Stockholder Rights
	 	 	19	 
	 

	 	 	 	 	 	(b)
	 	Representation of Ownership
	 	 	19	 
	 	 	 	8.6	 	 	Change in Stock and Adjustments	 	 	19	 
	 

	 	 	 	 	 	(a)
	 	Changes in Law or Circumstances
	 	 	19	 
	 

	 	 	 	 	 	(b)
	 	Exercise of Corporate Powers
	 	 	19	 
	 

	 	 	 	 	 	(c)
	 	Recapitalization of the Company
	 	 	19	 
	 

	 	 	 	 	 	(d)
	 	Issue of Common Stock by the Company
	 	 	20	 
	 

	 	 	 	 	 	(e)
	 	Assumption under the Plan of Outstanding Stock Options
	 	 	20	 
	 

	 	 	 	 	 	(f)
	 	Assumption of Incentive Awards by a Successor
	 	 	20	 
	 	 	 	8.7	 	 	Termination of Employment or Directorship, Death, Disability and Retirement	 	 	21	 
	 

	 	 	 	 	 	(a)
	 	Termination of Employment
	 	 	21	 
	 

	 	 	 	 	 	(b)
	 	Termination of Directorship
	 	 	21	 
	 

	 	 	 	 	 	(c)
	 	Termination of Employment for Cause
	 	 	21	 
	 

	 	 	 	 	 	(d)
	 	Voluntary Resignation
	 	 	21	 
	 

	 	 	 	 	 	(e)
	 	Retirement
	 	 	22	 
	 

	 	 	 	 	 	(f)
	 	Disability or Death
	 	 	22	 
	 

	 	 	 	 	 	(g)
	 	Continuation
	 	 	22	 
	 	 	 	8.8	 	 	Change in Control	 	 	22	 
	 	 	 	8.9	 	 	Exchange of Incentive Awards	 	 	24	 
	 	 	 	8.10	 	 	Financing	 	 	24	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	SECTION 9 GENERAL	 	 	24	 
	 	 	 	9.1	 	 	Effective Date and Grant Period	 	 	24	 
	 	 	 	9.2	 	 	Funding and Liability of Company	 	 	24	 
	 	 	 	9.3	 	 	Withholding Taxes	 	 	25	 
	 

	 	 	 	 	 	(a)
	 	Tax Withholding
	 	 	25	 
	 

	 	 	 	 	 	(b)
	 	Share Withholding
	 	 	25	 
	 

	 	 	 	 	 	(c)
	 	Loans
	 	 	25	 
	 	 	 	9.4	 	 	No Guarantee of Tax Consequences	 	 	25	 
	 	 	 	9.5	 	 	Designation of Beneficiary by Grantee	 	 	25	 
	 	 	 	9.6	 	 	Deferrals	 	 	25	 
	 	 	 	9.7	 	 	Amendment and Termination	 	 	26	 
	 	 	 	9.8	 	 	Requirements of Law	 	 	26	 
	 

	 	 	 	 	 	(a)
	 	Governmental Entities and Securities Exchanges
	 	 	26	 
	 

	 	 	 	 	 	(b)
	 	Securities Act Rule 701
	 	 	26	 
	 	 	 	9.9	 	 	Rule 16b-3 Securities Law Compliance for Insiders	 	 	27	 
	 	 	 	9.10	 	 	Compliance with Code Section 162(m) for Publicly Held Corporation	 	 	27	 
	 	 	 	9.11	 	 	Notices	 	 	27	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	iii

 

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Page
	 	 	 	9.12	 	 	Pre-Clearance Agreement with Brokers	 	 	27	 
	 	 	 	9.13	 	 	Successors to Company	 	 	27	 
	 	 	 	9.14	 	 	Miscellaneous Provisions	 	 	28	 
	 	 	 	9.15	 	 	Severability	 	 	28	 
	 	 	 	9.16	 	 	Gender, Tense and Headings	 	 	28	 
	 	 	 	9.17	 	 	Governing Law	 	 	28	 

iv

 

 

SMITH INTERNATIONAL, INC.

1989 LONG-TERM INCENTIVE COMPENSATION PLAN

SECTION 1

GENERAL PROVISIONS RELATING TO

PLAN GOVERNANCE, COVERAGE AND BENEFITS

1.1 Background and Purpose

     Smith International, Inc., (the “Company”) established and adopted the “Smith International,
Inc. 1989 Long-Term Incentive Compensation Plan” (the “Plan”). The Plan has been amended from time
to time, and most recently amended and restated effective as of January 1, 2005.

     The Company also previously established and adopted the “Smith International, Inc. Stock Plan
for Outside Directors” (the “Directors Plan”), effective as of April 28, 1992, amended from time to
time.

     The Company hereby amends and restates the Plan under the form of this Plan document primarily
to (i) incorporate various changes for the benefit of the Company and the participants in the Plan
and the Directors Plan and (ii) merge the Directors Plan into the Plan effective as of January 1,
2007. This amendment and restatement is generally effective as of January 1, 2005 (the “Effective
Date”), except as may otherwise be noted under certain terms and provisions of the Plan.

     Effective as of January 1, 2007, all awards previously granted under the Directors Plan are
assumed and continued under the Plan and shall remain subject to the existing individual incentive
agreements that evidence such awards.

     Effective as of January 1, 2007, upon the assumption and continuation of all outstanding
awards under the Plan, and coincident with the merger of the Directors Plan into the Plan, the
Directors Plan shall cease to exist as a separate plan.

     The purpose of the Plan is to foster and promote the long-term financial success of the
Company and to increase stockholder value by: (a) encouraging the commitment of selected key
Employees, (b) motivating superior performance of key Employees by means of long-term performance
related incentives, (c) encouraging and providing key Employees with a program for obtaining
ownership interests in the Company which link and align their personal interests to those of the
Company’s stockholders, (d) attracting and retaining key Employees by providing competitive
compensation opportunities, (e) enabling key Employees to share in the long-term growth and success
of the Company, (f) providing additional incentives for securing and retaining qualified
individuals who are not employees of the Company to serve on the Board of Directors of the Company
(“Outside Directors”), and (g) to enhance the future growth of the Company by furthering Outside
Directors’ identification with the interests of the Company and its stockholders.

     The Plan provides for payment of various forms of compensation. It is not intended to be a
plan that is subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
The Plan shall be interpreted, construed and administered consistent with its status as a plan that
is not subject to ERISA.

     The Plan will remain in effect, subject to the right of the Board to amend or terminate the
Plan at any time pursuant to Section 9.7, until all Shares subject to the Plan have been
purchased or acquired according to its provisions.

1.2 Definitions

     The following terms shall have the meanings set forth below:

 

 

     (a) Advisory Director. An individual who (i) is not an officer or employee of the
Company or any Subsidiary and (ii) serves as an advisory director on the Board.

     (b) Authorized Officer. The Chairman of the Board, the CEO or any other senior
officer of the Company to whom either of them delegate the authority to execute any
Incentive Agreement for and on behalf of the Company. No officer or director shall be an
Authorized Officer with respect to any Incentive Agreement for himself.

     (c) Award Date. The annual date or other date upon which a Common Stock Award is
granted by the Board to a Grantee as provided in Section 3.

     (d) Board. The Board of Directors of the Company.

     (e) Cause. When used in connection with the termination of a Grantee’s Employment,
shall mean the termination of the Grantee’s Employment by the Company or any Subsidiary by
reason of (i) the conviction of the Grantee by a court of competent jurisdiction as to which
no further appeal can be taken of a crime involving moral turpitude or a felony; (ii) the
proven commission by the Grantee of a material act of fraud upon the Company or any
Subsidiary, or any customer or supplier thereof; (iii) the misappropriation of any funds or
property of the Company or any Subsidiary, or any customer or supplier thereof; (iv) the
willful and continued failure by the Grantee to perform the material duties assigned to him
that is not cured to the reasonable satisfaction of the Company within 30 days after written
notice of such failure is provided to Grantee by the Board or CEO (or by another officer of
the Company or a Subsidiary who has been designated by the Board or CEO for such purpose);
(v) the knowing engagement by the Grantee in any direct and material conflict of interest
with the Company or any Subsidiary without compliance with the Company’s or Subsidiary’s
conflict of interest policy, if any, then in effect; or (vi) the knowing engagement by the
Grantee, without the written approval of the Board or CEO, in any material activity which
competes with the business of the Company or any Subsidiary or which would result in a
material injury to the business, reputation or goodwill of the Company or any Subsidiary.

     (f) CEO. The Chief Executive Officer of the Company.

     (g) Change in Control. Any of the events described in and subject to Section
8.8.

     (h) Code. The Internal Revenue Code of 1986, as amended, and the regulations and
other authority promulgated thereunder by the appropriate governmental authority. References
herein to any provision of the Code shall refer to any successor provision thereto.

     (i) Committee.

     A committee appointed by the Board to administer the Plan. While the Company is a Publicly
Held Corporation, the Plan shall be administered by a Committee appointed by the Board
consisting of not less than two directors who fulfill the “nonemployee director”
requirements of Rule 16b-3 under the Exchange Act and the “outside director” requirements of
Code Section 162(m). In either case, the Committee may be the Compensation and Benefits
Committee of the Board, or any subcommittee of the Compensation and Benefits Committee,
provided that the members of the Committee satisfy the requirements of the previous
provisions of this paragraph. Notwithstanding the preceding provisions of this subsection,
with regard to Incentive Awards granted to Outside Directors, the Board shall have the sole
power and authority to administer the Plan, and thus all references to the Committee herein
shall mean the Board with respect to Incentive Awards granted to Outside Directors.

     The Board shall have the power to fill vacancies on the Committee arising by
resignation, death, removal or otherwise. The Board, in its sole discretion, may bifurcate
the powers and duties of the Committee among one or more separate committees, or retain all
powers and duties of the Committee in a single Committee. The members of the Committee shall
serve at the discretion of the Board.

2

 

     (j) Common Stock. The common stock of the Company, $1.00 par value per share, and
any class of common stock into which such common shares may hereafter be converted,
reclassified or recapitalized.

     (k) Common Stock Award. An authorization of the Board to issue or transfer common
stock to a Grantee who is an Outside Director pursuant to Section 3.

     (l) Company. Smith International, Inc. and any successor in interest thereto.

     (m) Covered Employee. A named executive officer who is one of the group of covered
employees, as defined in Code Section 162(m) and Treasury Regulation § 1.162-27(c) (or its
successor), during any period that the Company is a Publicly Held Corporation.

     (n) Disability. A physical or mental condition of a Grantee which renders him unable
to engage in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which (a) can be expected to result in death or can be
expected to last for a continuous period of not less than 12 months, or (b) for which the
Grantee is receiving income replacement benefits for a period of not less than three months
under an accident and health plan or long-term disability plan covering Employees of the
Company or any Subsidiary. A determination of Disability shall be made by a physician
selected or approved by the Committee and, in this respect, the Grantee shall submit to any
reasonable examination(s) required by such physician upon request. In addition, any
determination of Disability shall be made in accordance with the requirements of Code
Section 409A as determined by the Committee.

     (o) Employee. Any full-time, salaried employee of the Company (or any Subsidiary)
within the meaning of Code Section 3401(c) who, in the opinion of the Committee, is in a
position to contribute to the growth, development or financial success of the Company (or
any Subsidiary), including, without limitation, officers who are members of the Board.

     (p) Employment. Employment means that the individual is employed as an Employee
by the Company or any Subsidiary. In this regard, neither the transfer of a Grantee from
Employment by the Company to Employment by any Subsidiary, nor the transfer of a Grantee
from Employment by any Subsidiary to Employment by the Company, shall be deemed to be a
termination of Employment of the Grantee. Moreover, the Employment of a Grantee shall not be
deemed to have been terminated because of an approved leave of absence from active
Employment on account of temporary illness, authorized vacation or granted for reasons of
professional advancement, education, or health, or during any period required to be treated
as a leave of absence by virtue of any applicable statute, Company personnel policy or
written agreement. All determinations regarding Employment, and the termination of
Employment hereunder, shall be made by the Committee.

     (q) Exchange Act. The Securities Exchange Act of 1934, as amended.

     (r) Fair Market Value. While the Company is a Publicly Held Corporation, the Fair
Market Value of one Share of Common Stock on the date in question is deemed to be (i) the
closing sales price of a Share as reported on the New York Stock Exchange or other principal
securities exchange on which Shares are then listed or admitted to trading, or (ii) the
closing sales price for a Share as quoted on the National Association of Securities Dealers
Automated Quotation System (“NASDAQ”), or (iii) if not quoted on NASDAQ, the average of the
closing bid and asked prices for a Share as quoted by the National Quotation Bureau’s “Pink
Sheets” or the National Association of Securities Dealers’ OTC Bulletin Board System. If
there was no public trade of Common Stock on the date in question, Fair Market Value shall
be determined by reference to the last preceding date on which such a trade was so reported.

     If the Company is not a Publicly Held Corporation at the time a determination of the
Fair Market Value of the Common Stock is required to be made hereunder, the determination of
Fair Market Value for purposes of the Plan shall be made by the Committee in its sole and
absolute discretion. In this respect, the

3

 

Committee may rely on such financial data,
appraisals, valuations, experts, and other sources as, in its sole and absolute discretion,
it deems advisable under the circumstances.

     (s) Grantee. Any Employee or Outside Director who is granted an Incentive Award
under the Plan.

     (t) Immediate Family. With respect to a Grantee, the Grantee’s child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including
adoptive relationships.

     (u) Incentive Agreement. A separate written agreement entered into between the
Company and the Grantee setting forth the terms and conditions pursuant to which an
Incentive Award is granted under the Plan, as such agreement is further defined in
Section 8.1.

     (v) Incentive Award or Award.

     A grant of an award under the Plan to a Grantee, including any Stock Option, Stock
Appreciation Right (SAR), Restricted Stock Award, Performance-Based Restricted Award, Common
Stock Award, Restricted Stock Unit Award or Other Stock-Based Award.

     (w) Independent SAR or SAR. A Stock Appreciation Right described in Section
2.4.

     (x) Insider. While the Company is a Publicly Held Corporation, an individual who is,
on the relevant date, an officer, director or ten percent (10%) beneficial owner of any
class of the Company’s equity securities that is registered pursuant to Section 12 of the
Exchange Act, all as defined under Section 16 of the Exchange Act.

     (y) Option Price. The exercise price at which a Share may be purchased by the
Grantee of a Stock Option.

     (z) Other Stock-Based Award. An award granted by the Committee to a Grantee under
Section 6.1 that is valued in whole or in part by reference to, or is otherwise
based upon, Common Stock.

     (aa) Outside Director. A member of the Board, or an Advisory Director, who is not,
at the time the Incentive Award is granted to him, an officer or employee of the Company or
any Subsidiary.

     (bb) Performance-Based Exception. The performance-based exception from the tax
deductibility limitations of Code Section 162(m), as prescribed in Code Section 162(m)(4)(C)
and Treasury Regulation § 1.162-27(e) (or its successor), which is applicable during such
period that the Company is a Publicly Held Corporation.

     (cc) Performance-Based Restricted Award. Restricted Stock Awards or Restricted Stock
Unit Awards awarded to a Grantee pursuant to Section 4 or Section 5, as applicable,
the grant of which is contingent upon the attainment of specified Performance Criteria,
and/or the vesting of which are subject to a risk of forfeiture if the specified Performance
Criteria are not met within the Performance Period.

     (dd) Performance Criteria. The business criteria that are specified by the Committee
pursuant to Section 7 for an Incentive Award that is intended to qualify for the
Performance-Based Exception; the satisfaction of such business criteria during the
Performance Period being required for the grant or vesting of the particular Incentive Award
to occur, as specified in the Incentive Agreement.

     (ee) Performance Period. A period of time determined by the Committee over which
performance is measured for the purpose of determining a Grantee’s right to and the payment
value of any Performance-Based Restricted Award or Other Stock-Based Award that is intended
to qualify for the Performance-Based Exception.

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     (ff) Plan.
Smith International, Inc. 1989 Long-Term Incentive Compensation Plan, as set forth herein
and as it may be amended from time to time.

     (gg) Publicly Held Corporation. A corporation issuing any class of common equity
securities required to be registered under Section 12 of the Exchange Act.

     (hh) Restricted Stock. Shares of Common Stock issued or transferred to a Grantee
pursuant to Section 4.

     (ii) Restricted Stock Award. An authorization by the Committee to issue or transfer
Restricted Stock to a Grantee pursuant to Section 4.

     (jj) Restricted Stock Unit. A unit granted to a Grantee pursuant to Section
5 which entitles him to receive one share of Common Stock on the date specified in the
Incentive Agreement.

     (kk) Restricted Stock Unit Award. An authorization to award Restricted Stock Units
to Grantee pursuant to Section 5.

     (ll) Restriction Period. The period of time determined by the Committee and set
forth in the Incentive Agreement during which the transfer of an Incentive Award by the
Grantee is restricted.

     (mm) Retirement. The voluntary termination of Employment by an Employee from the
Company and any Subsidiary constituting retirement, and as confirmed through the Company’s
Human Resources Department (i) on any date after the Employee attains the normal retirement
age, (ii) on an earlier retirement date as expressly agreed to by the Committee prior to
termination of Employment, or (iii) as of such other age as may be designated by the
Committee in the Employee’s individual Incentive Agreement.

     (nn) Share. A share of the Common Stock of the Company.

     (oo) Share Pool. The number of Shares authorized for issuance under Section
1.4, as adjusted for awards and payouts under Section 1.5 and as adjusted for
changes in corporate capitalization under Section 8.6.

     (pp) Spread. The difference between the exercise price per Share specified in a SAR
grant and the Fair Market Value of a Share on the date of exercise of the SAR.

     (qq) Stock Appreciation Right or SAR. A Stock Appreciation Right as described in
Section 2.4.

     (rr) Stock Option or Option. A stock option that is a nonstatutory stock option (and
not an “incentive stock option” as described in Code Section 422), as described in
Section 2.

     (ss) Stock Option Award. An authorization to award a Stock Option to a Grantee
pursuant to Section 2.

     (tt) Subsidiary. Any corporation (whether now or hereafter existing) which
constitutes a “subsidiary” of the Company, as defined in Code Section 424(f) of the Code,
and any limited liability company, partnership, or other entity in which the Company
controls fifty percent (50%) or more of the voting power or equity interests.

     (uu) Termination of Directorship. The date upon which a Grantee who is an Outside
Director ceases to be an Outside Director for whatever reason, voluntary or involuntary.
The effective date of such Termination of Directorship shall be the actual date of such
termination (whether occasioned by

5

 

death, Disability, retirement, resignation, non-election
or otherwise). The change in an Outside Director’s position to an Advisory Director shall
not be a Termination of Directorship hereunder.

1.3 Plan Administration

          (a) Authority of the Committee. Except as may be limited by law, and subject to the
provisions herein, the Committee shall have full power to (i) select Grantees who shall
participate in the Plan; (ii) determine the amounts, duration and types of Incentive Awards;
(iii) determine the terms and conditions of Incentive Awards and Incentive Agreements; (iv)
determine whether any Shares subject to Incentive Awards will be subject to any restrictions
on transfer; (v) construe and interpret the Plan and any Incentive Agreement or other
agreement entered into under the Plan; and (vi) establish, amend, or waive rules for the
Plan’s administration. Further, the Committee shall make all other determinations which may
be necessary or advisable for the administration of the Plan.

          With respect to Incentive Awards granted under the Plan to Outside Directors, the Board
shall constitute the Committee.

          (b) Meetings. The Committee shall designate a chairman from among its members who
shall preside at its meetings, and shall designate a secretary, without regard to whether
that person is a member of the Committee, who shall keep the minutes of the proceedings and
all records, documents, and data pertaining to its administration of the Plan. Meetings
shall be held at such times and places as shall be determined by the Committee and the
Committee may hold telephonic meetings. The Committee may take any action otherwise proper
under the Plan by the affirmative vote, taken with or without a meeting, of a majority of
its members. The Committee may authorize any one or more of its members or any officer of
the Company to execute and deliver documents on behalf of the Committee.

          (c) Decisions Binding. All determinations and decisions of the Committee shall be
made in its discretion pursuant to the terms and provisions of the Plan, and shall be final,
conclusive and binding on all persons including the Company, its stockholders, Employees,
Grantees, and their estates and beneficiaries. The Committee’s decisions with
respect to any Incentive Award need not be uniform and may be made selectively among
Incentive Awards and Grantees, whether or not such Incentive Awards are similar or such
Grantees are similarly situated.

          (d) Modification of Outstanding Incentive Awards. Subject to the stockholder
approval requirements of Section 9.7 if applicable, the Committee may, in its
discretion, provide for the extension of the exercisability of an Incentive Award,
accelerate the vesting or exercisability of an Incentive Award (except for an Incentive
Award in the form of a SAR which is subject to Code Section 409A), eliminate or make less
restrictive any restrictions contained in an Incentive Award, waive any restriction or other
provisions of an Incentive Award, or otherwise amend or modify an Incentive Award in any
manner that is either (i) not adverse to the Grantee to whom such Incentive Award was
granted or (ii) consented to by such Grantee. Notwithstanding the preceding provisions of
this subsection, (i) no amendment or other modification of an Incentive Award shall be made
to the extent such modification results in any Stock Option with an exercise price less than
100% of the Fair Market Value per Share on the date of grant, and (ii) no acceleration of
the vesting of any Incentive Award shall be made, except in the event of the Grantee’s
death, Disability, or Retirement, or a Change in Control, or another type of similar
circumstance as determined by the Committee.

          (e) Delegation of Authority. The Committee may delegate to designated officers or
other employees of the Company any of its duties and authority under the Plan pursuant to
such conditions or limitations as the Committee may establish from time to time; provided,
however, the Committee may not delegate to any person the authority (i) to grant Incentive
Awards or (ii) if the Company is a Publicly Held Corporation, to take any action which would
contravene the requirements of Rule 16b-3 under the Exchange Act, the Performance-Based
Exception under Code Section 162(m), or the Sarbanes-Oxley Act of 2002.

6

 

          (f) Expenses of Committee. The Committee may employ legal counsel, including,
without limitation, independent legal counsel and counsel regularly employed by the Company,
and other agents as the Committee may deem appropriate for the administration of the Plan.
The Committee may rely upon any opinion or computation received from any such counsel or
agent. All expenses incurred by the Committee in interpreting and administering the Plan,
including, without limitation, meeting expenses and professional fees, shall be paid by the
Company.

          (g) Surrender of Previous Incentive Awards. The Committee may, in its absolute
discretion, grant Incentive Awards to Grantees on the condition that such Grantees surrender
to the Committee for cancellation such other Incentive Awards as the Committee directs.
Incentive Awards granted on the condition precedent of surrender of outstanding Incentive
Awards shall not count against the limits set forth in Section 1.4 until such time
as such previous Incentive Awards are surrendered and cancelled.

          (h) Indemnification. Each person who is or was a member of the Committee shall be
indemnified by the Company against and from any damage, loss, liability, cost and expense
that may be imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be a party or in which he may be
involved by reason of any action taken or failure to act under the Plan, except for any such
act or omission constituting willful misconduct or gross negligence. Each such person shall
be indemnified by the Company for all amounts paid by him in settlement thereof, with the
Company’s approval, or paid by him in satisfaction of any judgment in any such action, suit,
or proceeding against him, provided he shall give the Company an opportunity, at its own
expense, to handle and defend the same before he undertakes to handle and defend it on his
own behalf. The foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which such persons may be entitled under
the Company’s Articles or Certificate of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them harmless.

	1.4	 	Shares of Common Stock Available for Incentive Awards

     Subject to adjustment under Section 8.6, there shall be available for Incentive Awards
that are granted wholly or partly in Common Stock (including rights or Stock Options that may be
exercised for or settled in Common Stock) Fourteen Million Five Hundred Twenty Thousand
(14,520,000) Shares of Common Stock. Effective as of August 24, 2005, the number of Shares of
Common Stock available shall be increased to Twenty Nine Million and Forty Thousand (29,040,000) to
reflect a two-for-one stock split as of such date. The number of Shares of Common Stock that are
the subject of Incentive Awards under the Plan, and which are forfeited or terminated, expire, are
settled in cash in lieu of Common Stock or in a manner such that all or some of the Shares covered
by an Incentive Award are not issued to a Grantee or are exchanged for Incentive Awards that do not
involve Common Stock (such as cash awards), shall again immediately become available for Incentive
Awards hereunder. The Committee may from time to time adopt and observe such procedures concerning
the counting of Shares against the Plan maximum as it may deem appropriate.

     During any period that the Company is a Publicly Held Corporation, then unless and until the
Committee determines that a particular Incentive Award granted to a Covered Employee is not
intended to comply with the Performance-Based Exception, the following rules shall apply to grants
of Incentive Awards to Covered Employees:

          (a) Subject to adjustment as provided in Section 8.6, the maximum aggregate
number of Shares of Common Stock (including Stock Options, SARs, Restricted Stock,
Performance-Based Restricted Awards, and Other Stock-Based Awards that are paid out in
Shares) that may be granted (in the case of Stock Options and SARs) or that may vest (in the
case of Restricted Stock Awards, Performance-Based Restricted Awards, Restricted Stock Unit
Awards or Other Stock-Based Awards), as applicable, in any calendar year pursuant to any
Incentive Award held by any individual Covered Employee shall be One Million (1,000,000)
Shares.

7

 

          (b) The maximum aggregate cash payout (including SARs or Other Stock-Based Awards that
are paid out in cash) with respect to Incentive Awards granted in any calendar year which
may be made to any Covered Employee shall be Ten Million dollars ($10,000,000).

          (c) With respect to any Stock Option or SAR granted to a Covered Employee that is
canceled or repriced, the number of Shares subject to such Stock Option or SAR shall
continue to count against the maximum number of Shares that may be the subject of Stock
Options or SARs granted to such Covered Employee hereunder and, in this regard, such maximum
number shall be determined in accordance with Code Section 162(m).

          (d) The limitations of subsections (a), (b) and (c) above shall be construed and
administered so as to comply with the Performance-Based Exception.

1.5 Share Pool Adjustments for Awards and Payouts

     The following Incentive Awards and payouts shall reduce, on a one Share for one Share basis,
the number of Shares authorized for issuance under the Share Pool:

          (a) Stock Option Award;

          (b) SAR;

          (c) Common Stock Award;

          (d) Restricted Stock Award;

          (e) Performance-Based Restricted Award;

          (f) A payout of a Restricted Stock Unit Award in Shares; and

          (g) A payout of an Other Stock-Based Award in Shares.

     A cancellation, termination, expiration, forfeiture, or lapse for any reason of any Shares
subject to an Award shall restore, on a one Share for one Share basis, the number of Shares
authorized for issuance under the Share Pool.

1.6 Common Stock Available

     The Common Stock available for issuance or transfer under the Plan shall be made available
from Shares now or hereafter (a) held in the treasury of the Company, (b) authorized but unissued
Shares, or (c) Shares to be purchased or acquired by the Company. No fractional Shares shall be
issued under the Plan; payment for fractional Shares shall be made in cash.

1.7 Eligibility

     Outside Directors and Employees shall be eligible to receive Incentive Awards under the Plan.
The Committee shall from time to time designate those Employees to be granted Incentive Awards, the
type of Incentive Awards granted, the number of Shares, Stock Options, rights or units, as the case
may be, which are subject to an Award, and any other terms or conditions relating to each Award, as
it may deem appropriate to the extent consistent with the provisions of the Plan. A Grantee who
has been granted an Incentive Award may, if otherwise eligible, be granted additional Incentive
Awards at any time.

     No Insider shall be eligible to be granted an Incentive Award that is subject to Rule 16a-3
under the Exchange Act unless and until such Insider has granted a limited power of attorney to
those employees of the

8

 

Company who have been designated by the Company for purposes of future
required filings under the Exchange Act.

1.8 Types of Incentive Awards

     The types of Incentive Awards under the Plan are (a) Stock Options and Stock Appreciation
Rights, (b) Common Stock Awards as described in Section 3, (c) Restricted Stock and
Performance-Based Restricted Awards, (d) Restricted Stock Units as described in Section 5,
(e) Other Stock-Based Awards, or (f) any combination of the foregoing.

SECTION 2

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

2.1 Grant of Stock Options

     The Committee is authorized to grant Stock Options to Employees and to Outside Directors, in
accordance with the terms and conditions of the Plan, and with such additional terms and
conditions, not inconsistent with the Plan, as the Committee shall determine in its discretion.
Successive grants may be made to the same Grantee regardless of whether any Stock Option previously
granted to such person remains unexercised.

2.2 Stock Option Terms

          (a) Written Agreement.

          Each grant of a Stock Option shall be evidenced by a written Incentive Agreement. Among its
other provisions, each Incentive Agreement shall set forth the extent to which the Grantee
shall have the right to exercise the Stock Option following termination of the Grantee’s
Employment or Termination of Directorship, as the case may be. Such provisions shall be
determined in the discretion of the Committee, shall be included in the Grantee’s Incentive
Agreement, and need not be uniform among all Stock Options issued pursuant to the Plan.

          (b) Number of Shares. Each Stock Option Award shall specify the number of Shares of
Common Stock to which it pertains.

          (c) Exercise Price. The exercise price per Share of Common Stock under each Stock
Option shall be determined by the Committee, but in no event shall the exercise price be
less than 100% of the Fair Market Value per Share on the date the Stock Option is granted.
Each Stock Option shall specify the method of exercise which shall be consistent with the
requirements of Section 2.3(a).

          (d) Term. In the Incentive Agreement, the Committee shall fix the term of each Stock
Option, not to exceed ten (10) years from the date of grant. In the event no term is fixed,
such term shall be ten (10) years from the date of grant.

          (e) Exercise. The Committee shall determine the time or times at which a Stock
Option may be exercised, in whole or in part. Each Stock Option may specify the required
period of continuous Employment or service as an Outside Director, as applicable, and/or the
performance objectives to be achieved before the Stock Option (or any portion thereof) will
become exercisable. Each Stock Option Award, the exercise (or timing of the exercise) of
which is dependent, in whole or in part, on the achievement of designated performance
objectives, may specify a minimum level of achievement in respect of the specified
performance objectives below which no Stock Options will be exercisable, as well as a method
for determining the number of Stock Options that will be exercisable if performance is at or
above such minimum but short of full achievement of the performance objectives. All such
terms and conditions shall be set forth in the Incentive Agreement.

9

 

	2.3	 	Stock Option Exercises

          (a) Method of Exercise and Payment. Stock Options shall be exercised by the delivery
of a signed written notice of exercise to the Company as of a date set by the Company on the
effective date of the proposed exercise. The notice shall set forth the number of Shares
with respect to which the Stock Option is to be exercised, accompanied by full payment for
the Shares.

          The Stock Option exercise price upon exercise of any Stock Option shall be payable to
the Company in full either: (i) in cash or its equivalent; or (ii) subject to prior approval
by the Committee in its discretion, by tendering previously acquired Shares having an
aggregate Fair Market Value at the time of exercise equal to the Option Price (provided that
the Shares which are tendered must have been held by the Grantee for at least six (6) months
prior to their tender to satisfy the Option Price); or (iii) subject to prior approval by
the Committee in its discretion, by withholding Shares which otherwise would be acquired on
exercise having an aggregate Fair Market Value at the time of exercise equal to the total
Option Price; or (iv) subject to prior approval by the Committee in its discretion, by a
combination of (i), (ii), and (iii) above.

          Any payment in Shares shall be effected by the surrender of such Shares to the Company
in good form for transfer and shall be valued at their Fair Market Value on the date when
the Stock Option is exercised. Unless otherwise permitted by the Committee in its
discretion, the Grantee shall not surrender, or attest to the ownership of, Shares in
payment of the Option Price if such action would cause the Company to recognize compensation
expense (or additional compensation expense) with respect to the Stock Option for financial
accounting reporting purposes.

          The Committee, in its discretion, also may allow the Option Price to be paid with such
other consideration as shall constitute lawful consideration for the issuance of Shares
(including, without limitation, effecting a “cashless exercise” with a broker of the Stock
Option), subject to applicable securities law restrictions and tax withholdings, or by any
other means which the Committee determines to be consistent with the Plan’s purpose and
applicable law. At the direction of the Grantee, the broker will either (i) sell all of the
Shares received when the Stock Option is exercised and pay the Grantee the proceeds of the
sale (minus the Option Price, withholding taxes and any fees due to the broker); or (ii)
sell enough of the Shares received upon exercise of the Stock Option to cover the Option
Price, withholding taxes and any fees due the broker and deliver the remaining Shares to the
Grantee (either directly or through the Company). Dispositions to a broker effecting a
cashless exercise are not exempt under Section 16 of the Exchange Act while the Company is a
Publicly Held Corporation. Moreover, in no event will the Committee allow the Option Price
to be paid with a form of consideration, including a loan or a “cashless exercise,” if such
form of consideration would violate the Sarbanes-Oxley Act of 2002 as determined by the
Committee.

          As soon as practicable after receipt of a written notification of exercise and full
payment, the Company shall deliver, or cause to be delivered, to or on behalf of the
Grantee, in the name of the Grantee or other appropriate recipient, evidence of ownership
for the number of Shares purchased under the Stock Option.

          Subject to Section 8.4, during the lifetime of a Grantee, each Stock Option
granted to him shall be exercisable only by the Grantee (or his legal guardian in the event
of his Disability) or by a broker-dealer acting on his behalf pursuant to a cashless
exercise under the foregoing provisions of this Section 2.3(a).

          (b) Restrictions on Share Transferability. The Committee may impose such
restrictions on any grant of Stock Options or on any Shares acquired pursuant to the
exercise of a Stock Option as it may deem advisable, including, without limitation,
restrictions under (i) any stockholders’ agreement, buy/sell agreement, right of first
refusal, non-competition, and any other agreement between the Company and any of its
securities holders or employees; (ii) any applicable federal securities laws; (iii) the
requirements of any stock exchange or market upon which such Shares are then listed and/or
traded; or (iv) any blue sky or state securities law applicable to such Shares. Any
certificate issued to evidence Shares issued upon the

10

 

exercise of an Incentive Award may
bear such legends and statements as the Committee shall deem advisable to assure compliance
with federal and state laws and regulations.

          Any Grantee or other person exercising an Incentive Award shall be required, if
requested by the Committee, to give a written representation that the Incentive Award and
the Shares subject to the Incentive Award will be acquired for investment and not with a
view to public distribution; provided, however, that the Committee in its discretion, may
release any person receiving an Incentive Award from any such representations either prior
to or subsequent to the exercise of the Incentive Award.

          (c) Proceeds of Option Exercise. The proceeds received by the Company from the sale
of Shares pursuant to Stock Options exercised under the Plan shall be used for general
corporate purposes.

2.4 Stock Appreciation Rights

          (a) Grant. The Committee may grant Stock Appreciation Rights to Employees that are
independent of Stock Options, but only with respect to Shares that are traded on an
established securities exchange. All SARs granted under the Plan are intended to be exempt
from deferred compensation treatment subject to Code Section 409A.

          (b) General Provisions. The terms and conditions of each SAR shall be evidenced by
an Incentive Agreement. The exercise price per Share shall be not less than one hundred
percent (100%) of the Fair Market Value of a Share on the grant date of the SAR. The term of
the SAR shall be determined by the Committee. The Committee cannot include any feature for
the deferral of compensation other than the deferral of recognition of income until exercise
of the SAR.

          (c) Exercise. SARs shall be exercisable subject to such terms and conditions as the
Committee shall specify in the Incentive Agreement for the SAR grant. No SAR granted to an
Insider may be exercised prior to six (6) months from the date of grant, except in the event
of his death or Disability which occurs prior to the expiration of such six-month period if
so permitted under the Incentive Agreement.

          (d) Settlement. Effective for any SARs issued on or after January 1, 2005, upon
exercise of the SAR, the Grantee shall receive an amount equal to the Spread. The Spread,
less applicable withholdings, shall be payable only in Shares within 30 calendar days of the
exercise date. In no event shall any SAR be settled in any manner other than by delivery of
Shares that are traded on an established securities market. In addition, the Incentive
Agreement under which such SARs are awarded, or any other agreements or arrangements, shall
not provide that the Company will purchase any Shares delivered as a result of the exercise
or vesting of a SAR. Any SARs issued under the Plan prior to January 1, 2005 shall be
subject to the settlement provisions of the Plan as in effect prior to January 1, 2005, but
only to the extent that such settlement is not considered a payment of deferred compensation
that would be subject to Code Section 409A after December 31, 2004.

SECTION 3

COMMON STOCK AWARDS

3.1 Initial Award

     Each Outside Director shall receive, upon initial election or appointment to the Board, the
grant of a Common Stock Award for the number of Shares as deemed appropriate to provide equity
compensation to such Grantee having a Fair Market Value, effective as of the first date of such
Outside Director’s service on the Board, as determined by the Board from time to time in its
discretion.

11

 

3.2 Annual Award

     Each Outside Director shall receive an annual Common Stock Award on each Award Date with
respect to service rendered through the respective Award Date. The Shares subject to the annual
Common Stock Award shall be such number as deemed appropriate to provide equity compensation to
such Grantee having a Fair Market Value as determined by the Board from time to time, and effective
as of the Award Date. The Award Date for annual Common Stock Awards shall be made on the date of
the annual Board meeting, with respect to the Grantee’s service as an Outside Director through such
annual Award Date. The annual Common Stock Awards shall not be prorated for partial service of any
Outside Director, except as described in Section 3.3.

3.3 Termination of Directorship

     If a Termination of Directorship occurs to an Outside Director, then in lieu of the annual
Common Stock Award under Section 3.2, as of the next following annual Award Date such
Outside Director shall be entitled to receive a number of Shares for such year equal to the nearest
whole number of Shares obtained by multiplying the number of Shares having a Fair Market Value
approximately equal to a dollar amount set by the Board from time to time pursuant to Section
3.2 by a fraction, the numerator of which is the number of days from the last previous annual
Award Date up to and including the date of his Termination of Directorship, and the denominator of
which is the number of days from the last previous annual Award Date up to and including his next
following regularly scheduled annual Award Date. Such Shares shall be delivered to the Outside
Director within thirty (30) days following the date of his Termination of Directorship.

3.4 Issuance of Common Stock

     Within thirty (30) days of the Award Date of a Common Stock Award pursuant to Sections
3.1, 3.2 or 3.3, the Company shall cause Shares of Common Stock to be issued in the name of the
Grantee.

3.5 Subsequent Deferrals

     At the discretion of the Committee, a Grantee may elect in writing to defer the receipt of a
Common Stock Award; provided, however, that (i) such election will not take effect until at least
twelve (12) months after the date upon which the election is made by the Grantee, (ii) except in
the case of payment on account of the Grantee’s death or Disability, the payment with respect to
which such election is made must be deferred for a period of not less than five (5) years from the
date the payment would otherwise have been paid, and (iii) such election may not be made less than
twelve (12) months prior to the date the payment was otherwise scheduled to be made. Any
subsequent deferral election made by the Grantee pursuant to this Section 3.5 must be
consistent with the requirements of Code Section 409A.

SECTION 4

RESTRICTED STOCK

4.1 Award of Restricted Stock

     (a) Grant. In consideration of the Grantee’s Employment or service as an Outside
Director, as applicable, Shares of Restricted Stock may be awarded by the Committee with
such restrictions during the Restriction Period as may be imposed by the Committee in its
discretion. The minimum Restriction Period for a Restricted Stock Award shall be three (3)
years, and for a Performance Based Restricted Stock Award shall be one (1) year. Any such
restrictions may differ with respect to a particular Grantee. Restricted Stock shall be
awarded for no additional consideration or such additional consideration as the Committee
may determine, which consideration may be less than, equal to, or more than the Fair Market
Value of the Shares of Restricted Stock on the grant date. The terms and conditions of each
Restricted Stock Award shall be evidenced by an Incentive Agreement and, during the
Restriction Period, Shares of Restricted Stock must remain subject to a “substantial risk of
forfeiture” within the meaning given to such

12

 

term under Code Section 83. Any Restricted Stock Award granted to an Employee may, at the
time of grant, be designated by the Committee as a Performance-Based Restricted Award that
is intended to qualify for the Performance-Based Exception.

     (b) Immediate Transfer Without Immediate Delivery of Restricted Stock. Unless
otherwise specified in the Grantee’s Incentive Agreement, each Restricted Stock Award shall
constitute an immediate transfer of the record and beneficial ownership of the Shares of
Restricted Stock to the Grantee in consideration of his performance of services as an
Employee or Outside Director, as applicable, entitling such Grantee to all voting and other
ownership rights in such Shares.

     As specified in the Incentive Agreement, a Restricted Stock Award may limit the
Grantee’s dividend rights during the Restriction Period in which the Shares of Restricted
Stock are subject to a “substantial risk of forfeiture” (within the meaning given to such
term under Code Section 83) and restrictions on transfer. In the Incentive Agreement, the
Committee may apply any restrictions to the dividends that the Committee deems appropriate.
Without limiting the generality of the preceding sentence, if the grant or vesting of Shares
of Performance-Based Restricted Stock granted to a Covered Employee is designed to comply
with the requirements of the Performance-Based Exception, the Committee may apply any
restrictions it deems appropriate to the payment of dividends declared with respect to such
Shares of Restricted Stock, such that the dividends and/or the Shares of Restricted Stock
maintain eligibility for the Performance-Based Exception. In the event that any dividend
constitutes a derivative security or an equity security pursuant to the rules under Section
16 of the Exchange Act, if applicable, such dividend shall be subject to a vesting period
equal to the remaining vesting period of the Shares subject to the Restricted Stock Award
with respect to which the dividend is paid.

     Shares awarded pursuant to a Restricted Stock Award or Performance-Based Restricted
Stock Award may be issued in the name of the Grantee and held, together with a stock power
endorsed in blank, by (i) the Committee (or its delegate), (ii) Company (or its delegate),
(iii) in trust or in escrow pursuant to an agreement satisfactory to the Committee, or (iv)
in a restricted account held by the transfer agent, as shall be determined by the Committee,
until such time as the restrictions on transfer have expired. All such terms and conditions
shall be set forth in the particular Grantee’s Incentive Agreement. The Company or
Committee, or its delegate, shall issue to the Grantee a receipt evidencing the Shares held
by it which are registered in the name of the Grantee.

4.2 Restrictions

     (a) Forfeiture of Restricted Stock. Restricted Stock awarded to a Grantee may be
subject to the following restrictions until the expiration of the Restriction Period: (i) a
restriction that constitutes a “substantial risk of forfeiture” (as defined under Code
Section 83), or a restriction on transferability; (ii) unless otherwise specified by the
Committee in the Incentive Agreement, the Shares of Restricted Stock that are subject to
restrictions which are not satisfied shall be forfeited and all rights of the Grantee to
such Shares shall terminate; and (iii) any other restrictions that the Committee determines
in advance are appropriate, including, without limitation, rights of repurchase or first
refusal in the Company or provisions subjecting the Restricted Stock to a continuing
substantial risk of forfeiture in the hands of any transferee. Any such restrictions shall
be set forth in the Grantee’s Incentive Agreement.

     (b) Issuance of Certificates. Reasonably promptly after the date of grant with
respect to the Restricted Stock Award, and unless the Committee has approved the use of
electronic stock accounts that do not require the issuance of stock certificates, the
Company shall cause to be issued a stock certificate, registered in the name of the Grantee
to whom the Restricted Stock Award was granted, evidencing such Shares; provided, however,
that the Company shall not cause to be issued such a stock certificate unless it has
received a stock power duly endorsed in blank with respect to such Shares. Each such stock
certificate shall bear the following legend or any other legend approved by the Company:

The transferability of this certificate and the shares of stock represented
hereby are subject to the restrictions, terms and conditions (including
forfeiture and restrictions

13

 

against transfer) contained in the Smith International, Inc. 1989 Long-Term
Incentive Compensation Plan and an Incentive Agreement entered into between
the registered owner of such shares and Smith International, Inc. A copy of
the Plan and Incentive Agreement are on file in the main corporate office of
Smith International, Inc.

Such legend shall not be removed from the certificate evidencing such Shares of Restricted
Stock unless and until such Shares vest pursuant to the terms of the Incentive Agreement.

     (c) Removal of Restrictions. The Committee, in its discretion, shall have the
authority to provide in an Incentive Agreement that the restrictions on the Restricted Stock
shall lapse upon the occurrence of the Grantee’s death or Disability, or in the event of a
Change in Control. In addition, the Committee shall have the authority, in its discretion,
to remove any or all of the restrictions on the Restricted Stock if it determines that, by
reason of a change in applicable law or another change in circumstance arising after the
grant date of the Restricted Stock Award, such action is necessary or appropriate.

4.3 Delivery of Shares of Common Stock

     When the restrictions in the Incentive Agreement have been satisfied, subject to (a)
withholding taxes under Section 9.3 with respect to Employees and (b) the terms of the
Incentive Agreement, the Company shall cause Shares of Common Stock to be issued in the name of the
Grantee free of restrictions.

SECTION 5

RESTRICTED STOCK UNITS

5.1 Award of Restricted Stock Units

     In consideration of the Grantee’s Employment or service as an Outside Director, as applicable,
Restricted Stock Unit Awards may be awarded by the Committee to designated Grantees, as determined
in the discretion of the Committee. Any Restricted Stock Unit Award to an Employee may, at the
time of grant, be designated by the Committee as a Performance-Based Restricted Award that is
intended to qualify for the Performance-Based Exception. The minimum Restriction Period for a
Restricted Stock Unit Award shall be three (3) years, and for a Performance Based Restricted Stock
Unit Award shall be one (1) year.

5.2 Restricted Stock Unit Award Terms

     (a) Written Agreement. The terms and conditions of each grant of a Restricted Stock
Unit Award shall be evidenced by an Incentive Agreement, which shall specify among other
provisions (i) the number of Restricted Stock Units awarded to the Grantee, (ii) a specified
period during which such Restricted Stock Units must remain subject to a “substantial risk
of forfeiture” within the meaning given to such term under Code Section 409A, and (iii) the
Performance Criteria, if applicable.

     (b) Vesting. The Committee, in its discretion, shall specify in the Grantee’s
Incentive Agreement the date or dates upon which the “substantial risk of forfeiture” (as
described in Section 4.2(a)) will lapse (the “Vesting Date”), and the events upon
which such lapse occurs.

     (c) Payment. When the restrictions in the Incentive Agreement have been satisfied,
subject to (i) withholding taxes under Section 9.3 with respect to Employees and
(ii) the terms of the Incentive Agreement, Restricted Stock Units shall be paid in Shares or
in cash, at the discretion of the Committee, within thirty (30) days after the later of (A)
the Vesting Date (as defined in Section 5.2(b)) or (B) the date that satisfaction of
any Performance Criteria for the Restricted Stock Units have been certified by the Committee
but, in either event, not later than 2-1/2 months following the last day of the calendar
year containing the Vesting Date.

14

 

     (d) Subsequent Deferrals. At the discretion of the Committee, a Grantee may elect
in writing to defer the receipt of Shares payable upon vesting of a Restricted Stock Unit
Award; provided, however, that (i) such election will not take effect until at least twelve
(12) months after the date upon which the election is made by the Grantee, (ii) except in
the case of payment on account of the Grantee’s death or Disability, the payment with
respect to which such election is made must be deferred for a period of not less than five
(5) years from the date the payment would otherwise have been paid, and (iii) such election
may not be made less than twelve (12) months prior to the date the payment was otherwise
scheduled to be made. Any subsequent deferral election made by the Grantee pursuant to this
Section 5.2(d) must be consistent with the requirements of Code Section 409A.

SECTION 6

OTHER STOCK-BASED AWARDS

6.1 Grant of Other Stock-Based Awards

     Other Stock-Based Awards may be awarded by the Committee to selected Grantees that are payable
in Shares, as determined by the Committee to be consistent with the goals of the Company. Other
types of Stock-Based Awards include, without limitation, purchase rights, Shares of Common Stock
awarded that are not subject to any restrictions or conditions other than Common Stock Awards
pursuant to Section 3 (limited, however, to not more than five percent (5%) of the Shares
available under the Plan under Section 1.4), convertible or exchangeable debentures, other
rights convertible into Shares, Incentive Awards valued by reference to the performance of a
specified Subsidiary, division or department of the Company, and settlement in cancellation of
rights of any person with a vested interest in any other plan, fund, program or arrangement that is
or was sponsored, maintained or participated in by the Company or any Subsidiary. As is the case
with other types of Incentive Awards, Other Stock-Based Awards may be awarded either alone or in
addition to or in conjunction with any other Incentive Awards. Other Stock-Based Awards are not
intended to be deferred compensation that is subject to Code Section 409A unless otherwise
determined by the Committee.

6.2 Other Stock-Based Award Terms

     (a) Written Agreement. The terms and conditions of each grant of an Other
Stock-Based Award shall be evidenced by an Incentive Agreement.

     (b) Purchase Price. Except to the extent that an Other Stock-Based Award is granted
in substitution for an outstanding Incentive Award or is delivered upon exercise of a Stock
Option, the amount of consideration required to be received by the Company shall be either
(i) no consideration other than services actually rendered (in the case of authorized and
unissued Shares) or to be rendered, or (ii) as otherwise specified in the Incentive
Agreement.

     (c) Performance Criteria and Other Terms. In its discretion, the Committee may
specify Performance Criteria for (i) vesting in Other Stock-Based Awards and (ii) payment
thereof to the Grantee, as it may determine in its discretion. The extent to which any such
Performance Criteria have been met shall be determined and certified by the Committee in
accordance with the requirements to qualify for the Performance-Based Exception under Code
Section 162(m). All terms and conditions of Other Stock-Based Awards shall be determined by
the Committee and set forth in the Incentive Agreement.

     (d) Payment. Other Stock-Based Awards shall be paid in Shares, in a single payment
or in installments on such dates as determined by the Committee; all as specified in the
Incentive Agreement.

15

 

SECTION 7

PERFORMANCE CRITERIA

     As determined by the Committee at the time of grant, Performance-Based Restricted Awards,
Other Stock-Based Awards and other types of Incentive Awards made under the Plan may be granted to
an Employee subject to performance objectives relating to one or more of the following within the
meaning of Code Section 162(m) in order to qualify for the Performance-Based Exception (the
“Performance Criteria”):

	 	(a)	 	profits (including, but not limited to, profit growth, net operating profit or
economic profit);
	 
	 	(b)	 	profit-related return ratios;
	 
	 	(c)	 	return measures (including, but not limited to, return on assets, capital,
equity, investment or sales);
	 
	 	(d)	 	cash flow (including, but not limited to, operating cash flow, free cash flow
or cash flow return on capital or investments);
	 
	 	(e)	 	earnings (including but not limited to, total shareholder return, earnings per
share or earnings before or after taxes);
	 
	 	(f)	 	net sales growth;
	 
	 	(g)	 	net earnings or income (before or after taxes, interest, depreciation and/or
amortization);
	 
	 	(h)	 	gross, operating or net profit margins;
	 
	 	(i)	 	productivity ratios;
	 
	 	(j)	 	share price (including, but not limited to, growth measures and total
shareholder return);
	 
	 	(k)	 	turnover of assets, capital, or inventory;
	 
	 	(l)	 	expense targets;
	 
	 	(m)	 	margins;
	 
	 	(n)	 	measures of health, safety or environment;
	 
	 	(o)	 	operating efficiency;
	 
	 	(p)	 	customer service or satisfaction;
	 
	 	(q)	 	market share;
	 
	 	(r)	 	credit quality; and
	 
	 	(s)	 	working capital targets.

     Performance Criteria may be stated in absolute terms or relative to comparison companies or
indices to be achieved during a Performance Period.

     The Committee shall establish one or more Performance Criteria for each Incentive Award that
is intended to qualify for the Performance-Based Exception no later than ninety (90) days after the
beginning of the

16

 

Performance Period to which the Award relates. In establishing the Performance Criteria for
each applicable Incentive Award, the Committee may provide that the effect of specified
extraordinary or unusual events will be included or excluded (including, but not limited to, all
items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in
occurrence or related to the disposal of a segment of business or related to a change in accounting
principle, all as determined in accordance with standards by Opinion No. 30 of the Accounting
Principles Board (APB Opinion 30) or other authoritative financial accounting standards). The
terms of the stated Performance Criteria for each applicable Incentive Award must preclude the
Committee’s discretion to increase the amount payable to any Grantee that would otherwise be due
upon attainment of the Performance Criteria. The Performance Criteria specified in any Incentive
Agreement need not be applicable to all Incentive Awards, and may be particular to an individual
Grantee’s function or business unit. The Committee may establish the Performance Criteria of the
Company or any entity which is affiliated by common ownership with the Company as determined and
designated by the Committee, in its discretion, in the Incentive Agreement.

SECTION 8

PROVISIONS RELATING TO PLAN PARTICIPATION

8.1 Incentive Agreement

     Each Grantee to whom an Incentive Award is granted (other than a Common Stock Award) shall be
required to enter into an Incentive Agreement with the Company, in such a form as is provided by
the Committee. The Incentive Agreement shall contain such specific terms as determined by the
Committee, in its discretion, with respect to the Grantee’s particular Incentive Award. Such terms
need not be uniform among all Grantees or any similarly situated Grantees. The Incentive Agreement
may include, without limitation, vesting, forfeiture and other provisions that are specific to the
individual Grantee’s Incentive Award, as well as, for example, provisions to the effect that the
Grantee (a) shall not disclose any confidential information acquired during Employment with the
Company, (b) shall abide by all the terms and conditions of the Plan and such other terms and
conditions as may be imposed by the Committee, (c) shall not interfere with the employment or other
service of any employee, (d) shall not compete with the Company or become involved in a conflict of
interest with the interests of the Company, (e) shall forfeit an Incentive Award if terminated for
Cause, (f) shall not be permitted to make an election under Code Section 83(b) when applicable, and
(g) shall be subject to any other agreement between the Grantee and the Company regarding Shares
that may be acquired under an Incentive Award including, without limitation, a stockholders’
agreement, buy-sell agreement, or other agreement restricting the transferability of Shares by
Grantee. An Incentive Agreement shall include such terms and conditions as are determined by the
Committee, in its discretion, to be appropriate with respect to the Grantee. The Incentive
Agreement shall be signed by the Grantee to whom the Incentive Award is made and by an Authorized
Officer; provided, however, effective as of January 1, 2006, the Committee, in its discretion, may
from time to time approve another method of acceptance.

8.2 No Right to Employment

     Nothing in the Plan or any instrument executed pursuant to the Plan shall create any
Employment rights (including without limitation, rights to either continued Employment or service
as an Outside Director) in any Grantee or affect any right to terminate the Employment of any
Grantee or service as an Outside Director at any time without regard to the existence of the Plan.

8.3 Securities Requirements

     The Company shall be under no obligation to effect the registration pursuant to the Securities
Act of 1933 of any Shares to be issued hereunder or to effect similar compliance under any state
laws. Notwithstanding anything herein to the contrary, the Company shall not be obligated to cause
to be issued or delivered any certificates evidencing Shares pursuant to the Plan unless and until
the Company is advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authorities, and the requirements
of any securities exchange on which Shares are traded. The Committee may require, as a condition of
the issuance and delivery of certificates evidencing Shares pursuant to the terms hereof, that the
recipient of such

17

 

Shares make such covenants, agreements and representations, and that such certificates bear
such legends, as the Committee, in its discretion, deems necessary or desirable.

     The Committee may, in its discretion, defer the effectiveness of any payment under an
Incentive Award to allow the issuance of Shares to be made pursuant to registration or an exemption
from registration or other methods for compliance available under federal or state securities laws.
The Committee shall inform the Grantee in writing of its decision to defer the effectiveness of
the exercise of an Incentive Award. During the period that the effectiveness of the exercise of an
Incentive Award has been deferred, the Grantee may, by written notice to the Committee withdraw
such exercise and obtain the refund of any amount paid with respect thereto.

     If the Shares issuable on payment of an Incentive Award are not registered under the
Securities Act of 1933, the Company may imprint on the certificate for such Shares the following
legend or any other legend which counsel for the Company considers necessary or advisable to comply
with the Securities Act of 1933:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (“ACT”), OR THE SECURITIES LAWS OF ANY STATE. THE
SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO ANY
APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS OR
PURSUANT TO A WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED.

8.4 Transferability

     Incentive Awards granted under the Plan shall not be transferable or assignable other than:
(a) by will or the laws of descent and distribution or (b) pursuant to a qualified domestic
relations order (as defined under Code Section 414(p)); provided, however, only with respect to
Incentive Awards consisting of Stock Options awarded to an Employee, the Committee may, in its
discretion, authorize all or a portion of the Stock Options to be granted on terms which permit
transfer by the Grantee to (i) the members of the Grantee’s Immediate Family, (ii) a trust or
trusts for the exclusive benefit of Immediate Family members, (iii) a partnership in which such
Immediate Family members are the only partners, or (iv) any other entity owned solely by Immediate
Family members; provided that (A) there may be no consideration for any such transfer, (B) the
Incentive Agreement pursuant to which such Stock Options are granted must be approved by the
Committee, and must expressly provide for transferability in a manner consistent with this
Section 8.4, (C) subsequent transfers of transferred Stock Options shall be prohibited
except in accordance with clauses (a) and (b) (above) of this sentence, and (D) there may be no
transfer of any Incentive Award in a listed transaction as described in IRS Notice 2003-47.
Following any permitted transfer, the Stock Option shall continue to be subject to the same terms
and conditions as were applicable immediately prior to transfer, provided that the term “Grantee”
shall be deemed to refer to the transferee. The events of termination of employment, as set out in
Section 8.7 and in the Incentive Agreement, shall continue to be applied with respect to
the original Grantee, and the Incentive Award shall be exercisable by the transferee only to the
extent, and for the periods, specified in the Incentive Agreement.

     Except as may otherwise be permitted under the Code, in the event of a permitted transfer of a
Stock Option hereunder, the original Grantee shall remain subject to withholding taxes upon
exercise. In addition, the Company and the Committee shall have no obligation to provide any
notices to any Grantee or transferee thereof, including, for example, notice of the expiration of
an Incentive Award following the original Grantee’s termination of Employment.

     The designation by a Grantee of a beneficiary of an Incentive Award shall not constitute
transfer of the Incentive Award. No transfer by will or by the laws of descent and distribution
shall be effective to bind the Company unless the Committee has been furnished with a copy of the
deceased Grantee’s enforceable will or such other evidence as the Committee deems necessary to
establish the validity of the transfer. Any attempted transfer in

18

 

violation of this Section 8.4 shall be void and ineffective. All determinations under
this Section 8.4 shall be made by the Committee, in its discretion.

8.5 Rights as a Stockholder

     (a) No Stockholder Rights. Except as otherwise provided in Section 4.1(b)
for grants of Restricted Stock, a Grantee of an Incentive Award (or a permitted transferee
of such Grantee) shall have no rights as a stockholder with respect to any Shares of Common
Stock until the issuance of a stock certificate or other record of ownership for such
Shares.

     (b) Representation of Ownership. In the case of the exercise of an Incentive Award
by a person or estate acquiring the right to exercise such Incentive Award by reason of the
death or Disability of a Grantee, the Committee may require reasonable evidence as to the
ownership of such Incentive Award or the authority of such person. The Committee may also
require such consents and releases of taxing authorities as it deems advisable.

8.6 Change in Stock and Adjustments

     (a) Changes in Law or Circumstances. Subject to Section 8.8 (which only
applies in the event of a Change in Control), in the event of any change in applicable law
or any change in circumstances which results in or would result in any dilution of the
rights granted under the Plan, or which otherwise warrants an equitable adjustment because
it interferes with the intended operation of the Plan, then, if the Board or Committee
should so determine, in its absolute discretion, that such change equitably requires an
adjustment in the number or kind of shares of stock or other securities or property
theretofore subject, or which may become subject, to issuance or transfer under the Plan or
in the terms and conditions of outstanding Incentive Awards, such adjustment shall be made
in accordance with such determination. Such adjustments may include changes with respect to
(i) the aggregate number of Shares that may be issued under the Plan, (ii) the number of
Shares subject to Incentive Awards, and (iii) the price per Share for outstanding Incentive
Awards, but shall not result in the grant of any Stock Option with an exercise price less
than 100% of the Fair Market Value per Share on the date of grant. The Board or Committee
shall give notice to each applicable Grantee of such adjustment which shall be effective and
binding.

     (b) Exercise of Corporate Powers. The existence of the Plan or outstanding Incentive
Awards hereunder shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalization, reorganization
or other changes in the Company’s capital structure or its business or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or prior
preference stocks ahead of or affecting the Common Stock or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding whether of a similar character
or otherwise.

     (c) Recapitalization of the Company. Subject to Section 8.8 (which only
applies in the event of a Change in Control), if while there are Incentive Awards
outstanding, the Company shall effect any subdivision or consolidation of Shares of Common
Stock or other capital readjustment, the payment of a stock dividend, stock split,
combination of Shares, recapitalization or other increase or reduction in the number of
Shares outstanding, without receiving compensation therefor in money, services or property,
then the number of Shares available under the Plan and the number of Incentive Awards which
may thereafter be settled shall (i) in the event of an increase in the number of Shares
outstanding, be proportionately increased and the Option Price or Fair Market Value of the
Incentive Awards awarded shall be proportionately reduced; and (ii) in the event of a
reduction in the number of Shares outstanding, be proportionately reduced, and the Option
Price or Fair Market Value of the Incentive Awards awarded shall be proportionately
increased. The Board or Committee shall take such action and whatever other action it deems
appropriate, in its discretion, so that the value of each outstanding Incentive Award to the
Grantee shall not be adversely affected by a corporate event described in this Section
8.6(c).

19

 

     (d) Issue of Common Stock by the Company. Except as hereinabove expressly provided
in this Section 8.6 and subject to Section 8.8 in the event of a Change in
Control, the issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, for cash or property, or for labor or services, either
upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon
any conversion of shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made with respect
to, the number of, Option Price or Fair Market Value of, any Incentive Awards then
outstanding under previously granted Incentive Awards; provided, however, in such event,
outstanding Shares of Restricted Stock shall be treated the same as outstanding unrestricted
Shares of Common Stock.

     (e) Assumption under the Plan of Outstanding Stock Options. Notwithstanding any
other provision of the Plan, the Board or Committee, in its discretion, may authorize the
assumption and continuation under the Plan of outstanding and unexercised stock options or
other types of stock-based incentive awards that were granted under a stock option plan (or
other type of stock incentive plan or agreement) that is or was maintained by a corporation
or other entity that was merged into, consolidated with, or whose stock or assets were
acquired by, the Company as the surviving corporation. Any such action shall be upon such
terms and conditions as the Board or Committee, in its discretion, may deem appropriate,
including provisions to preserve the holder’s rights under the previously granted and
unexercised stock option or other stock-based incentive award; such as, for example,
retaining an existing exercise price under an outstanding stock option. Any such assumption
and continuation of any such previously granted and unexercised incentive award shall be
treated as an outstanding Incentive Award under the Plan and shall thus count against the
number of Shares reserved for issuance pursuant to Section 1.4. In addition, any
Shares issued by the Company through the assumption or substitution of outstanding grants
from an acquired company shall reduce the Shares available for grants under Section 1.4 and,
if not prohibited by any applicable rule or regulation and after obtaining any required
shareholder approval, shall likewise increase the number of shares available for Incentive
Awards.

     (f) Assumption of Incentive Awards by a Successor. Subject to the accelerated
vesting and other provisions of Section 8.8 that apply in the event of a Change in
Control, in the event of a Corporate Event (defined below), each Grantee shall be entitled
to receive, in lieu of the number of Shares subject to Incentive Awards, such shares of
capital stock or other securities or property as may be issuable or payable with respect to
or in exchange for the number of Shares which Grantee would have received had he been
entitled to exercise Shares subject to the Award immediately prior to such Corporate Event,
together with any conforming adjustments. For this purpose, Shares of Restricted Stock
shall be treated the same as unrestricted outstanding Shares of Common Stock. A “Corporate
Event” means any of the following: (i) a dissolution or liquidation of the Company, (ii) a
sale of all or substantially all of the Company’s assets, or (iii) a merger, consolidation
or combination involving the Company (other than a merger, consolidation or combination (A)
in which the Company is the continuing or surviving corporation and (B) which does not
result in the outstanding Shares being converted into or exchanged for different securities,
cash or other property, or any combination thereof). The Board or Committee shall take
whatever other action it deems appropriate to preserve the rights of Grantees holding
outstanding Incentive Awards.

     Notwithstanding the previous paragraph of this Section 8.6(f), but subject to
any accelerated vesting or other provisions of Section 8.8 or the Incentive
Agreement that apply in the event of a Change in Control, in the event of a Corporate Event
(described in the previous paragraph), the Board or Committee, in its discretion, shall have
the right and power to:

(i) cancel, effective immediately prior to the occurrence of the
Corporate Event, each outstanding Incentive Award (whether or not then exercisable)
and, in full consideration of such cancellation, pay to the Grantee an amount in
cash equal to the excess of (A) the value, as determined by the Board or Committee,
of the property (including cash) received by the holders of Common Stock as a result
of such Corporate Event over (B) the exercise price of such Incentive Award, if any;
provided, however, this subsection (i) shall be inapplicable to an Incentive Award
granted within six (6) months before the occurrence of the Corporate Event if the
Grantee is an
Insider and such disposition is not exempt under Rule 16b-3 (or other rules
preventing liability of the Insider under Section 16(b) of

20

 

the Exchange Act) and, in
that event, the provisions hereof shall be applicable to such Incentive Award after
the expiration of six (6) months from the date of grant; or

       (ii) provide for the exchange or substitution of each Incentive Award
outstanding immediately prior to such Corporate Event (whether or not then
exercisable) for another award with respect to the Common Stock or other property
for which such Incentive Award is exchangeable and, incident thereto, make an
equitable adjustment as determined by the Board or Committee, in its discretion, in
the Option Price or exercise price of the Incentive Award, if any, or in the number
of Shares or amount of property (including cash) subject to the Incentive Award; or

       (iii) provide for assumption of the Plan and such outstanding
Incentive Awards by the surviving entity or its parent.

     The Board or Committee, in its discretion, shall have the authority to take whatever
action it deems to be necessary or appropriate to effectuate the provisions of this
Section 8.6(f).

8.7 Termination of Employment or Directorship, Death, Disability and Retirement

     (a) Termination of Employment. Unless otherwise expressly provided in the Grantee’s
Incentive Agreement with respect to a Grantee who is an Employee, if the Grantee’s
Employment is terminated (i) involuntarily by the Company without Cause or (ii) for any
other reason except due to his death, Disability, Retirement, for Cause, or his voluntary
resignation, as subject to the following provisions of this Section 8.7, then any
non-vested portion of any Stock Option or other Incentive Award at the time of such
termination shall automatically expire and terminate and no further vesting shall occur
after the termination date unless the Committee, in its discretion, provides for an
extension of exercisability or other modification pursuant to Section 1.3(d) or
Section 8.7(g). In such event, except as otherwise expressly provided in his
Incentive Agreement or as determined by the Committee in its discretion, the Grantee shall
be entitled to exercise his rights only with respect to the vested portion of the Incentive
Award for a period that shall end on the earlier of (i) the expiration date set forth in the
Incentive Agreement or (ii) one (1) year after the date of his termination of Employment.

     (b) Termination of Directorship. With respect to a Grantee who is an Outside
Director, unless otherwise specifically provided in the Grantee’s Incentive Agreement, and
except as provided in Section 3.3, upon a Grantee’s Termination of Directorship, all
outstanding Awards that are not vested as of such Termination of Directorship will be
forfeited.

     (c) Termination of Employment for Cause. Unless otherwise expressly provided in the
Grantee’s Incentive Agreement with respect to a Grantee who is an Employee, in the event of
termination of the Grantee’s Employment for Cause, all vested and non-vested Incentive
Awards granted to such Grantee shall immediately expire, and shall not be exercisable to any
extent, as of 12:01 a.m. (CST) on the date of such termination of Employment.

     (d) Voluntary Resignation. Unless otherwise expressly provided in the Grantee’s
Incentive Agreement, with respect to a Grantee who is an Employee, in the event of
termination of the Grantee’s Employment due to his voluntary resignation except resulting
from his Disability or Retirement:

       (i) any non-vested portion of any outstanding Incentive Award shall
immediately terminate and no further vesting shall occur; and

       (ii) any vested Incentive Award shall expire on the earlier of (A)
the expiration date set forth in the Incentive Agreement for such Incentive Award,
or (B) the expiration of ninety (90) days after the date of his termination of
Employment.

21

 

     (e) Retirement. Unless otherwise expressly provided in the Grantee’s Incentive
Agreement, with respect to a Grantee who is an Employee, upon the termination of Employment
due to Retirement:

       (i) any non-vested portion of any outstanding Incentive Award shall
immediately terminate and no further vesting shall occur; and

       (ii) any vested Incentive Award shall expire on the earlier of (A)
the expiration date set forth in the Incentive Agreement for such Incentive Award,
or (B) the expiration of three (3) years after the date of his termination of
Employment.

     (f) Disability or Death. Unless otherwise expressly provided in the Grantee’s
Incentive Agreement, with respect to a Grantee who is an Employee, upon termination of
Employment as a result of the Grantee’s Disability or death:

     (i) any non-vested portion of any outstanding Incentive Award shall
immediately terminate upon termination of Employment and no further vesting shall
occur; and

     (ii) any vested Incentive Award shall expire on the earlier of (A)
the expiration date set forth in the Incentive Agreement for such Incentive Award or
(B) the expiration of three (3) years after the date of his termination of
Employment.

     In the event that the Grantee dies or becomes permanently and totally disabled as
determined by the Committee within the one-year period specified in Section 8.7(a)
(above), then notwithstanding Section 8.7(a), the Incentive Award shall expire on
the earlier of (A) the expiration date set forth in the Incentive Agreement for such
Incentive Award or (B) the expiration of one (1) year after the date of his death or the
date he is determined to be permanently and totally disabled as such date is determined by
the Committee.

     In the event that the Grantee dies or becomes permanently and totally disabled as
determined by the Committee within the three-year period specified in Section 8.7(e)
(above), then notwithstanding Section 8.7(e), the Incentive Award shall expire on
the earlier of: (A) the expiration date set forth in the Incentive Agreement for such
Incentive Award or (B) the later of either (i) the expiration of three (3) years after the
date of his Retirement or (ii) one (1) year from the date of his death or the date he is
determined to be permanently and totally disabled as such date is determined by the
Committee.

     (g) Continuation. Subject to the conditions and limitations of the Plan and
applicable law and regulation, with respect to a Grantee who is an Employee, in the event
that the Grantee ceases to be an Employee, the Committee and Grantee, in their discretion,
may mutually agree with respect to any outstanding Incentive Award then held by the Grantee
(i) for an acceleration or other adjustment in any vesting schedule applicable to the
Incentive Award; (ii) for a continuation of the exercise period following termination for a
longer period than is otherwise provided under such Incentive Award; or (iii) to any other
change in the terms and conditions of the Incentive Award. In the event of any such change
to an outstanding Incentive Award, a written amendment to the Grantee’s Incentive Agreement
shall be required.

8.8 Change in Control

     Notwithstanding any contrary provision in the Plan, with respect to a Grantee who is an
Employee, in the event of a Change in Control (as defined below), the following actions shall
automatically occur as of the day immediately preceding the Change in Control date unless expressly
provided otherwise in the individual Grantee’s Incentive Agreement:

     (a) all of the Stock Options and Stock Appreciation Rights then outstanding shall
become 100% vested and immediately and fully exercisable;

22

 

     (b) all of the restrictions and conditions of any Restricted Stock and any Other
Stock-Based Awards then outstanding shall be deemed satisfied, and the Restriction Period
with respect thereto shall be deemed to have expired, and thus each such Incentive Award
shall become free of all restrictions and fully vested; and

     (c) all of the Performance-Based Restricted Awards and any Other Stock-Based Awards
shall become fully vested and deemed earned in full at the specified 100% target amounts,
and promptly paid within thirty (30) days to the affected Grantees without regard to payment
schedules and notwithstanding that the applicable performance cycle, retention cycle or
other restrictions and conditions have not been completed or satisfied.

     For all purposes of the Plan, a “Change in Control” of the Company means the occurrence of any
one or more of the following events:

     (a) The acquisition by any individual, entity or group (a “Person”) (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of
either (i) the then outstanding Shares (the “Outstanding Company Stock”) or (ii) the
combined voting power of the then outstanding voting securities of the Company entitled to
vote generally in the election of directors (the “Outstanding Company Voting Securities”);
provided, however, that the following acquisitions shall not constitute a Change in Control:
(i) any acquisition directly from the Company or any Subsidiary, (ii) any acquisition by the
Company or any Subsidiary or by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any Subsidiary, or (iii) any acquisition by any corporation
pursuant to a reorganization, merger, consolidation or similar business combination
involving the Company (a “Merger”), if, following such Merger, the conditions described in
Section 8.8(c) (below) are satisfied;

     (b) Individuals who, as of the Effective Date, constitute the Board of Directors of the
Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual becoming a director subsequent to the
Effective Date whose election, or nomination for election by the Company’s stockholders, was
approved by a vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other than the
Board;

     (c) Consummation of a reorganization, merger or consolidation, or sale or other
disposition of all or substantially all of the assets of the Company (a “Business
Combination”), in each case, unless, following such Business Combination, (1) all or
substantially all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or indirectly,
more than sixty percent (60%) of, respectively, the then outstanding Shares and the combined
voting power of the then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company’s assets either
directly or through one or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the Outstanding Company Stock
and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit plan (or
related trust) of the Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, twenty (20%) or more of, respectively, the then
outstanding Shares resulting from such Business Combination or the combined voting power of
the then outstanding voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination, and (3) at least a
majority of the members of the board of directors of the corporation resulting from
such Business Combination were members of the Incumbent Board at the time of the execution
of the initial agreement, or the action of the Board, providing for such Business
Combination;

23

 

     (d) The adoption of any plan or proposal for the liquidation or dissolution of the
Company; or

     (e) Any other event that a majority of the Board, in its sole discretion, determines to
constitute a Change in Control hereunder.

     Notwithstanding the occurrence of any of the foregoing events set out in this Section
8.8 which would otherwise result in a Change in Control, the Board may determine in its
discretion, if it deems it to be in the best interest of the Company, that an event or events
otherwise constituting or reasonably leading to a Change in Control shall not be deemed a Change in
Control hereunder. Such determination shall be effective only if it is made by the Board (i) prior
to the occurrence of an event that otherwise would be, or reasonably lead to, a Change in Control,
or (ii) after such event only if made by the Board a majority of which is composed of directors who
were members of the Board immediately prior to the event that otherwise would be, or reasonably
lead to, a Change in Control.

     Notwithstanding the foregoing provisions of this Section 8.8, to the extent that any
payment or acceleration hereunder is subject to Code Section 409A for deferred compensation,
whether a Change in Control has occurred with respect to such amount shall be determined within the
meaning set forth in Code Section 409A(a)(2)(A)(v), but only to the extent inconsistent with the
foregoing provisions as determined in the discretion of the Committee.

8.9 Exchange of Incentive Awards

     The Committee may, in its discretion, permit any Grantee to surrender outstanding Incentive
Awards in order to exercise or realize his rights under other Incentive Awards or in exchange for
the grant of new Incentive Awards, or require holders of Incentive Awards to surrender outstanding
Incentive Awards (or comparable rights under other plans or arrangements) as a condition precedent
to the grant of new Incentive Awards.

8.10 Financing

     Subject to the requirements of the Sarbanes-Oxley Act of 2002, the Company may extend and
maintain, or arrange for and guarantee, the extension and maintenance of financing to any Grantee
to purchase Shares pursuant to exercise of an Incentive Award upon such terms as are approved by
the Committee in its discretion.

SECTION 9

GENERAL

9.1 Effective Date and Grant Period

     The Plan is adopted by the Board effective as of the Effective Date, subject to the approval
of the stockholders of the Company. Incentive Awards may be granted under the Plan at any time
prior to receipt of such stockholder approval; provided, however, (a) no Shares may be issued
pursuant to Incentive Awards granted after the Effective Date until the requisite stockholder
approval is obtained, and (b) if the requisite stockholder approval is not obtained then any
Incentive Awards granted hereunder after the Effective Date shall automatically become null and
void and of no force or effect. Notwithstanding the foregoing, any Incentive Award that is
intended to satisfy the Performance-Based Exception shall not be granted until the terms of the
Plan are disclosed to, and approved by, stockholders of the Company in accordance with the
requirements of the Performance-Based Exception.

9.2 Funding and Liability of Company

     No provision of the Plan shall require the Company, for the purpose of satisfying any
obligations under the Plan, to purchase assets or place any assets in a trust or other entity to
which contributions are made, or to otherwise segregate any assets. In addition, the Company shall
not be required to maintain separate bank accounts, books, records or other evidence of the
existence of a segregated or separately maintained or administered fund for purposes of the Plan.
Although bookkeeping accounts may be established with respect to Grantees who are entitled to cash,
Common Stock or rights thereto under the Plan, any such accounts shall be used merely as a
bookkeeping

24

 

convenience. The Company shall not be required to segregate any assets that may at any
time be represented by cash, Common Stock or rights thereto. The Plan shall not be construed as
providing for such segregation, nor shall the Company, the Board or the Committee be deemed to be a
trustee of any cash, Common Stock or rights thereto. Any liability or obligation of the Company to
any Grantee with respect to an Incentive Award shall be based solely upon any contractual
obligations that may be created by the Plan and any Incentive Agreement, and no such liability or
obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company, the Board nor the Committee shall be required to give
any security or bond for the performance of any obligation that may be created by the Plan.

9.3 Withholding Taxes

     (a) Tax Withholding. The Company shall have the power and the right to deduct or
withhold, or require a Grantee to remit to the Company, an amount sufficient to satisfy
federal, state, and local taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as the result of an Incentive Award.
Upon the lapse of restrictions on Restricted Stock, the Committee, in its discretion, may
elect to satisfy the tax withholding requirement, in whole or in part, by having the Company
withhold Shares having a Fair Market Value on the date the tax is to be determined equal to
the minimum withholding taxes which could be imposed on the transaction as determined by the
Committee.

     (b) Share Withholding. With respect to tax withholding required upon the exercise of
Stock Options or SARs, upon the lapse of restrictions on Restricted Stock or Restricted
Stock Units, or upon any other taxable event arising as a result of any Incentive Awards,
Grantees may elect, subject to the approval of the Committee in its discretion, to satisfy
the withholding requirement, in whole or in part, by having the Company withhold Shares
having a Fair Market Value on the date the tax is to be determined equal to the minimum
withholding taxes which could be imposed on the transaction as determined by the Committee.
All such elections shall be made in writing, signed by the Grantee, and shall be subject to
any restrictions or limitations that the Committee, in its discretion, deems appropriate.

     (c) Loans. To the extent permitted by the Sarbanes-Oxley Act of 2002 or other
applicable law, the Committee may provide for loans, on either a short term or demand basis,
from the Company to a Grantee who is an Employee to permit the payment of taxes required by
law.

9.4 No Guarantee of Tax Consequences

     The Company, the Committee and the Board do not make any commitment or guarantee that any
federal, state or local tax treatment will apply or be available to any person participating or
eligible to participate in the Plan.

9.5 Designation of Beneficiary by Grantee

     Each Grantee may, from time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid in case of his death
before he receives any or all of such benefit. Each such designation shall revoke all prior
designations by the same Grantee, shall be in a form prescribed by the Company and will be
effective only when filed by the Grantee in writing with the Company during the Grantee’s lifetime.
In the absence of any such designation, benefits remaining unpaid at the Grantee’s death shall be
paid to the Grantee’s estate.

9.6 Deferrals

     Except as set forth in Section 5.2, the Committee shall not permit a Grantee to defer
such Grantee’s receipt of the payment of cash or the delivery of Shares that would otherwise be due
to such Grantee by virtue of the lapse or waiver of restrictions with respect to Restricted Stock
or Restricted Stock Units, or the satisfaction of any requirements or goals with respect to
Performance-Based Restricted Awards or Other Stock-Based Awards.

25

 

9.7 Amendment and Termination

     The Board shall have the power and authority to terminate or amend the Plan at any time,
provided, however, the Board shall not, without the approval of the stockholders of the Company
within the time period required by applicable law:

     (a) except as provided in Section 8.6, increase the maximum number of Shares
which may be issued under the Plan pursuant to Section 1.4;

     (b) amend the requirements as to the class of individuals eligible to purchase Common
Stock under the Plan;

     (c) extend the term of the Plan; or,

     (d) while the Company is a Publicly Held Corporation (i) increase the maximum limits on
Incentive Awards to Covered Employees as set for compliance with the Performance-Based
Exception or (ii) decrease the authority granted to the Committee under the Plan in
contravention of Rule 16b-3 under the Exchange Act.

     No termination, amendment, or modification of the Plan shall adversely affect in any material
way any outstanding Incentive Award previously granted to a Grantee under the Plan, without the
written consent of such Grantee or other designated holder of such Incentive Award.

     In addition, to the extent that the Committee determines that (a) the listing for
qualification requirements of any national securities exchange or quotation system on which the
Company’s Common Stock is then listed or quoted, if applicable, or (b) the Code (or regulations
promulgated thereunder), require stockholder approval in order to maintain compliance with such
listing requirements or to maintain any favorable tax advantages or qualifications, then the Plan
shall not be amended in such respect without approval of the Company’s stockholders.

9.8 Requirements of Law

     (a) Governmental Entities and Securities Exchanges. The granting of Incentive Awards
and the issuance of Shares under the Plan shall be subject to all applicable laws, rules,
and regulations, and to such approvals by any governmental agencies or national securities
exchanges as may be required. Certificates evidencing Shares delivered under the Plan (to
the extent that such Shares are so evidenced) may be subject to such stop transfer orders
and other restrictions as the Committee may deem advisable under the rules and regulations
of the Securities and Exchange Commission, any securities exchange or transaction reporting
system upon which the Common Stock is then listed or to which it is admitted for quotation,
and any applicable federal or state securities law, if applicable. The Committee may cause a
legend or legends to be placed upon such certificates (if any) to make appropriate reference
to such restrictions.

     (b) Securities Act Rule 701. If no class of the Company’s securities is registered
under Section 12 of the Exchange Act, then unless otherwise determined by the Committee,
grants of Incentive Awards to “Rule 701 Grantees” (as defined below) and issuances of the
underlying Shares, if any, on the exercise or conversion of such Incentive Awards are
intended to comply with all applicable conditions of Securities Act Rule 701 (“Rule 701”),
including, without limitation, the restrictions as to the amount of securities that may be
offered and sold in reliance on Rule 701, so as to qualify for an exemption from the
registration requirements of the Securities Act. Any ambiguities or inconsistencies in the
construction of an Incentive Award or the Plan shall be interpreted to give effect to such
intention. In accordance with Rule 701, each Grantee shall receive a copy of the Plan on or
before the date an Incentive Award is granted to him, as well as the additional disclosure
required by Rule 701(e) if the aggregate sales price or amount of securities sold during any
consecutive 12-month period exceeds $5,000,000 as determined under Rule 701(e). If Rule 701
(or any successor provision) is amended to eliminate or otherwise modify any of the
requirements specified in Rule 701, then the provisions of this Section 9.8(b) shall
be interpreted and

26

 

construed in accordance with Rule 701 as so amended. For purposes of this
Section 9.8(b), as determined in accordance with Rule 701, “Rule 701 Grantees” shall
mean any Grantee other than a director of the Company, the Company’s chairman, CEO,
president, chief financial officer, controller and any vice president of the Company, and
any other key employee of the Company who generally has access to financial and other
business related information and possesses sufficient sophistication to understand and
evaluate such information.

9.9 Rule 16b-3 Securities Law Compliance for Insiders

     While the Company is a Publicly Held Corporation, transactions under the Plan with respect to
Insiders are intended to comply with all applicable conditions of Rule 16b-3 under the Exchange
Act. Any ambiguities or inconsistencies in the construction of an Incentive Award or the Plan shall
be interpreted to give effect to such intention, and to the extent any provision of the Plan or
action by the Committee fails to so comply, it shall be deemed null and void to the extent
permitted by law and deemed advisable by the Committee in its discretion.

9.10 Compliance with Code Section 162(m) for Publicly Held Corporation

     While the Company is a Publicly Held Corporation, unless otherwise determined by the Committee
with respect to any particular Incentive Award, it is intended that the Plan shall comply fully
with the applicable requirements so that any Incentive Awards subject to Section 162(m) that are
granted to Covered Employees shall qualify for the Performance-Based Exception, except for grants
of Stock Options with an Option Price set at less than the Fair Market Value of a Share on the date
of grant. If any provision of the Plan or an Incentive Agreement would disqualify the Plan or would
not otherwise permit the Plan or Incentive Award to comply with the Performance-Based Exception as
so intended, such provision shall be construed or deemed to be amended to conform to the
requirements of the Performance-Based Exception to the extent permitted by applicable law and
deemed advisable by the Committee; provided, however, no such construction or amendment shall have
an adverse effect on the prior grant of an Incentive Award or the economic value to a Grantee of
any outstanding Incentive Award.

9.11 Notices

     (a) Notice From Insiders to Secretary of Change in Beneficial Ownership.
Within two business days after the date of a change in beneficial ownership of the Common
Stock issued or delivered pursuant to the Plan, an Insider should report to the Secretary of
the Company, or his delegate, any such change to the beneficial ownership of Common Stock
that is required to be reported with respect to such Insider under Rule 16(a)-3 promulgated
pursuant to the Exchange Act. Whenever reasonably feasible, Insiders will provide the
Committee or Company with advance notification of such change in beneficial ownership.

     (b) Notice to Insiders and Securities and Exchange Commission. The Company
shall provide notice to any Insider, as well as to the Securities and Exchange Commission,
of any “blackout period,” as defined in Section 306(a)(4) of the Sarbanes-Oxley Act of 2002,
in any case in which Insider is subject to the requirements of Section 304 of said Act in
connection with such “blackout period.”

9.12 Pre-Clearance Agreement with Brokers

     Notwithstanding anything in the Plan to the contrary, no Shares issued pursuant to the Plan
will be delivered to a broker or dealer that receives such Shares for the account of an Insider
unless and until the broker or
dealer enters into an agreement with the Company whereby such broker or dealer agrees to
report immediately to the Secretary of the Company (or other designated person) a change in the
beneficial ownership of such Shares.

9.13 Successors to Company

     All obligations of the Company under the Plan with respect to Incentive Awards granted
hereunder shall be binding on any successor to the Company, whether the existence of such successor
is the result of a direct or indirect

27

 

purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.

9.14 Miscellaneous Provisions

     (a) No Employee, Outside Director, or other person shall have any claim or right to be
granted an Incentive Award under the Plan. Neither the Plan, nor any action taken hereunder,
shall be construed as giving any Employee or Outside Director any right to be retained in
the Employment or other service of the Company or any Subsidiary.

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

     (c) By accepting any Incentive Award, each Grantee and each person claiming by or
through him shall be deemed to have indicated his acceptance of the Plan.

9.15 Severability

     In the event that any provision of the Plan shall be held illegal, invalid or unenforceable
for any reason, such provision shall be fully severable, but shall not affect the remaining
provisions of the Plan, and the Plan shall be construed and enforced as if the illegal, invalid, or
unenforceable provision was not included herein.

9.16 Gender, Tense and Headings

     Whenever the context so requires, words of the masculine gender used herein shall include the
feminine and neuter, and words used in the singular shall include the plural. Section headings as
used herein are inserted solely for convenience and reference and constitute no part of the
interpretation or construction of the Plan.

9.17 Governing Law

     The Plan shall be interpreted, construed and constructed in accordance with the laws of the
State of Delaware without regard to its conflicts of law provisions, except as may be superseded by
applicable laws of the United States.

[Signature page follows.]

28

 

     IN WITNESS WHEREOF, the Company has caused the Plan to be duly executed in its name and on its
behalf by its duly authorized officer, effective as of January 1, 2005.

	 	 	 	 	 	 	 
	 	 	SMITH INTERNATIONAL, INC.  
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ RICHARD E. CHANDLER, JR.	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Name:
	 	Richard E. Chandler, Jr.	 	 
	 

	 	Title:
	 	Senior Vice President, General Counsel and
Secretary	 	 

29

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